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Central European Distribution Corp. (NASDAQ:CEDC)

Q3 2009 Earnings Call

November 4, 2009 8:30 pm ET

Executives

James Archbold - Director of IR

Bill Carey - Chairman, President and CEO

Chris Biedermann - CFO

Analysts

Douglas Lane - Jefferies & Company

Richard Baldwin - Gartmore Investment Management

Daniel Wakerly - Morgan Stanley

Margaret Kalvar - Harding Loevner

Andrzej Knigawka - ING Financial Markets

Operator

Good day and welcome to the CEDC Third Quarter Earnings Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. James Archbold. Please go ahead, sir.

James Archbold

I'd like to welcome everyone today to CEDC's third quarter 2009 earnings conference call. Joining me this morning are William Carey, our President, CEO and Chairman; and Chris Biedermann, our Chief Financial Officer. Please note that the contents of this call contains time sensitive information that is accurate only as of the date of the live broadcast, November 4, 2009. 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 website.

Please also note that the 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 Reform Act of 1995. Without limiting the foregoing discussions, the forecasts, 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, November 3, 2009 and in the Form 10-Q to be filed with the Securities and Exchange Commission. 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?

Bill Carey

I'm going to welcome everyone to our third quarter earnings call. It was a very eventful quarter we had. As you know, we did a lot of work on buying out a number of our Russian minorities. We completed during the quarter the buy out of another 6% of the Russian Alcohol Group as well as Parliament. That was at the beginning of the quarter as well as the Parliament, 15% remaining minority interest, which we bought out.

In the end of the quarter, what we saw was the economies slowly improve in Poland and Russia. We saw currency strengthen a bit coming off the second quarter, and again, our cost of goods remained in pretty good shape in terms of our raw spirits remaining at yearly lows heading into the end of the quarter and really for the full quarter as well. Overall, it was a pretty good quarter from an overall company performance.

First, we'll get into a little bit of the economics behind what we're seeing in the marketplace, and then we'll get a little bit into the P&L as our usual way of working. I'll turn it over to Chris Biedermann, our CFO. He will take you through a bit of the balance sheet, what we see on different operating measures as well, and then I'll take you through a bit of the outlook, what we see in the marketplace and some other dynamics that have happened, which we think are positive for the business as well.

First off, a little bit of the economics behind what's happening in our key economies. We'll talk about Poland and Russia. What we're seeing out of Poland is that pretty steady GDP growth, around 1%. Government expecting next year and analysts expecting next year about 1.5%, 2% growth next year for Poland.

If we look at Russia, what we're seeing was that third quarter was the first quarter of positive growth that they've had coming off of the second quarter. They are looking at probably a 3% to 4% growth coming into the fourth quarter; and next year, most analysts are putting it anywhere from 2% to 4% growth for the GDP in Russia. Again, that's coming off the lows this year of around 8%, which will be the reduction. 7%, 8% will be the average this year reduction.

So we think it's pretty meaningful because you got to remember where that consumer came from last fall. It went from a plus 7% down to a minus 10% practically overnight. So pretty major shift for that Russian economy, which we think is slowly coming out with more positive GDP growth. Again, in the first half, we think we'll get some better comps as well coming out of our business as well.

We look at inflation coming down in both of our key markets. Poland has come down from around 4.5% to 3%, while Russia has come off significantly down to around 9%, 9.5%. If you take out some of that energy increase out of that number, you're really underlying, that place is really around 5%. So, again, we think that next year projections are keeping under 10% in Russia. Poland is thinking they can keep around this 3%, 3.5% rate. We'll wait and see, but again, this is fairly favorable.

Poland's held their interest rates flat for the last three months at around 4%. Russia has been reducing their interest rates. I think its 200, 250 basis points they've been reducing over the last three months. They are expected another 50 basis points yet to the end of the year. They really want to get the borrowing costs down for the consumer.

