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Central European Distribution Corporation (NASDAQ:CEDC)

Q4 2009 Earnings Call

March 1, 2010 8:30 am ET

Executives

William Carey – President & CEO

Chris Biedermann – CFO

James Archbold – Director IR

Analysts

Douglas Lane - Jefferies & Company

Margaret Kalvar - Harding Loevner

Andrzej Knigawka - ING Financial Markets

Michal Potyra – UniCredit

[Victor Dima] - Unspecified Company

Daniel Wakerly - Morgan Stanley

Operator

Good day and welcome to the CEDC fourth quarter and full year 2009 earnings conference 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 fourth quarter and full year 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, March 1, 2010. The online replay will be available shortly after the conclusion of the call. You may also view a copy of today’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 today and in the 2009 Form 10-K 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.

William Carey

Thank you Jim, I want to welcome everyone to our fourth quarter and full year earnings call for 2009. Just to give you a little bit background, first of all the very brief economic data, really not getting into too much of that, because most of you obviously know what’s happening in the economy in our core markets.

We’ll give you the fourth quarter results and full year results. Chris will take you through the balance sheet, the recent financing that we did in the fall, including the impact of that refinancing, cash flow and other balance sheet items. I’ll take it back over and go over some of the government regulations that we saw in Russia recently and how that’s looking for 2010, get into 2010 outlook, also talk a little bit about the distribution business here in Poland, also some of the speculations surrounding this [inaudible] process that’s been ongoing, touch on that a bit, see how the synergies are progressing, and we’ll talk projections and guidance. Then open the call for any questions.

So first off on the economic data, generally most of you know that Russia had a quite negative year last year, close to minus 8% GDP decline. Most analysts are projecting this year about 2% to 3% to 4% increase. In Poland its ranging anywhere from 2% to 3% increase this year, up from around 1% last year. So a very slight increase for Poland, quite a different mood for Russia.

Inflation is coming down in both markets of Russia and Poland which we forecast to continue to come down. There’s been some rate reductions in Russia recently. Expectations are further rate reductions in Russia. Poland is estimated probably to keep rates stable at least for the next five, six months. Generally we’re seeing exchange rates moving pretty much in line with the euro dollar move except the currencies with the dollar strengthening over the last two months, what you’ve seen is a pretty stable actual Zloty and Ruble currency, which actually is helping us on the revaluation of some of our euro liabilities from the bond offer we did last fall.

Unemployment is holding fairly steady in both markets, has moved up a touch but nothing that significant. So what we’re seeing generally how this impacted the consumer, we’re seeing generally a fairly, through the fourth quarter a general softness still from the consumer. We did see the markets increase a bit in the second half of the fourth quarter which I’ll get into in a minute. But generally we’re anticipating a bigger step up from the consumer especially in Russia, probably later in the second half of this year, beginning 2011.

If you look at our fourth quarter results, first off it was impacted slightly by the currency. The Zloty was fairly stable year on year on the fourth quarter, the Ruble lost about 8% year on year so we did have some drop of currency for our numbers of top line down to the bottom line. If you look at the vodka market in general for Poland and Russia, were quite similar. We saw in the first half of the quarter roughly around a 3% to 6% decline in the vodka markets and we saw a, which went in line with the decline from the year before which really we saw the decline coming in the second half of the quarter in 2008.

So actually the second half of the quarter of 2009 we actually saw like to like, we were increasing our sales over the previous year in the vodka market actually started to see some organic movement over the last half of the quarter year on year. So generally for the second quarter we had fairly easy comps in Russia the last 45 days but not so in Poland, mainly for the reason in Poland, because you had the excise increase January 1, 2009, which certainly benefited the last two to three weeks in December where we sold extra from production and from distribution. So it wasn’t quite so easy comps on the Polish side, much easier in the last half of the quarter on the Russian side.

When we look at our Russian businesses including Whitehall, we are up organically in low single-digits in value while our Polish production business was down in low single-digits, again coming from the excise issue I mentioned before. Both of Poland and Russia production showed substantial improvement over the last three quarters of 2009.

The distribution business was still quite negative mainly coming again one is the excise which we wrote in the press release about $40 million of worse comps, our negative comps on the distribution as well as the SKUs that we’ve been taking out during the year also the loss of sales and just in general struggling a bit with the distribution business, mainly from the fact the consumer has been moving for a lower priced basket which is impacting a bit the distribution revenue.

