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Executives

Marina Kagan – Head of Public Affairs

Tony Maher – Chairman and CEO

Dmitry Ivanov – CFO

Analysts

Victoria Sokolova – Troika

Daniel Wakerly – Morgan Stanley

Victoria Petrova – Credit Suisse

Taras Shumelda – American Century

Margaret Kalvar – Harding Loevner

Howell Famaninko [ph] – Merrill Lynch

Wimm-Bill-Dann Foods OJSC (WBD) Q4 2009 Earnings Call Transcript March 23, 2010 8:30 AM ET

Operator

Good morning. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to Wimm-Bill-Dann Foods’ fourth quarter results conference. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

I will now turn the call over to Marina Kagan. You may begin your conference.

Marina Kagan

Hello ladies and gentlemen and thank you for joining us to discuss the financial results of Wimm-Bill-Dann for the fourth quarter and full-year 2009. As always, after our presentation, we will be happy to take your questions. Before I hand the call over to our Chief Executive Officer, Tony Maher, I would ask that you please refer to the cautionary statements included in the press release covering any comments made during this conference call. Tony?

Tony Maher

Thanks Marina. Good afternoon to those of you joining us from Russia and Europe and good morning to our participants in the United States. While 2009 was not easy for business as a whole as the macroeconomic environment was more negative than many expected, Wimm-Bill-Dann succeeded in strengthening its market position and enhanced its balance sheet.

The full-year numbers are strong despite additional challenges in the fourth quarter when the disruption of raw milk supplies forced us to curtail production primarily of sterilized milk. As we outlined in our trading update, the fourth quarter saw lower-than-expected sales and subsequent pressure on margins. Generally however, despite the macroeconomic and industry challenges we faced, I am pleased with our overall performance for the full year of 2009.

In 2009, we achieved solid margin expansion and continued to generate strong cash flow from our business, both of which are remarkable achievements given the environment. Full-year gross margins improved by 110 basis points to 33.4% and full-year EBITDA margins improved 130 basis points to 14.1%, both records for our business.

We also generated over $312 million in cash from operations. Additionally, our sales were resilient, down only 1.3% on a constant currency basis. This financial performance is the result of our continued fiscal discipline and execution of our strategic initiatives. This same discipline will allow us to navigate the near term market challenges and position our business favorably over the long term. The fundamentals of our business remains sound and our guiding principles remain unchanged. We are focused on driving efficiency improvements to boost margin performance, investing in our brands to promote strategic and profitable market growth, and driving healthy cash flows from all our businesses to fuel our growth initiatives.

I would now like to take a moment to address the impact of the raw milk charges on our business, and then I will review each segment’s results in greater detail. As we mentioned on our December conference call, limitations on the import of dry milk put significant pressure on the supply of raw milk, which we rely upon for our dairy products. As I am sure you are aware, for much of the fourth quarter, the border with Belarus, a major supplier of dry milk into Russia was closed, putting significant strain on the markets.

The fourth quarter is seasonally at times a very high demand for dry milk in Russia, driven primarily by the confectionary industry. As a result, we saw a distortion in the market, with the price of dry milk rising above the price of raw milk, and raw milk being tried to meet this demand. This supply shortage impacted our business primarily in two ways. First, it created a price spike and raw milk pricing in December was 29% higher than from the beginning of October. Second, because of the shortages, we prioritized our portfolio with an emphasis on ensuring that our value-added products primarily were available to on store shelves. These disruptions were particularly unfortunate because the demand was strong, something you can see in the sequential improvement in sales in the dairy business.

Absent the shortages, the fourth quarter would have been much stronger, which is why I am confident on the fundamentals of the business that remained solid. As we moved into the first quarter, the conditions we saw in the fourth quarter persisted. Raw milk prices continued to escalate up until February. We have taken pricing actions in the first quarter as a way to manage our rising input costs, and going forward, we believe that recent trends in raw milk pricing and availability should help us to maintain healthier margins from the second quarter onwards as raw milk prices rebate.

Let me now highlight some of the numbers. While sales were flat compared to the fourth quarter of 2008, fourth quarter sales grew 6% on a constant currency basis over the third quarter of 2009 overall and in every segment, dairy, beverages and baby food. Full-year revenues were down slightly at 1.3%, while gross margin for the year was 33.4%, up 110 basis points. For the full year of 2009, EBITDA in US dollars declined by 15.1% to $307 million, however on a ruble basis, it grew 8.5%. Despite the pressure on the fourth quarter, full-year 2009 EBITDA and margin improved to 14.1%, up 130 basis points.