The Russian economy is still struggling a little bit, small businesses, the consumer with very high borrowing rates. It has been coming down. We should start to see some more positive impact of those low borrowing rates into 2010, but certainly it's a good issue that we've been seeing, quite an aggressive reduction out of Russia with the interest rates.

For these various factors, for these reasons that we are seeing positive currency moves. Also, of course, on the euro-dollar a bit, oil price, of course, but generally, we're seeing a slight improvement over the second quarter in terms of currencies. The bit of the problem running into on some of our P&L presentations and balance sheet is because, just like this third quarter, we are coming off a depreciation of currency, depending if you divide last year by this year, this year by last year, but you are coming off a 25% or 35% devaluation of currency, which is very significant when you are comparing year-on-year numbers.

Then, as we get into the fourth quarter, when we looked at the currency already started to appreciate in 2008 in the fourth quarter, we are starting to see that already at today's currency rates that is probably around zero right now in terms of pretty close to the average last year. So, hopefully, going forward, we're not going to see these type of comparison differences as we move forward in presenting quarterly, yearly numbers basing off the year before in hard currency.

We start on the sales side, again, highlighted from the fact that the currency moved a very significant move year-on-year comparison on the currency. In general, we've seen the overall dynamics of our markets. We haven't seen the consumer come back in any meaningful way. We see the second and third quarter, consumer is not trending any worse, but we don't see really any large improvement in the consumer in terms of their purchasing power right now in Poland or in Russia.

We do believe as the economics are picking up a bit in these economies and you will start to see some wage increases starting probably in 2010 coming in a bit to the consumer as well, we believe that this definitely will pick up a bit in our key markets and we will see some better top-line improvement in our overall business.

What we did see in the quarter, we saw a quite good growth in our import business in Poland. First, I'll start on Poland. We saw a 10% value growth in our import business; again, led by some of our key products, our whiskeys and wines did pretty well even with the higher price. Because of the devaluation of the currency, we raised the price. We saw exports up over 25% for the quarter. Duty-free, which is a smaller base, because we are the market leader in duty-free, we are seeing over 65% growth in duty-free, being a market leader, which is mainly coming out of the various international airports in Poland.

If you look at our key vodka portfolio, generally what we saw was that we were down, a little better than the market. The market, we estimate is down around 5%. Again, we were down around 3% to 4% in our vodka portfolio. Some brands did extremely well. The Palace brand, which we re-launched in the third quarter, was up over 20%.So there are some quite positives with the market re-launches of some of our key products.

Overall, again, we did see some improvement in the consumer coming back, which we anticipate probably the markets to come down around 3% to 4% in the fourth quarter, and again, us having better improvement than the overall market. I think next year we'll start to see some flattish to maybe even some positive signs of the overall vodka market, especially in the first quarter as we will work off lower comps because of the huge inventory build last year, as you remember, from the excise increase at the end of 2008 and the large inventory put in the marketplace that we should start to see much more favorable comps coming into the first quarter of 2010.

If we look at the Russian market, what we saw is that the import business in Russia, we were up 4% in rubles. Again, this is a quite positive surprise for us, mainly from the fact that within the overall cognac and champagne business, which we were down probably 20%, 30%, this is replaced by a very, very nice growth in overall wine and sparkling business, which has contributed to a positive ruble number.

This is even more beneficial because on the import business of the wines and sparkling, we have a better margin on that business than the champagnes and cognac. So, as that champagne and cognac start to come back as well, we believe again the import business is setting up for a very nice fourth quarter and full year next year and getting into a much more robust growth as we saw in previous years.

If we look at the overall vodka market, the vodka market again with the top-line, we haven't seen the consumer come back and drive the top-line in terms of the overall vodka market. The vodka market is down around 10%. We haven't really seen any improvement off of that number in the third quarter. We do anticipate that coming to about 7%, 8% in the fourth quarter. Again, we are performing a bit better than the overall marketplace.

Also, on the top-line in the Russian markets, we also launched two new lower mainstream products in Russia in October, which we talked a bit on the last call. This is a price point that we are not able to achieve, having only four products in Russia; two in the sub-premium, one in mainstream and one in economy. This gives us a price point that we feel where there has been some trade-down in Russia and this gives us a price point that we can further gain.