Our key import brands in Russia and Poland, again we saw single-digit increase, exports are still up about 15% for the quarter but obviously from a lower base. If we turn to the gross margins, we increased around 200 basis points over Q3. Again this is from the impact of the consolidation of Russian Alcohol Group, also the lower margin from distribution business and in general that we saw margins from production business in Poland and Russia fairly stable year on year for the quarter.

Also the cost of goods remained quite low and even until today, the beginning of March, we’ve seen any really change in the key raw material prices that we have in Russia and Poland. If you look at the SG&A for the quarter mainly impacted again because RAG was consolidated from the second quarter, we had the impact of the RAG consolidation.

Also there was a large reduction of percentage of sales for the quarter as the number of acquisition finance and related charges were taken out for the full year in the fourth quarter and the SG&A expense was roughly around 14.5% for the quarter. Also that a lot of the cost cutting we did during the year that benefited quite substantially in the fourth quarter as well which brought that number quite low.

So as we move on in terms of the operating margins, the operating margins came in roughly around 20% for the quarter which is certainly a record for the company and the really reasons described above being the benefit of the gross margin impact, the SG&A reduction, and the overall quite stable cost of goods which the operating margins came in quite strong.

If you look at the full year results, the sales were impacted on a number of factors. One there’s a 28% move on currency for the year on the average. The distribution drop of revenue from the SKU reduction as well as the overall drop in the business and as well as the consolidation of Russian Alcohol Group from the second quarter. If you look at organic sales for the year we were flat on the year excluding the distribution business.

So overall pretty much in line with what we talked about before. If we look at the gross margins we increased gross margins around 500 basis points for the year and operating margins around 100 basis points for the year. Again that’s coming from the RAG consolidation taking effect also lower margin from distribution which was lowering the margins, and the growth in the import and export margins helping the overall growth in operating margins.

And the reason why the 500 basis points gross margins, 100 basis points increase in operating margins, a lot of that is coming from the RAG consolidation and that the company, production company, where you operate on a much higher cost base as a distribution business but then you have much higher gross margins as well.

Organically if we’re looking at the SG&A expense for the year we again did a lot of work not only on the Russian Alcohol Group which is not in this number but excluding acquisition which Russian Alcohol excluding FX, so apples to apples in the business we had a reduction in SG&A around 1.6% of sales for the year or if you just look at the SG&A cost base we had a reduction of about 8.5% in our overall cost base of the company.

So overall when we look at the quarter, the year, what we saw generally was that it was a tough year 2009. We did a lot of work financially, structurally, balance sheet wise, operational wise, really to position the company to really focus on our objectives ahead which I’ll get to in a minute but I think that we accomplished a lot during the year. We’re quite pleased with the results, obviously we’d liked a little better top line in terms of the overall for the year but if you look at the currency and we look at the, a big part of that was from the distribution business which I’ll get to a little bit later, that we weren’t able to achieve a better revenue number because of difficulties in the FX movement and the overall distribution business.

Chris I’ll turn it over to you and take through the number of issues with the balance sheet.

Chris Biedermann

Thanks, first we’ll take a look at our P&L for the full year 2009 and quarter, total operating profit, and we continue to have a number of items related to the final [inaudible] to RAG which were completed in Q4 and also the refinancing of our debt and I’ll get to that in a minute. The one-off relates to fair value adjustments to the consolidation of RAG, the final write-off the deferred consideration, numerous legal and advisory fees, other charges we had to pay, the write-off of capitalized finance off, as well as the normal FX movements.

Now stripping all that out and then looking at the profit, we had that interest expense of $80.2 million for the year, that also includes about $7.4 million of double interest that we had with the old senior notes due 2012 and the new senior notes outstanding. So on a normalized basis our net interest expense was about $69 million for the year. Now if we look out to 2010 to include the impact of the debt refinancing which I’ll describe in a minute as well, we expect our net interest expense to be between $98 and $102 million for the full year 2010.

Now moving on to refinancing, in Q4 we issued new notes in equity to fund both the final buy out of the Russian Alcohol Group as well as refinancing our 2012 notes and the debt of Russian Alcohol business. The new notes were issued in both Euros and USD with an average effective interest rate a little above 9%. The refinancing was driven not only to get the full control of RAG and obtain the benefits as William will discuss in a few minutes, but also the refinancing greatly enhanced our maturity profile whereas before we had a number of payments with a line and debt related coming due each year for the next two years. [inaudible] have our convertibles sitting around $10 million due in 2013 and the majority of the remainder of our debt is in 2016 with the repayment of these notes.

