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Executives

Marina Gennadievna Kagan - Member of the Management Board, Director of Public and Investor Relations

Tony Maher - Chief Executive Officer

Dmitry Vladimirovich Ivanov - Member of the Management Board, Chief Financial Officer

Wimm-Bill-Dann Foods OJSC (WBD) Q1 2009 Earnings Call June 18, 2009 9:00 AM ET

Operator

Good day and welcome to the Wimm-Bill-Dann Q1 2009 earnings conference call. For your information, today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Marina Kagan. Please go ahead, Madam.

Marina Gennadievna Kagan

Hello, ladies and gentlemen, and thank you for joining us to discuss the financial results of Wimm-Bill-Dann for the first quarter of 2009. After our presentation is over, we will be happy to take your questions. I would ask that you please refer to the cautionary statements included in the press release covering any comments made during this conference call.

And now I would like to hand the call over to our Chief Executive Officer, Tony Maher.

Tony Maher

Thank you, Marina. Good afternoon to all of you joining us from Russia and Europe and good morning to participants in the United States. The first quarter laid a solid foundation for the year, particularly in terms of a substantial improvement in margins and a balance sheet that is healthier than ever. The company continues to perform very well in all business segments despite the very challenging economic environment. In addition, we continue to strengthen the business by investing prudently in improving our market position and driving efficiency across our supply chain. We continue to enhance all aspects of our business, ensuring the company is tightly managed and possesses the strength needed for success in both the short- and long-term.

Let me take a minute to share with you some of our efforts to improve our market position, our operations, and our capital structure.

We view the current economic downturn as a very good opportunity to enhance our marketing efforts and strengthen our competitive position. In particular, we are focused on gaining market share in higher margin categories. Leveraging our strengths as one of Russia’s largest advertisers, we acquired more primetime media for 2009 for substantially less costs. This allows us to have more GRPs at peak viewing slots in Russia’s national and regional television channels.

Looking at current market share numbers, we are happy that this approach is already paying off. At the end of the first quarter, our market share in juices increased by 170 basis points in volume terms compared to the first quarter of 2008. Our market share in baby food increased by 240 basis points in the same period while our market share in yogurts and desserts increased by 140 basis points in volume over the same period.

At the same time, I want it to be clear that we have no intention to chase market share purely for the sake of market share. Let me give you an example. We are the leader in the traditional dairy segments and we are committed to remaining so. However, we did lose a small amount of share in this category in the first quarter, while our share in the higher margin categories grew.

I underline that this is in no way a signal that we are moving away from traditional dairy segments, which we are not chasing on profitable volume either. Given the breadth of our product portfolio, we are able to adjust our sales efforts in line with changes in market demand. We are also committed to maintaining expanding our profitability across all our market segments.

In a moment I will take you through some of the recent new product launches, which we see as [providing] significant future growth in revenue and profit. We are continuing our work to optimize business operations for greater efficiencies. In the first quarter, we reduced our general and administrative expenses by 2% in Ruble terms over prior year, we significantly decreased our personnel expenses at all levels. We are constantly reviewing our transportation, logistics, delivery, and warehousing costs. Every quarter we are achieving productivity improvements.

Many of you have visited our flagship [inaudible] dairy plant. There we have modern systems --

Tony Maher

Okay, everybody, I think we are back live again. Sorry about that. And despite all the cost-cutting, I can assure you we are paying our telephone bill, so that’s not the reason for the breakdown in the call and I hope it’s the last one.

Once again, I was talking about [Leonosiva] before the line broke down and there we’ve got modern systems to monitor and enhance productivity. [Leonosiva] best practices have been applied at our other production sites. These are significant and lasting improvements. At the same time, we continue to evaluate our cost structure and look for further opportunities to extract additional efficiencies from our business. We are also improving our capital structure to have the flexibility to pursue our short-term and long-term ambitions.

Last quarter we paid down our bond using internal funds and this quarter we reissued some of those bonds on more favorable terms. This second reissue of 3 billion Rubles was sold at the lowest yield to market of any major Russian issuance this year, a significant accomplishment for Wimm-Bill-Dann and a testament to the strength of our business.

In a couple of minutes, Dmitry will further provide details on more -- our continued efforts to improve our working capital that has led us to generating over $85 million in free cash flow in the quarter. This kind of cash generation allows us to significantly enhance shareholder value.

To give you an example, we were very active with our share repurchase program, buying back in total 3.6% of our outstanding share capital in the open market in the form of ordinary shares.

The initiatives I have described in sales operations and financial management demonstrate our ability to adapt to changing circumstances and deliver on our strategy despite some strong headwind. Our multi-faceted strategy has the single goal of enabling the company to pursue sustainable growth opportunities in a profitable manner. With this in mind, I can now share with you the results of the quarter and provide some additional color to the numbers.

Total revenue for the first quarter of 2009 fell 29% on a year-over-year basis in dollar terms to $516.8 million, driven by an unfavorable exchange rate but offset somewhat by a favorable sales mix.