We feel market share gains are in Russia. We launched these two products, both were launched in October. So we feel quite good that we can, moving out over the next year to two years, we can grab some decent market share by having this new price point in our overall vodka portfolio, up from four brands to six brands.

Also on the long drinks, the long drinks we saw around $10 million reduction in overall sales. That was mainly from the fact that this is a business that, as we've mentioned I think before, that we are looking to sell. This is the RTD business, the 5% alcopop business. We've done a major restructuring over the last year. We've brought this business to profitability, but it’s still a business that we're looking to sell and within that, we had to restructure a bit of the overall portfolio. We have brought it profitable but with a lower top-line revenue base.

Dropping down to the margins, we've seen substantial margin improvement in the business from 25.6% to 33.3% year-on-year and 33.3% is even slightly better than 33.1% in the second quarter. Again, it's highlighted from the growth of the import and export, our branded business taking more market share over our distribution business. The distribution business also, you know, we've been taking out quite a bit of the lower value, lower margin SKUs in our distribution business, which is having a lower weight in our overall business model.

The consolidation of Russian Alcohol Group, which is the second quarter now, the cost of goods are still lower than a year ago, still trending at very nice numbers. If we look at moving out into the fourth quarter margins, we will be looking 37%, 38% gross margins because this is our most profitable season now as we're in the fourth quarter in terms of driving more higher margin products through sort of a fixed cost infrastructure. So it really accelerates our gross and operating margins in the fourth quarter.

If we move down to SG&A, what we're seeing on SG&A is because we've done a major cost cutting initiative in Poland and in Russia, comparing the second quarter to the third quarter, we've dropped from 21.5% of sales to 20.5% of sales. If we look at even going to the fourth quarter, we're going to continue to reduce that probably 19% or below 19% in terms of overall SG&A as a percentage of sales.

We will continue the cost reduction program that we've been doing in Poland. Business will continue out to Q4. This will, obviously, have a full year benefit next year. Russian Alcohol Group, as you know, in the last nine months we've taken down the headcount from 4,000 to 3,000 people. Again, we'll start to see a full year benefit of that coming in 2010. We're still doing a lot of work still on the logistics, the banking, purchasing raw materials.

We are now incorporating Parliament into that purchasing group, so Parliament will be able to enjoy again some of these negotiations from this very large company in terms of getting some lower purchase of raw materials, transport and banking.

Also, I think that when we look at the SG&A, this is the last quarter we're working on off of a bad comparison as well. Last year, we increased salaries in August around 12% in Parliament, and I think in Russian Alcohol Group, it was a similar raise in July. So as we move into the fourth quarter, we will have like-for-like. There has not been further salary increases since that time, so we'll be able to have a much better comparison also on our (inaudible) item, which is salaries.

All that is translating into increasing our gross margins from 11.7% to 12.8% really for the reasons I discussed above. As we move out into the fourth quarter, again, as mentioned, the operating margins really accelerate to over 18%, setting up for the overall business model, as we'll get to a little bit of the outlook into, we think, a very productive 2010.

I'll now turn over to Chris Biedermann to take you through a bit of the balance sheet on what we're doing down in the working capital ratios.

Chris Biedermann

Let me start looking further down of the P&L. First thing, we had a $15 million charge which was a true-up of our contingent consideration. What that means is that in the third quarter we made our final earn-out settlement with the original sellers of the Russian Alcohol Group and this final settlement differs from the initial accrual made.

Under new accounting regulations, any adjustments to the initial purchase price after the initial recognition period must go to the P&L as a gain or loss. This represents a one-time charge for this final settlement, which there will be no further adjustments in the future.

The main items in our non-operating expenses include the reevaluation of USD and euro liabilities. That resulted in a $58 million FX gain compared to a loss in the prior quarter. It also includes the amortization of our deferred consideration. This is related to the future payments to Lion Capital to buyout the remaining stake in Russian Alcohol Group. The impact of both these items are adjusted for in our comparable EPS.