[inaudible] all the deferred consideration to RAG doesn’t have any finance and new debt and equity proceeds. That puts our net debt to EBITDA at year-end on a pro forma basis at around 4.8, about a 245 pro forma EBITDA and our target there going forward is to bring this number to the mid 3’s by year-end 2010 assuming we don’t do any asset disposals, again we’ll discuss those a bit later. And if we are able to complete asset disposals that number would dip down to the low 3’s.

Some other highlights of the balance sheet first is the liquidity, well positioned to meet our obligations, we [inaudible] on the balance sheet year end of this 41 was designed to the final payment of lines, 110 which is done in January and also final redemption of our 2012 notes which is also completed on January 4 leaving us with a clean $152 million of cash. Now with deferred consideration and contingent liability settled, RAG, and our long-term debt refinanced we can really, the cash on our balance sheet to drive the daily operations.

And our short-term bank facilities amounts to $124 million at year-end for which we expect the majority to roll over by year-end. Operating cash flow for the 12 months of 2009 was $92.6 million which compared to $72.1 million last year, again as mentioned on prior calls this doesn’t factor in the roughly $40 million that RAG could generate in Q1 before we consolidated which would result in a operating cash flow of about $132 million.

We were able to manage receivables effectively through a difficult year in all of our core markets which came through in our cash flow number and looking at 2010 we expect the trends on working capital to continue. On a CapEx front we look forward to a CapEx of about $12 to $15 million looking out at 2010. I’ll now turn it back over to William to provide a further overview of our planned activities.

William Carey

Thank you Chris, if we take a look at the 2010 market overview, and before we get there just touch a little bit on the government regulations that we saw that came out in Russia that impact the market overview for 2010 pretty much in line with what we discussed on the November call. The government went ahead with its 200% beer excise increase. What we’ve seen in Russia generally is about a 20% to 30% increase in beer prices pretty much across the board.

The government has been very aggressive on the continued crackdown on illegal production. There’s been a number of arrests made in the first few months of this year in Russia in terms of illegal production. They went ahead with the minimum selling price of 79 Rubles for half a liter bottle of vodka or spirits, again that we believe this is quite positive to potentially bring down the black market.

And the government’s main aim through the different regulations they have put in place is to continue to bring down the grey zone or black market which is still operating above 40% because its costing the government quite a bit of money on health costs as well as they would like to collect more excise revenue from moving some of this unofficial market into the official market.

So we believe this is all quite positive for us. We don’t know how positive yet, we’re only after a few months. As we said before we need to give it six to eight months to really see what sort of effects are coming from this government regulation but overall we do view it as certainly neutral to positive which we can give some more color probably later this summer. There’s been a number of other small government regulations which I won’t get into but again, has been generally neutral to positive for our overall business.

If we look at the 2010 market overview what we see coming out of the markets in Russia and Poland that we’re anticipating coming from markets that were 5% to 10% down last year, in 2009 we’re anticipating the markets, the vodka market to be relatively flat this year on terms of volume. We are able to get some pricing through this year. We are looking at organically to grow, mid single-digits from our vodka brands through our core markets and a bit more to high single-digits in terms of value growth.

We are seeing much bigger growth coming out of the import business in Russia again coming out of a very weak first quarter 2009, we’re looking around a 15% to 17% increase in value in our import business in Russia. On our vodka business in Russia we also launched a new vodka brand in the fall of last year and that additional shelves will be on top of the numbers that I previously mentioned for the vodka market as well as we’ll be looking to launch another vodka brand the second half of this year in Russia as well, priced above the Green Mark product that we have in Russia.

Also we’re looking to launch a new vodka brand in Poland in the second half of this year as well which we anticipate quite good results from. Also what we’re seeing in the overall market is that the import margins which were under pressure in the first quarter of 2009 have come back quite strong with the strength of the currency. As the know the Zloty and Ruble has appreciated 20% off of its lows in the first quarter a year ago. So we’re seeing import margins helped by the weakened euro as most of the imports that we import into Poland and Russia are based on the euro Zloty or euro Ruble currency.

So this is a quite positive also because we look at the overall imports, they are tracking at around 20% to 25% of our overall business. Sometimes people view our company as just a vodka company but to be honest the imports track about 20% to 25% of our sales in Russia and in Poland. And historically have been better growth rates than our vodka business. If we touch back a little bit from the press release that we’re anticipating a much stronger consumer demand in the later half of 2010 and we believe that there will be a renewed trend again towards [inaudible] within our core market and the largest potential market, Russia.