Our gross margin performance was very solid at 32.5%, up 250 basis points over prior year periods. The decline in revenues was offset by lower cost of goods, particularly [raw milk] prices. Our gross profit was $168.1 million, down 23.4% in dollar terms from last year due to a weaker Ruble. Our EBITDA performance was also very strong. On a constant currency basis in Rubles, EBITDA increased 13% and stood at $73.1 million. In dollars, it was down 19.4% for the first quarter 2008 due to the unfavorable exchange rates but offset somewhat by a favorable sales mix and overhead management.

At the same time, EBITDA margin improved significantly and stood at 14.1% for the first quarter, up 170 basis points quarter on quarter.

As our markets recover and normal demand returns, Wimm-Bill-Dann will be very favorably positioned for margin expansion across all our segments.

Now let me turn to the operating results for each of our businesses. Our dairy segment delivered sales of $269.2 million in the first quarter of 2009, down 33% over prior year quarter, primarily due to an unfavorable exchange rate again somewhat offset by favorable mix.

We did see some share gains in the higher margin value-added categories, particularly [curd] desserts and spoonable yogurts. We are also very encouraged by significant volume growth in cheese, driven by our premium Lambert brand.

Overall, we remain confident that the long-term --

Tony Maher

Okay, once again, apologies. There’s obviously this operator service comes out of my own national country by the sound of the voice of the operator and it’s not working very well. Overall we remain confident, as I said, in the long-term viability of our dairy segment given the defensive nature of our product mix. Gross margin in the dairy segment was up 270 basis points in the first quarter compared to the same period last year, primarily driven by the lower cost of milk, which I mentioned earlier, and a positive mix of [eggs]. We also made some changes in packaging that contributed to the improvement.

In our beverage business, revenue declined 19.5% to $94.1 million, driven by an unfavorable exchange rate. Despite a juice market contraction estimated at 13%, we demonstrated single-digit volume growth in the first quarter, which we are particularly happy about.

Both our flagship brands, Lovely Garden and [J7], showed another quarter of share gains. The first quarter also saw the launch of new television campaigns, both for Lovely Garden and [J7]. For these financially difficult times, we launched a new juice brand, 100% [Goltastic], which offers great value for money and still makes a real contribution to our profitability.

We also launched [inaudible], a new water brand that we believe is going to be very successful. This is a natural source water first bottled in March this year and today you can find it prominently positioned in most supermarket chains. The advertising campaign is currently running on national and regional television channels.

Gross margin in the beverage segment was 36.9% for the first quarter of 2009, down 110 basis points versus the prior year period due to the stronger Euro and dollar versus the Ruble. Despite this decline, we remain very optimistic about the performance of our beverage business. We were able to take advantage of key concentrate prices coming down in the quarter, which freed up additional resources to invest in marketing, advertising, root to market, but also indeed helped offset some of the Ruble devaluation.

Finally we turn to our baby food segment, which continues to demonstrate outstanding growth. Excluding the exchange rate effect, baby food revenue grew 25.4% for the first quarter 2009. This is an excellent achievement at any time but especially in the current economic climate. Sales for the quarter reached $53.5 million, down 10% from last year due only to an unfavorable exchange rate effect. The sales mix is offsetting most of the Ruble devaluation, helped by successful launch of our dry formula last year. We are very pleased to see this segment continue to gain share even in the current economic environment, with volume growing in the high 20s in the first quarter.

Gross margin for the first quarter was 48.3%, 80 basis points higher than the prior year period.

Before I conclude, let me dwell on another very successful launch not only of a new brand but a new segment unique for the Russian market -- [Deliveri], our new brand for kids aged between 4 and 9, proves once again that our company’s strength in innovation and knowledge of consumer preferences and needs. The work of this brand commenced over a year-and-a-half ago. The initial idea was tested with many moms and kids across the country. The brand was then designed and produced in-house with dozens of kids taking part in creating the main characters.

Tony Maher

-- first products in all our categories from milk to juice to yogurt and curds. There are many functional products within the portfolio, enriched with vitamins aimed at improving memory, eyesight, attention span.

We believe that in times like now, it is more important than ever to continue investing in marketing, especially in the launch of new products.

An advertising campaign for [Strivery] is also currently running on national and regional television channels.

Let me now update you on the outlook for the business. This year will continue to pose us challenges and we are working to manage the business through the near-term hurdles without compromising our competitive position or our ability to execute our long-term opportunities. As I have said many times before, we intend to invest in the long-term profitable growth of the company but we also recognize that the near-term economic climate requires prudent and conservative capital allocation. We have over $160 million in cash and that affords us some flexibility to pursue a variety of strategic options.

In conclusion, in the near-term we will continue to face headwinds; however, the soundness of our strategy, the strength of our balance sheet, and the depth of our management team will help us navigate this crisis and position the company for sustainable growth as the economic environment improves.

I would now like to turn the call over to Dmitry for a more detailed discussion on our financial results.