On a GAAP basis, our net income was $47.1 million or $0.80 per fully diluted share for the quarter. On a comparable basis, our net income was $27.15 million for the quarter or $0.49 per fully diluted share. Again, the major differences between these two results in the elimination of the one-time purchase price true-up, the FX reevaluation and the amortization of deferred consideration as I mentioned earlier.

Some highlights of our balance sheet, first in terms of liquidity, we believe we are well positioned to meet our near-term obligations with $255 million of cash on the balance sheet at quarter end and short term bank facilities of $151 million. During the quarter, we cleaned up almost all of the remaining contingent payments to Parliament and Whitehall, including purchasing the remaining 15% of the Parliament business, which we did not yet own. In addition, we purchased further minority positions not held by Lion and the Russian Alcohol Group.

Our cash position on the balance sheet was reported in the quarter by the $129 million net proceeds of our July equity offering, as well as strong cash flow generation. Our operating cash flow for the year amounted to $95 million, and had we consolidated RAG from the first quarter of '09, we would have had cash flow from operations in excess of $125 million. This cash flow generation has been driven by the constant focus in working capital.

During the third quarter, our AR days went down from 65 to 52 from prior quarter and overall working capital days went down from 84 to 73 from last quarter. Our net debt at quarter end was approximately $920 million and our outstanding EBITDA on a pro forma basis, including the EBITDA of our non-consolidated periods for RAG, would have amounted to about 3.5 times net debt to EBITDA. Our target in the upcoming period is to continue to focus on de-levering and bringing this down to a sub 3 times net debt to EBITDA next year.

I'll now turn back to Bill to provide a further review of our planned activities.

Bill Carey

I think first we'll talk a little bit about the market developments before we get to the outlook. There's been a number of interesting developments over the quarter. I think, first-off, we'll talk a little bit about the government policy in Russia. There's been a lot of discussion over the last three to four months on what's happening with the government, on their focus on the spirit and beer and wine sector in Russia.

What we're seeing out of Poland first that, right now, the excise situation is scheduled in the current budget as no increases on beer, wine or spirits. Myself being the Chairman of the Polish Beer Council, we've done really a lot of work this year and really doing a better job with the Ministry of Finance of explaining to them that any further excise increase will probably have a negative contribution to their excise revenue.

We are on their side. CEDC alone, we account for I think over 1% of the state budget in Poland from the excise that we pay just as a company. Obviously, we would like to pay more tax, that means we sell more. So I think that the current budgeting is put forth with no excise increase for next year.

In terms of Russia, the government has put forth, which we estimated from the last call last quarter, 59% increase on spirits, which they've put in place every year for the last three or four years. We don't think this is very significant for our business. They put a 200% increase on beer, which is quite favorable for the spirit market, as certainly the beer price per unit becomes a lot higher on the shelf.

They've also been very focused on a number of initiatives of reducing consumption where they wouldn't like it to be. For example, they've taken the initiative to not allow kiosk street vendors selling beer on the street, which is currently allowed. That will be going away. They do not sell spirits, just beer. They're putting more criminal penalties on retailers selling to minors across Russia. We think that is favorable.

They're putting restrictions on being able to sell alcohol near schools or churches. Poland already has that in place. Again, we think that's quite favorable, but we think it's nice propaganda. We don't really think that has much impact, to be honest, on completions. The government's main objective is to reduce the black market, which is still up over 40%, 45% of the Russian market. That's also why they're not so aggressive on spirit excise increase because they know any substantial increase will potentially, certainly, drive more people to the black market.

So they are looking to take some more government control over the production of raw spirits. Today, it's about half and half, half private sector, half government. A lot of the leakage, we believe, that comes into the black market is coming out of the raw spirit manufacturing. So, we believe that by having more control over this sector, we think could be, again, good to drive down the overall black market.