We’ve positioned ourselves in a very strong market position in Russia to take advantage of what we believe is to be around a three to five year growth cycle coming out of the market in terms of [inaudible] and strong demand for imported products. We’ve taken control as Chris said of our largest asset in the Russian Alcohol Group. We thought it was necessary to really take control during this three to five year window. We were quite pleased with the number of things Lion Capital did by running the Russian Alcohol Group, but we felt by having a three to five year growth cycle, it sounds like a long time, but if we wanted to have full control of to realizing our potential opportunities, by taking management control of RAG which we felt it paramount to where we want to go with the company to control our destiny and not having to work with a partner on that.

We’ve taken control also of the Parliament business and we are currently looking at the integration of Parliament and RAG as we discussed before. We’ve done a lot of work since mid December on putting these businesses together. We’re looking at the sales structure to be completed by March, April this year and we’re looking at the back office, logistics, etc. to be completed by June, July of 2010. So we’re currently looking, things are progressing quite nicely and we’re looking at $11 to $12 million of synergies in our projections coming from the integration savings in 2010 because we don’t have the full year of savings so we’re looking at $11 and $12 million in 2010 coming from the synergies which is in our guidance which I’ll get to a little bit later, our operating guidance and EPS guidance.

But if we look at the vodka market in general that we still see the opportunity coming from the vodka market in Russia coming from the two main factors, from the sector consolidation which is coming from the premiezation which means the mainstream and sub premium sectors growing at the expense of the economy sector. If you look back a little bit of history in Russia 10 years ago economy sector was probably close to 80, 85% of the market. Today its closer to around 45% of the market again replaced my mainstream and sub premium which has been driven by the overall growth of the middle class and premiezation within the market.

And we believe quite strongly that the market will continue to trend down, 2009 was not a good example but as the markets continue positive GDP growth we believe that the market will continue to trend down to 25% 30% economy sector again replaced by mainstream and sub premium markets. We have the best leading brands in mainstream and sub premium in Russia and we’re looking to extend our portfolio within these two sectors. We believe there’s going to be a very nice sector consolidation over the next three to five years and continued growth in these two categories.

At the same time as we discussed before that the consolidation of the Russian vodka market we continue to see weak players really generally players with less than 1% share, which is roughly 80 to 100 of these players in the market that continue to struggle in the market because they don’t have the leverage portfolio leverage, they don’t have the logistic leverage, they don’t have the [inaudible] leverage to really grow much in the market in terms of their overall market share. So what we see is that the vodka market probably there’ll be four to five winners in the market moving up from around the 45% top five players today moving up to that 70 to 75% of the market in the next three to five years and again that we believe that CDC with its leading position in that consolidation in terms of organic consolidation there might be some small M&A along the way but generally speaking I’m talking more organic that we believe that in looking at the other consumer markets sectors across Eastern Europe it’s a natural trend that four to five players will gain roughly 70 to 75% market share that you see almost across every consumer sector across Eastern Europe and for that matter the world. We’re looking at 2010 improving gross margins by 300 to 400 basis points, again that’s coming from a number of factors not only the growth that I talked about in our core businesses. You’ve got the consolidation of RAG for one more quarter.

You’ve also got pricing opportunities which we did not have in 2009 and you have a mix generally coming from Russia growing faster than Poland so you have a geographical mix which is beneficial to the overall gross margins. If we look at the operating margin expansion of 200 to 300 basis points again that’s coming from the growth in the gross margin business, the large cost reductions we’ve done throughout the last 12 months, the synergy savings, the growth in the import and the export business.

And again we’re looking to increase market share in our core markets not just going into economy sector to highlight a market share gain but really looking in the core business which is mainstream and sub premium. We’re also looking at a number of new vodka developments which I mentioned before in terms of Russia and Poland. We’re also, we’ve explored deeply at the Russian brandy market which is one of the largest in the world. We looked at some small M&A but did not find any true brand equity that we wanted to acquire so we will start organically in creating our own brandy business the second half of this year which will be put through the overall RAG infrastructure we have which is by far the largest sales force in Russia in the spirit sector.

We’re still doing a lot of work on the export and import side of the business. We’re restructuring currently the export team across Parliament, RAG and Poland in terms of one export team. We’ve signed a very key agreement for us with Remy, one of the very good distributors in the US for our key Zubrowka brand. We’re also negotiating on a number of import brands for Russia which we hopefully could put some announce something by summer. So we’re working on a number of new initiatives to increase our overall product portfolio again moving to a fixed cost infrastructure, we think that’s really key for us to developing a much faster top and bottom line performance.

If we turn our attention to the distribution business, in Poland there’s no doubt we’ve been struggling with this business for the last three to four years. We’ve done a lot of work last year on taking out a lot of low value SKUs that didn’t make a lot of sense in terms of distribution but certainly the business in general has struggled last year but we’ve seen for the first few months this year the business has stabilized. But again this is not our long-term strategy. We continue to look at options of discussing this, of divesting this asset either through a trade sale or a local IPO.