We successfully reduced our selling and distribution expenses by 22.2% in 2009 and general and administrative expenses by 19.8% for the same period. As a percentage of revenue, both were essentially flat. The economic downturn provided an opportunity for greater intersection which enabled us to make perhaps greater efficiency gains than we otherwise would have achieved in a normal growing economy. Many of the savings relate to permanent improvements to our business, and will allow us to deliver greater earnings leverage overtime.

As an example, consider our transportation costs, which were down 34.3% for the year. By enhancing our distribution and placing our products closer to our customers, we have reduced our transportation costs and achieved greater utilization of our trucks. Even while we take cost out of the business, we recognized that selective investments are necessary to grow our brands for the long term. Hence our marketing and advertising spend stood at 6.4% of revenue in 2009 compared to 5% of revenue in 2008. The fact that our EBITDA margin increased in the context of this additional investment speaks strong overall performance.

We also took steps to strengthen our capital structure by repaying debts in 2009. We successfully reduced our total debt by $149 million, or 22%. Dmitry will provide more details on this momentarily, but we are extremely pleased with our leverage ratios and our net debt positions as a result of our prudent debt paydown and cash flow generation. Cash generation continues to be of paramount importance to our financial discipline, especially as we work through the challenges facing our industry and the broader economy. We generated $312 million in cash from operations in 2009 and ended the year with over $248 million in cash.

This healthy balance sheet allows us the freedom to actively pursue further industry consolidation which we foresee especially within dairy. We intend to make some investments in market opportunities that we feel are strategically complementary and financially attractive. In this economic environment, fair evaluations are extremely difficult to come by, so I take some time to come to an understanding of the true value of our business. But there are some interesting opportunities in the market. The dairy market particularly across Russia is highly fragmented and regionalized, creating an opportunity to realize the benefits of scale through consolidation.

Now, turning to our market segments. Starting with dairy segment, fourth quarter sales were up $415 million, a decrease of 11% on a year-over-year basis. Sales for the full year were $1.53 billion, down 27% compared to 2008, 6.7% on a constant currency basis. Gross margin for the dairy segment in the quarter contracted to 24.9% from 28.9% in the fourth quarter of 2008, due to the impact of the disruptions I discussed previously. Full-year gross margin was 29.4%, up 30 basis points from 2008 levels despite the headwinds.

In our beverage segment, fourth quarter sales were $103 million, an increase of 2.5% on a year-over-year basis and 9% on a constant currency basis. Beverage sales totaled $407 million for the full year, down 14.1% in comparison to 2008, but up 9.8% on a constant currency basis. Overall, performance from our juice part is strong. We continue to gain market share and strengthened our market position vis-à-vis competition. Gross margin for the beverage segment in the fourth quarter was 31.2%, an improvement of 50 basis points compared to the same quarter a year ago, and 110 basis points over the third quarter of 2009. Gross margin for the full year was 39.7%, up 60 basis points year-over-year.

In our baby food segment, fourth quarter sales were $67.4 million, an increase of 7.4% year-over-year or 17.8% on a constant currency basis, continuing with the strong performance this segment has delivered over the last number of years. For the full year, baby food sales totaled $244.2 million, down 4% year-over-year, but up 52.6% on a constant currency basis. We continue to grow rapidly and realized market share gains in baby food, our large product portfolio coupled with our strong focus on the customer and a significant pipeline of innovative products will continue to grow this business and support strong margin performance from favorable product mix. For the fourth quarter, gross margin for the baby food segment was 45.2% and 48% for the full year, up 110 basis points from the full year of 2008.

Overall, our branding strategy continues to deliver market share gains and margin improvement despite the challenging market conditions. We have consistently been able to leverage our customer knowledge to deliver products at all price levels. We have ample cash on hand and carefully considering opportunity to improve our return on invested capital and support business growth initiatives.

Thank you for your time and your continued interest in our company. I will now hand the call over to Dmitry to review our financial results in detail.

Dmitry Ivanov

Thank you Tony. Wimm-Bill-Dann Group sales decreased 7% in the fourth quarter of 2009 over the same period last year to $586 million. Sales in the dairy segment declined 11% over the same period in 2008 to $450 million. The average dollar selling price for dairy declined 10% to $1.21 per kilo in the fourth quarter of 2009 from $1.35 per kilo in the same period last year. This decline primarily reflects unfavorable change of exchange rate.