I think a number of investors I've spoke with over the past three, four months, my view is that until the government really looks at reducing excise and bringing down the price to really stomp out the black market, I think we're not going to see major reductions in the black market.

They've also put a minimum spirit price on the shelf of 90 rubles. They want to put in place next year, which is also good for those of us who operate in the 100 to 200 range to bring up the minimum price of vodka to 90 rubles on the shelf. Again, hoping to stomp out some of the black market that is currently on the shelves for 70, 75.

I think, generally, we see it quite positive in the overall dynamics of what's being discussed, and I think especially on the beer excise, it should bode well for the spirit market next year.

Also, if we look at what we're doing on some of our assets that we have, as mentioned before, we are looking to sell the long drink business that we have in Russia. This is a business that when we bought it, it was losing money. We've restructured it, it's making a small amount of money today, I think around $3 million EBITDA.

Also, we have a plant in Georgia, a production plant that's been losing money. It's something that we are in the process of selling as well. Hopefully, in the first half, maybe by the first three quarters of next year, both of these assets will be sold. Also, the long drink business is diluting a bit of our margins as it does operate on a lower EBITDA margin of around 6% or 7%.

As the company continues its focus on branded and import product base, our view is that as a company, we like to remain focused on a more branded and owned product base out of Central Europe. When we look at our distribution business in Poland, we are exploring different options, including a local IPO, as well as other options, for potentially spinning off its distribution business potentially in 2010.

I think that sometimes the distribution business, which we certainly like as a company, but if you strip out the distribution and really look at the operating margins and gross margins that we have as a company, I think sometimes the investors don't realize that our margin base, stripping out the distribution, you are looking at 27%, 28% operating margins and you're looking at a 50-plus gross margins. Both of those are second only internationally to Diageo, which is not far behind Diageo and better than all other spirit companies internationally.

I think that sometimes people don't appreciate on how good a business we have because of the overall dilution that comes from the overall consolidation of our business model today. Hopefully, we would look at something probably to take place potentially in 2010 on this as well.

If we look at our branded development in Russia, as we said, we launched two newer lower mainstream products. Our view and aim is to bring that up to eight products eventually. As the market picks up and consumer demand picks up over time, we will put out probably one more mainstream, one more sub-premium brand to complement our six brands today. Still our aim is to achieve the 30%, 35% market share, up from 18.5% today in the next three to four years. We believe our current portfolio of four brands could probably only take us to 22%, 23% before it gets too mature. We need to put new brands into our portfolio of vodka brands, which we have just done in October.

Remember, just because they're lower mainstream doesn't mean they're not necessarily much lower in terms of operating profit because we have a huge fixed cost infrastructure in Russia that enabled to put more products through this fixed cost infrastructure, you have a much greater per liter operating profit because you don't really have any more incremental costs coming into this new product development.

Also, next year, we are targeting to move into the local brandy market. It's one of the largest in the world in Russia, but we don't operate in there today. It is the same type of consumer, same type of retailer and that's something that we are looking to enter into the Russian market next year. Also, we are in discussion with many different foreign drinks companies to potentially look at a much greater import portfolio. We're a big fan of long-term wine and spirit business development of imports in these markets and we believe that with our development of the larger sales force in Russia having a very small portfolio of product to sell, we believe we are a very attractive company to attract other products, import products coming into our organization starting in 2010.

If we look at a bit of the outlook for 2010, certainly the recent buyout of the minority stake in Parliament really gives us the opportunity to start to realize the $30 million of synergies between our Russia vodka companies. We are anticipating starting that in the beginning of the year. We could start it earlier, but we didn't want to disrupt the seasonality, which is now coming into our business and we will start realizing this in the first quarter of 2010.

Also, we believe that consumer wages will pick up in Poland and Russia, which no doubt from previous experience that demand will pick up for more branded opportunities and products as well as imported products. The new product launches that we've made now in October will help us take some additional market share next year in Russia.