We’re exploring both avenues and I think we should be able to give more color on this in the second quarter on how the process is going. But if you look at the business model we have a production in import. If you do separate out the distribution business you’re looking at EBITDA margins ranging around 28 to 29% which is second in the world only to [Diagio] which I think is around 31 32%, so I think that this would be doubling our overall obviously you’d have a revenue decline but you’d be doubling your overall EBITDA margins.

I know many of you want to know potential sale multiple etc., at the moment we cannot disclose information as we’re in the middle of negotiated discussions and I just can’t give you more detail at this time on more specific numbers on that business. But because the process is moving forward we have decided to account in the first quarter distribution as a separate segment in our accounting so you will see that separated out in the first quarter of 2010.

If we looked a little bit at the [Nemeroff] process there’s been a lot of speculation on this Ukrainian Russian vodka company on the asset, on the sale process that is currently ING is running a formal process on selling this asset. This asset is a really one of the top vodka assets in the region in terms of brand equity. Its probably top five vodka brand in Russia and certainly number one in Ukraine and probably top five in Russia in terms of brand equity. Its one of the leading brands with about a 3% market share in Russia and about an 17%, 18% share in Ukraine. The formal process has started probably they’re looking some time later this year to have some type of closure. We view this as strategically quite interesting for us. There’s a huge amount of synergy without a lot of overlap on customer base. This is a, it makes a lot of sense for us but its not a must have brand for us. I want to make it clear its not a must have for us. We’re looking at, if we can divest some of our assets in the transaction is immediately accretive to earnings, and keeping leverage at a low level.

As Chris mentioned one of our keys to our business is decreasing our leverage with a [free] range this year, that we will take a hard look at this asset. There is substantial synergies, obviously across Russia within this company but we feel that it is strategically important for us that we deliver on our objectives organically and that we deliver on a very ambitious plan that we have in front of us this year but at the same time if it makes sense financially. We’re not looking for dilution. We’ve not looking for leveraging up the balance sheet so if we can find this and can fit in with some of the asset disposals we have in place, we will take a look at this.

So really to summarize, year 2009 was a challenging year for us. We did a lot of work with Lion Capital on restructuring our deal then we went ahead and took them out early. We took out a lot of contingent liabilities off of our balance sheet. We’ve seen the consumer, the vodka market decline 5% to 10%. As we look forward we see the consumer pick up the later half of 2010. The recent restructuring of our balance sheet that Chris mentioned last fall the company is in a great position from all angles to take advantage of a strong market over the next three to five years.

We certainly don’t like the dilution that came from the offering but we believe that looking at the overall objectives of our company looking forward we believe it was the right thing to do at the right time. We have a sound management team in place and with the refinancing behind us we can actually start focusing on our key objectives for 2010. We have moved our business over the last five years from a distribution company that most of you know from before to the largest vodka company in the world today.

With the strong position that we have in Central Europe and Russia for future growth opportunities that we see in front of us over the short horizon. So we are very very pleased that we can actually start focusing as management and rather than discussing with legal and bankers on deal flow. If we look at the guidance that we put out that we’ve lowered guidance for 2010 that’s on the back of the offering. It was around $0.30 dilutive with the increase of the equity and the increase in the debt that we did at the end it became around $0.40 to $0.45 dilutive for 2010 earnings as well as the exchange rates we are using for our guidance also we raised the exchange rates because where they currently are trading which add another $50 million of revenue decline in the top line because of the currency and on the bottom line EPS one from the dilutive offering of the debt and the new shares and also on the currency move we are reducing our guidance from $3.00, $3.15 to $2.56, $2.57 mid point, $2.62 on EPS for 2010.

The operating profit that we’re looking at for 2010 is $315 to $330 million and that includes an $18 million of depreciation, so you’re looking at roughly around the $340 million EBITDA for the year for 2010 which is an increase from $230, $240 for 2009. So quite a bit increase again coming from a lot of factors we talked about and we’re quite excited about what’s in front of us and I’ll now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Douglas Lane - Jefferies & Company

Douglas Lane - Jefferies & Company

Can you talk about in your outlook for 2010 the fourth quarter sales number was maybe $100 million below kind of where the targeted range was and yet you only brought the top end of the full year 2010 down by $100 million, what’s the key delta, what do you think happened in 2009 that won’t happen again in 2010 on the sales line.