Dmitry Vladimirovich Ivanov

Thank you, Tony. Throughout the first quarter of 2009, Wimm-Bill-Dann's financial position remained fundamentally strong. We continued to further enhance the efficiency of our business, improve the management of our working capital, and our already very strong balance sheet despite the continued challenges of today’s economic environment.

Wimm-Bill-Dann's group sales decreased 29.4% in the first quarter of 2009 over the same period last year to $517 million. As Tony stated earlier, this decrease is attributed to [inaudible].

Sales in the dairy segment declined 33.5% over the same period in 2008 to $369 million. Average overall selling price for dairy declined 22.6% to $1.06 per kilo in the third quarter of 2009 from $1.30 per kilo in the same period in 2008. This decline is reflective on favorable exchange rate effect and partially offset by the improved sales mix.

Gross margins in the dairy segment increased to 29.1%, up 270 basis points compared to the same period last year. This increase is comparable to favorable raw milk costs and the improved sales mix.

Sales in the beverage segment decreased 19.5% over last year to $94 million due to some favorable exchange rate effects and partially offset by [good volume] [inaudible]. The average overall selling price in the beverage segment declined 27.8% over the same period last year to $0.74 per kilo in the first quarter of 2009. Gross margin in the beverage segment was 36.9% for the first quarter of 2009, a decline of 110 basis points over last year due to the negative exchange rate effect on imported raw materials such as concentrates and packaging.

Dmitry Vladimirovich Ivanov

-- relative to the first quarter of 2008, first quarter 2009 revenue in the baby food segment decreased 10.3% to $53.5 million. The average selling price in the baby food segment decreased 29.6% over the same period last year to $1.70 per kilo. This decrease was driven by the overall devaluation and the [inaudible] and stronger sales mix. Gross margin in the baby food segment was 48.3%, an improvement of 80 basis points over the same period in 2008.

I will now turn to operating expenses and other components of the P&L. Total selling and distribution expenses decreased by 23.3% compared to 2008. Marketing and advertising expenditures were $27.5 million, or 5.3% of sales compared to $26.6 million, or 3.6% of sales a year earlier. Transportation costs totaled $21.7 million compared to $36.2 million last year. Personnel expenses decreased 19.7% over the same period last year to $22.6 million.

General and administration expenses decreased 30% over the same period last year to $29.5 million, and as a percentage of sales, general and administrative expenses were flat at 5.7%.

Financial expenses of $3.8 million, up from $3.4 million over the same period last year. This year-over-year increase is attributable to the currency and [inaudible] loss incurred in the first quarter 2009 and in [inaudible] $260 million [syndicated loan] taken out in the second quarter of 2008. In the first quarter of 2009, currency [inaudible] loss amounted to $25 million compared to currency [inaudible] gain of $9 million in the first quarter of 2008. Currency [inaudible] loss is not a cash items.

Our effective tax rate was 24%, a decrease of 4.7% in comparison to the same period of 2008. Operating income decreased 20.5% over the same period last year to $50 million. But our operating margins expanded 110 basis points year over year to 9.8% as a result of improved efficiencies throughout the business.

For the first quarter of 2009, we reported a net income of $12.6 million in comparison to net income of $42 million in the first quarter last year. The decrease is attributable to the negative exchange rate effect and higher financial expenses I just mentioned.

Before I move on, I would like to highlight again the main drivers of the net income performance because I think that there could be some confusion at this point due to the nature of the reporting standards that could [inaudible] the performance.

Adjusted for losses from foreign exchange and the subsequent --

Dmitry Vladimirovich Ivanov

I would like to repeat the paragraph. Before I move on, I would like to highlight again the main drivers of the net income performance because I think that there could be some confusion at this point due to the nature of the reporting standards that cloud the performance.

Adjusted for losses from foreign exchange and the subsequent tax implications, our net income in Rubles for the first quarter was 25% higher than last year. Our EBITDA declined 19.4% over the same period last year to $73 million. EBITDA margin, however, improved by 170 basis points to 14.1% compared to the first quarter of 2008. Capital expenditures were $16 million compared to $50 million in the first quarter of 2008.

I would now like to provide you with an update on our continued efforts to improve our [inaudible]. We were able to decrease working capital by $66 million in the first quarter. We have accomplished this by tightly managing our inventory and receivables.

As a result of our working capital gains, we were able to drive better cash flows in the business. Our operating cash flow in the first quarter was over $102 million, up 136% from $43 million in the third quarter of 2008. As a result, we generated over $85 million in free cash flow in the first quarter, significantly improved from $1 million generated in the first quarter a year ago.

We also have made great strides in managing our debt levels. [inaudible] announced their payment of our 5 billion Ruble bond and as Tony already mentioned, in May we made the secondary placement in the amount of 8 billion Rubles at a very attractive rate. But furthermore, strong cash generation and effective debt management have led to lower net debt levels for the company. I am very happy to say we have successfully lowered our net-to-debt EBITDA levels to 0.9. Our financial strength provides us with a competitive advantage in this economy as it allows us to pursue both current [plan] and growth initiatives.

Operator

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Question-and-Answer Session

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