We don't really see any major inventory issues as compared to the year 2009, moving into 2010. We have a bit of a tailwind as well on the comps and currency in the first half of the year. We have a full year benefit also of our large cost reduction program that we implemented in 2009. We'll have a full year benefit next year. Again, the synergies to come through from the first quarter starting and putting together our vodka entities in Russia.

We'll continue to push exports; it has continued to be a very nice business, we'll continue to push our export business into our key export markets. We have some new developments, hopefully to come through in the first quarter that we could be able to announce. The current excise situation, as mentioned should be quite beneficial for us in 2010. We've done a large distribution move in terms of reduction of our portfolio this year in our distribution business, which has cost us quite a bit of top line. That will be completed in the fourth quarter of this year, so this will not be an issue coming into our operations in 2010 as well.

On the fixed assets, we've invested over $70 million in the last three years of fixed asset infrastructure development. We are quite complete with opportunity and capacity, so we don't really feel any further large need at all for fixed asset expenditure. So, we're in quite good shape there to put more products through, again, our fixed cost, our infrastructure.

So all in all, we're quite enthusiastic as we move into next year and within that we are reconfirming guidance as we said in the press release of revenue of 158-170 this year in terms of billion dollars, and a $2.35 to $2.50 EPS; for 2010, re-confirming at $1.8 billion to $2 billion, and $3.00 to $3.15 on EPS base. I believe that's incorporating around $10 million to $11 million of synergies also expected coming into 2010 EPS; using currencies sort of where they are currently.

I believe that ends my presentation. I'll now open the call for any questions.

Questions-and-Answers Session

Operator

(Operator Instructions) Our first question comes from Douglas Lane with Jefferies & Company.

Douglas Lane - Jefferies & Company

You mentioned market shares in Russia around 18.5%. That sounds like about even sequentially with the second quarter, if my recollection is right. Can you give us an update on your production market shares in Poland and the competitive dynamic there?

Bill Carey

Yes, I think in Russia Douglas, it's hard to get accurate data coming out of markets that you can really trust. What we can really estimate is where the market is and we are doing better in the marketplace, so we have to be gaining share. Then of course, some people might be moving in Russia because of the trade down, a little bit to the black markets. Generally, we believe we are doing better in the market from the data we see. So, we estimate that we are gaining some share over the last couple of quarters. Is it 18.5%, is it 19%? It could be, but it's hard to get reliable data, some more trends over time that we need to look at.

In terms of Poland, if we look at the overall dynamics in Poland again; mentioned the Polish vodka market, we are again slightly better than the market. So, we believe we're holding our own. We don't think we're substantially gaining much share. We think we're holding our own within the marketplace. We don't operate in the economy sector, even though that's not really gaining share; it might be gaining a little bit because of the crisis. Then there was a new product development, two dynamics going on, major, I think we discussed last quarter, was the Belvedere Group, which is still having stress in their overall business model in Poland financially.

I think they're currently under bankruptcy. They are continuing to lose large share out of the Polish market being replaced by the other one, Polmos Lublin, which is owned by Oaktree. A lot of that share has come out of the economy sector, being replaced from Belvedere to Oaktree and then Oaktree has developed a new product over the last couple of years that's done quite well in the mainstream category and I think that's up to around 12% or so market share in the lower mainstream price point; very aggressive marketing. They've taken market share from probably all the brands surrounding that sort of price point. They've probably taken maybe 1% from our Absolwent brand over the last, probably year and a half. But really the big shift has come from the Belvedere drop and the replacement of the Polmos Lublin in terms of where Belvedere was.

Douglas Lane - Jefferies & Company

How do you think the Belvedere- Sobieski situation is going to resolve itself?

Bill Carey

Well, I saw their financials earlier this week where they had, I think it was EUR6 million EBITDA and $900 million of debt for the first half of the year, losing a lot of money still on the net income base. I don't see how they will get out of that, to be honest. I think at the end of the day the judge will appoint the court to sell off the assets.

Douglas Lane - Jefferies & Company

Okay. Then any update on some of these Pernod Ricard properties; any possible acquisitions there?