William Carey

If you look at the sales line, a big part of that was the drop in the distribution revenue for the year. The distribution revenue for the year dropped about $150 million drop for the year and what we’re looking at that stabilization of the distribution today. So that’s one of the factors that impacted 2009 that you’re not going to see in 2010.

Douglas Lane - Jefferies & Company

Now when you report in 2010 with the distribution separate, are you going to have basically Russia and then two sort of Poland divisions, one distribution one production, is that what we should expect.

Chris Biedermann

We’re going to start viewing distribution as a separate segment so you’d have four segments rather than three, you’d have Russia, Hungary and two for Poland.

Douglas Lane - Jefferies & Company

And the balance sheet here as December 31 and sort of in the middle of this whole process with the RAG, are a couple of these short-term obligations, are these gone now the short-term obligations under senior notes, the $359 million there, the deferred consideration.

Chris Biedermann

Those senior notes are completely, basically paid on January 4, 2010 and $110 of the deferred consideration for [Lion] as well paid at the beginning of January, 2010.

Douglas Lane - Jefferies & Company

And the remaining $50 is what in May.

Chris Biedermann

Yes, $45 would be in May has the option of share or cash.

William Carey

The K that will be filed later today you’ll see clearly all that clearly highlighted.

Douglas Lane - Jefferies & Company

And then on some of your strategic moves here what do you think the impact will be of having obviously Remy [Contreau] in a big player and a lot of penetration in the US is that going to be a meaningful change in the Zubrowka sales in the US.

William Carey

It will be a meaningful sales change from what we currently are yes. As you know we solved the trademark issue. You will see it. We’re launching into five main markets including New York so you will see it around much much more. We’re targeting around 20,000 cases for the first year. I think 30,000 for the second year. It’s meaningful for us to get it out in the marketplace and start to realize a strong brand equity that is has and we believe potential. Is it going to change much, our P&L, no.

Douglas Lane - Jefferies & Company

And then you had talked in the past, I know you have a strong relationship with Gallo, bringing their wines into Poland, can you update us on Gallo wines in Russia or CDC vodka in the US, where do you stand strategically with the folks at Gallo.

William Carey

We’ve started with Gallo as of last November in Russia, and now that that’s moving into the RAG sales force as we speak so that’s moving ahead so we anticipate again starting from a zero base we hopefully will see some of the similar results as we’ve seen from some of the business that we have over at Whitehall, or some of the business that we have from Compari so I, we can’t get too excited about it because its coming from a zero base but certainly we are excited that we get started and any type of success that we built the brand number one in Poland, this certainly will be a very nice market for us and on the US side on Green Mark that we’re still discussing with the parties.

Douglas Lane - Jefferies & Company

How many Gallo brands have you started with in Russia.

William Carey

Two. So basic, the ones that we have in Poland, the basic Gallo and the Carlo Rossi.

Douglas Lane - Jefferies & Company

So the Parliament Russian Alcohol Group combined you have Green Mark, you have Parliament, you have two vodka brands that you introduced in the fall and then now you have the two Gallo brands, is that pretty much it.

William Carey

We also have some of the tequila from [Borko] group which does our business in Germany, Parliament is doing very well in Germany, one of the top brands in Germany that we work with Borko Group, it’s the second biggest group in Germany. We work with them in Poland and also we work with them in Russia on some of the brands for Russia and we also have the number one economy brand in Russia, [Yumskya] So today we have the number one sub premium, number one mainstream and number one economy in Russia, Yumskya is doing quite well. Plus the new vodka brands we launched.

Douglas Lane - Jefferies & Company

If you look at those companies versus a year ago, you’re really building out the portfolio pretty rapidly. Wasn’t it basically two brands a year ago.

William Carey

Three, Parliament, Green Mark and [inaudible], yes.

Operator

Your next question comes from the line of Margaret Kalvar - Harding Loevner

Margaret Kalvar - Harding Loevner

I have a couple of questions, first this is quick one, could you repeat I didn’t quite catch the number that you mentioned for your EBITDA estimates for guidance for 2010.

William Carey

For 2010 we’re looking at roughly around a $340, $342 number at the mid point.

Margaret Kalvar - Harding Loevner

And of that you said how much is depreciation.

Margaret Kalvar - Harding Loevner

We said $18.

Margaret Kalvar - Harding Loevner

Now another question on working capital are you expecting to have any impact from higher amounts of excise duty paid in advance. Is there some sort of policy change going on or will the additional volume that you sell simply necessitate a higher amount of up front payments and is there a change in the way the government is collecting or billing for this.

William Carey

Yes in Russia you’ll probably have a couple of weeks on the excise payment moved up on average.