Bill Carey

No, I think at this point we've got a lot of upside to do in overall business model, as well as expansion into the brandy sector next year as well as integration of the Parliament business, and what we're doing in Russia with our vodka companies and we've got a lot of work to do on hopefully gaining some of these import contracts into Russia as well. So we're really focused on getting new export agreements, as I was saying; hopefully we can have some things announced soon as well as not only our restructuring of synergies in Russia, but also to gain some of these new contracts and really focus organically, let's say, and maybe we do something in the brandy sector organically; or maybe we buy something small. But we'd like to focus.

We think the market is wide open yet. The consolidation opportunity, the sector growth; we still think we have a very big opportunity in Russia to really move deeper into the product portfolio in Russia.

Operator

Our next question comes from Richard Baldwin with Gartmore Investment Management.

Richard Baldwin - Gartmore Investment Management

I wonder if you could just provide some clarification [related to] a couple of balance sheet items. In particular, I'm looking at the line which is long-term deferred consideration $359 million. Also the fact that's the gross net figures have risen between the end of last year and September this year, which my guess is all due to the sort of take-out minority stakes in the subsidiaries, etcetera. I was just wondering if you could talk around these figures a little bit for me and particularly give me any kind of a schedule of when cash outflows are likely to occur, please.

Chris Biedermann

Yes. In terms of the deferred consideration, short-term and long-term, that basically the future payments we have to make to Lions Capital as we renegotiated the agreement back last quarter. We have these future cash obligations to them; roughly speaking of $55 million next year and then $150 million for three years thereafter, plus some shared payments as well. But this is basically the net present value of those future payments that are put on our balance sheet. I'm not sure if you remember in Q2 we discussed, we basic consolidated the full portion of Russian Alcohol, including what Lion had. We treated it as if the acquisition happened then with this deferred consideration put on our balance sheet.

Richard Baldwin - Gartmore Investment Management

Okay.

Chris Biedermann

In terms of future cash outflows, I think really the main commitment is what I just mentioned, Lions Capital payments going out in the future. The next real major debt payment we have in 2012, when our year notes are payable [through] 2012 and then 2013, our convertible notes. So, really up till that point the only major things we have is this deferred consideration. As Bill mentioned, we spent a lot of CapEx historically, because we don't have a lot of cash outgoing or CapEx either in the next few years.

Richard Baldwin - Gartmore Investment Management

Understood, just to be clear, that's $55 million going out in 2010 and $150 million, which is roughly $50 million each year 2011 to --

Chris Biedermann

No. $150 million each year for the following three years.

Richard Baldwin - Gartmore Investment Management

$150 million in each year for the following three years, okay. How is that split during the year? Is that split evenly during each year or –

Chris Biedermann

It will be done as one payment in each period. The whole agreement is actually filed out there as an 8-K.

Richard Baldwin - Gartmore Investment Management

Yes, I'll take a look at that.

Chris Biedermann

Our payment dates and all those details behind it because that's just a broad --

Bill Carey

I think the gross debt you are looking at, I think that is the incorporation of the Russian Alcohol Group, the liquor (inaudible) consolidated by a quarter. You shouldn't really see any change much from the second quarter to the third quarter but from a year ago, there was not consolidation on the Russian Alcohol Group. So one, there wasn't the cash, and there wasn't the debt either.

Richard Baldwin - Gartmore Investment Management

Okay, understood.

Chris Biedermann

That's the only (inaudible).

Operator

Our next question comes from Daniel Wakerly with Morgan Stanley.

Daniel Wakerly - Morgan Stanley

I've got a first question, just on those two new low price brands you're launching in Russia. Can you give us a sense of how much additional sales we should think about, in terms of maybe next year or the year after for those two brands?

Bill Carey

I think for a brand to be successful in Russia, you would like to see it upwards of over 1 million cases certainly in the first couple of years. So, that's certainly our first target level that we'd like to achieve.

Daniel Wakerly - Morgan Stanley

Okay. That's split up or per brand.

Bill Carey

That's 1 million case per brand, yes.

Daniel Wakerly - Morgan Stanley

My other question is, can you split out the third quarter sales and EBIT into the three countries for us, just to give us an idea of how you got to your current numbers?

Bill Carey

Yes, I think if we look at the Russian number, it is more skewed because of the consolidation of the Russian Alcohol Group. But you can probably get a better understanding next week, but on the Polish number, I can give you some guidance. What we saw was the devaluation of the currency, if you look at the top number or starting from the top, around 25%. Then we had around $23 million, I think, on the distribution, because beer is a much bigger factor than previous quarter because the season for the third quarter is for beer. I think organically, we're looking around 3% drop organically in Poland.

Operator

Our next question comes from Margaret Kalvar with Harding Loevner.

Margaret Kalvar - Harding Loevner

I was curious to know what percent of sales at this point your import/export businesses represent in both Poland and Russia, and I assume you're pushing the imported brands through the enhanced distribution that you've got with Russian Alcohol Group in Russia. Are you seeing a lot of distribution synergies occurring from that?

Bill Carey

If we look at the business in Russia, the import business represents roughly around probably 20% of our overall business in Russia. If we look in Poland, it's probably around a similar number, maybe 15% to 20% in Poland. What we're seeing in Russia is that, no, we are not utilizing the large sales force sitting at Russian Alcohol Group to sell currently our import portfolio. That is upside in the future.

First off, we'd like to get our vodka manufacturing synergies completed in the first half, three quarters of next year, so we can get that situated. Also, there is a vodka plant that potentially could be closed also in Russia behind that in 2011.

So we'd like to at least get all those things started and well on its way before we move to the next step, would be to utilize also the sales force potentially also to sell some of our imported products coming into the Whitehall Company, not to do too much at one time.

Margaret Kalvar - Harding Loevner

Okay.

Bill Carey

Put it step-by-step. But yes, certainly we feel that is upside down the road, yes.

Operator

Our next question comes from Andrzej Knigawka with ING.

Andrzej Knigawka - ING Financial Markets

I've got two questions. In Russia, can you give us your assumption on volume in cases for the Russian Alcohol Group for 2009 and 2010, in terms of millions of nine-liter cases, what you've been assuming for Russian Alcohol Group?

Bill Carey

I don't know if I have them correctly, but I can give a stab at it. With the new brand that we launched as well and assuming that we do have the 3% to 4% GDP growth, that's estimated to come out of Russia in terms of some consumer pickup, we're certainly anticipating out of the Group probably around low single digits greater than '09 on the core, and then plus the new brand; so we're probably talking around 5% to 6% pickup.

Andrzej Knigawka - ING Financial Markets

2009.

Bill Carey

Over 2009, which would estimate in volume and then probably another 6% to 7% in value.

Andrzej Knigawka - ING Financial Markets

Right, and 2009 volumes in cases for Russian Alcohol would be what? Would be like 18 million, 19 million cases?

Bill Carey

Currently in Russia, I think we have around close to 20 million in Russia --

Andrzej Knigawka - ING Financial Markets

Including Parliament?

Bill Carey

Including Parliament. I think you are probably looking at around 17.5 million, plus/minus a bit.

Andrzej Knigawka - ING Financial Markets

That makes sense. Just a clarification, on profit and loss, amortization of future payments was $16 million in the quarter. That was up from $11 million in the first quarter. I know it's a non-cash item, but what should we expect in the fourth quarter? That there is going to be around $16 million (inaudible)?

Chris Biedermann

No, it will be normalized more around 11 million. We had some adjustments as well to the valuations in terms of the final liability settlement, which will then flow through that line. But generally, we should be about $11 million to $12 million.

Operator

Thank you. 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 with you again next quarter. Thank you.

Operator

This does conclude today's conference and we thank you for your participation. You may now disconnect.

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Source: Central European Distribution Corp. Q3 2009 Earnings Call Transcript
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