Margaret Kalvar - Harding Loevner

What kind of impact is that going to have.

William Carey

In Poland we don’t have any impact, just Russia, a couple of weeks moved up on the excise on average. Its not that significant. And that’s factored in our cash flow.

Margaret Kalvar - Harding Loevner

And then you also mentioned just now on the call the creation of looking to create did you call it a value business in Russia, I didn’t quite understand that because I thought that you were definitely more moving just not going much below the mainstream segment in order to—

William Carey

No we’ve always had a few economy brands, we have one in Parliament, we have one at RAG, Yumskya, its been there for a number of years its just that its again because of the consolidation effort the brand is getting bigger and bigger distribution reach and today its number one economy brand. Its not that large, its around two million cases out of a business in Russia, we do about 19 million cases so its not that significant but we do make some money with it.

Its good for overall cost of goods, lowering the cost of production labor and other things that we put into the cost of production so in the segment Poland we also have about 10% 15% of our business in Poland also in economy which has always been there. Its just that we don’t focus on it.

Operator

Your next question comes from the line of Andrzej Knigawka - ING Financial Markets

Andrzej Knigawka - ING Financial Markets

On the numbers can you just tell us what was the organic growth in Poland over all or maybe separately for distribution and production in fourth quarter if you exclude the currency impact from the fourth quarter for production and distribution.

William Carey

We had relatively flat organic growth in fourth quarter for production and import. We had in terms of value, it was slightly negative import was slightly positive and it gave us relatively flat number.

Andrzej Knigawka - ING Financial Markets

So production organic growth was flat and how about distribution.

William Carey

It was slightly negative but the import was slightly positive, it trended out at an average of around flat. And the distribution business with the excise as discussed on the call the excise was a headwind on production as well because a year ago with the excise increase January 1, 2009 we sold more as a producer and sold more as a distributor so this year in the fourth quarter we had negative comps on our Polish business because this year there wasn’t any excise. So you didn’t get the benefit of selling more in the fourth quarter as you did the year before. Which should translate to a better first quarter.

Andrzej Knigawka - ING Financial Markets

You’re referring to the $40 million impact mentioned in the release.

William Carey

Yes. Also there was some headwind on the production as well, obviously you sold more from a producer as well.

Andrzej Knigawka - ING Financial Markets

And in terms of guidance what is it that you’re assuming for the vodka volumes for Russia in 2010 in terms of million of cases.

William Carey

I don’t have that in my head on the millions of cases but we are assuming for our vodka business a mid single-digit volume growth with a flat market and a high single-digit value growth. And then on the import side as I mentioned about 15% to 17% for our import business and value growth in Russia.

Andrzej Knigawka - ING Financial Markets

And that mid single-digit volume growth will be from the base of what $19 million, $20 million last year in Russia.

William Carey

I don’t have the numbers in front of me but that would be from the base of 2009 and as I mentioned the new vodka brand launches we did in the fall would be on top of that plus any new vodka launches we would make in 2010 would be on top of that number.

Operator

Your next question comes from the line of Michal Potyra – UniCredit

Michal Potyra – UniCredit

Can you please give us a bit more details on the gross margin in 4Q, I remember you guided gross margin around 37%, 38% in 4Q and it turned out it was around 35%, can you please explain the difference.

William Carey

Yes I think the main difference is coming from the distribution margin which was lower because not only is the business struggling with sales its also struggling with margins. So that has a big weight in the overall margin. So that had some impact. And then we anticipated some better top line in the fourth quarter from our overall business that we had budgeted better top line growth rather than flat in the fourth quarter. We only really saw December, like I said the last 45 days pick up quite substantially but the first 40, 45 days were a bit soft. And we anticipated going into the quarter a bit stronger top line.

Michal Potyra – UniCredit

Do you expect now when [inaudible] vodka has gained such a substantial market share that they would go for some substantial price increases in 2010.

William Carey

Yes we’ve seen them already take some price increases quite significantly in December and January on some of their key products, [inaudible] to some of their economy and remember their market share is also based a big part on economy which again we don’t really focus on. We don’t really have too much in the economy market share. We already know they’re focused on cash flow as any private equity group is, much more now and also focused on increasing the profitability so I think we will see further price increases during the year.

Michal Potyra – UniCredit

And can you also give us some estimate of your market share in Russia at the year-end.

William Carey

I think we had 18.8%.

Michal Potyra – UniCredit

So as far as I remember that is up from 17 last year right.

William Carey

Its hard to really estimate true market share because the data is so poor but yes I think we had 17.5 and I think we’re looking around 18.8, it should be up slightly because we were better than the market.

Operator

Your next question comes from the line of [Victor Dima] - Unspecified Company

[Victor Dima] - Unspecified Company

On the fourth quarter operating expenses out of $270 million how much roughly were one-offs.

Chris Biedermann

If you look at our reconciliation you’ll see that in the press release how much were one-offs that are backed out to get to normalized operating expenses.

[Victor Dima] - Unspecified Company

And question on how your sub premiums, main sub premium brands in Russia are doing, we’re already two months into the first quarter and I’m just wondering what’s your feeling about the sub premium brands, specifically the Parliament and Zhuravli, because I assume they would be probably the ones who suffered the worst from the consumer.

William Carey

They are doing much better on a comparable base to last year certainly Parliament no doubt is doing much better than a year ago. And I think that our assumptions on the Parliament brand is plus 10% on the Parliament brand itself for Russia this year but again coming from a weak base for 2009 in volume and a little bit more on value.

[Victor Dima] - Unspecified Company

And is there any chance for the Whitehall for you to gain the operational control of the Whitehall’s here.

William Carey

We would like to take control as we said before, we would like to take control of the Whitehall business in terms of management control. We will negotiate with Mark [Koffman] at some point later, probably in the first half of this year also with Hennessey because we would need their approval as well. And we will try to progress those discussions but again it needs to be at a fair price so it’s a bit too premature to say how much but yes we would like take control over that maybe later this year or 2011.

[Victor Dima] - Unspecified Company

In terms of if you’re looking to dispose of the Polish distribution business just wondering are you running any price or bargaining power with from disposing probably what is one of the largest distribution businesses in Poland once you’re left with the vodka business and imports only.

William Carey

In terms of bargaining power with—

[Victor Dima] - Unspecified Company

With the distributors, do you, is there any risk in this respect if you’re going to—

William Carey

I think the distributors will be quite happy because you wouldn’t be competing against them as a producer and distributor so they would be quite happy but obviously that any potential process that we would be very careful of the fact that the partner that we do choose or an IPO that we’re very careful that we make sure that the distribution of our core product is maintained.

But also the risk is on the other side because the entity is buying that cash flow stream so its very important to them that they want to keep that cash flow stream as well because they’re paying for that.

Operator

Your final question comes from the line of Daniel Wakerly - Morgan Stanley

Daniel Wakerly - Morgan Stanley

My first question is for me the story with the margin in the fourth quarter was a really massive reduction in your operating expenses and sequentially versus the third quarter of 2009 we didn’t see that change sequentially last year and we did this year so I guess it’s the RAG effect, can you talk about what it is within the RAG business that makes it so, why it has this big leverage benefit in the fourth quarter, is it, can you just talk about its cost base and it helps to understand how you do that.

William Carey

I think it’s a number of accumulated acquisition costs, Lion charges, finance charges, legal, other charges through the year that were accumulated RAG that are not relative to the operating business. So it was a bit of a catch up in the fourth quarter that you’ll not see going forward and I think your true run rate will be closer to about a 17%, 17.5% run rate which is still quite good which is down from around the 19% that we projected in the previously for the quarter of the fourth quarter and then you—17%, 17.5%.

Daniel Wakerly - Morgan Stanley

So what is that, what are you thinking.

Chris Biedermann

What we’re saying is we did, as we took control we had a clear picture of all the costs that are included in RAG are related to transaction, those all [inaudible] in Q4 so you had a bit of catch up in Q4 so the real cost base on a quarter basis is a little bit lower. I still think a real normalized Q4 rate would be that 17, 17.5%.

Daniel Wakerly - Morgan Stanley

For operating expenses.

Chris Biedermann

Yes.

Daniel Wakerly - Morgan Stanley

If we think back to fourth quarter 2008 and first quarter 2009, we had loading in Poland and then deloading because of the tax we had some I guess one of inventory reductions in Russia in 1Q, thinking about the fourth quarter we’ve just had and the first quarter now are there any, it sounds like its pretty clean, maybe there was a little bit of loading in Russia or how should we think of it.

William Carey

No I think Russia was impacted mostly by Parliament and Whitehall were the two biggest effected in the first quarter coming out of Russia being our two highest premium product bases on the import side, on the cognac, champagne as well as on the higher priced vodka Parliament. So obviously they’re seeing the best benefit coming in the first quarter, RAG didn’t have much increase of stock, didn’t really see any impact on their business. And in Poland of course with the excise there was certainly higher stock in Poland which you don’t see to the same degree this year.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

James Archbold

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

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Source: Central European Distribution Corporation Q4 2009 Earnings Call Transcript

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