Gross margins in the dairy segment decreased to 24.9% from 28.9% compared to the same period last year. This decrease is attributable to sharp increase in the raw milk costs in late 2009 caused by unprecedented dry and raw milk shortage. Nevertheless, gross margin in the dairy segment increased 30 basis points to 29.4% in the full year 2009 from 29.1% in 2008, driven by improved sales mix.

Sales in beverage segment increased 2.5% over last year to $103 million, due to strong volume growth and prices. The average dollar selling price in the beverage segment in the fourth quarter declined 8.5% over the same period last year to $0.80 per kilo. Gross margin in the beverage segment was 41.2% for the fourth quarter of 2009, an increase of 50 basis points over last year.

Relative to the fourth quarter of 2008, revenue in the baby food segment for the fourth quarter 2009 increased 7.4% to $67 million. The average selling price in the baby food segment decreased 3.8% over the same period last year to $2 per kilo. This decrease was driven by the ruble devaluation, offset by volume growth and a stronger sales mix. Gross margin in the baby food segment was 45.4% or 260 basis points less over the same period in 2008, driven by sharp increases in raw milk in late 2009. The gross margin in the baby food segment increased to 48% in the full year of 2009 from 46.9% in 2008.

I will now turn to operating expenses and other components of the P&L. Total selling and distribution expenses decreased by 12% to $107 million compared to 2008, driven by decreases in transportation and marketing and advertising expenses, 23% and 6% respectively. General and administrative expenses decreased 20% for the full year 2009 over the same period last year to $137 million, driven by continued optimization of G&A expense.

Financial was $11 million, a decrease of $54 million from $65 million during the same period last year. This year-over-year decline is attributable mainly to currency exchange rate effect. Our EBITDA declined 23% over the same period last year to $60 million. EBITDA margin declined by 220 basis points to 7.2% compared to the fourth quarter of 2008. However, EBITDA margins improved by 130 basis points to 14.1% for the full year of 2009 over the same period last year. We reported net income of $117 million for 2009 in comparison to $102 million in 2008.

Capital expenditures increased [ph] by 37% for the full year of 2009 to $122 million compared to (inaudible) for the same period last year. Our operating cash flow for 2009 was $312 million, less 3% from $321 million in 2008. We generated $187 million from free cash flow for 2009, a significant improvement from $140 million generated in 2008.

We also continue to maintain our debt level and it’s under control. Our net debt decreased by 31% year-on-year to $275 million, and our net debt-to-EBITDA ratio declined to 0.9 as of the end of 2009 from 1.1 in 2008. Overall, our results are solid with challenging environment, and we continue to improve the efficiency of our future.

Marina Kagan

Thank you Dmitry. Operator, we are now open for questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question is from Victoria Sokolova.

Victoria Sokolova – Troika

Hi everyone. It’s Victoria from Troika. I have several questions on the dairy if I may. First of all, I would like to understand the market share evolution by different segments. So, what was the market share evolution and traditional in value add etcetera? Secondly, if you can give us a feel for the volumes, how did the volumes perform in the fourth quarter, and thirdly, if you can please comment on the supply of milk situation, at which point it has recovered and what will the impact be on the first quarter? Many thanks.

Tony Maher

Hi Victoria, we are well. Thank you, and I hope you are too. Firstly, on market share, our market share in – we divided into many categories actually both primarily into what we describe as value added and the market share in value added for 2009 has increased. In the case of traditional dairy products, we lost some market share in the full year about, somewhere about 2 share points. And that was pretty much all in sterilized milk. In pasteurized milk, actually we started gaining share because we haven’t probably said too much about it, but we have launched pasteurized milk in bottles and we have started gaining share in this area in the recent past. But overall, we lost share in the traditional dairy products, but they are lower value, so we prioritize basically where we have the best return, revenue for example in sterilized milk actually gained share. So, in respect of our sterilized milk with also mix, because of course we have got some high, you know, relatively speaking, high price trends and some lower price trends. That was your first question.

In relation to milk, as I said on the introductory remarks, the price of milk continued to grow into and all the way to February. The availability of milk improved as we went through February. So, the shortage basically by the time we got into February had pretty much writhed us out. Just remember, the dry milk story and therefore the pressure on raw milk was really driven not by dairy companies per se, but by the confectionary industry that for our non-Russian visitors would have a huge portion of sales chopped at the time of December and January. It’s a big portion of their business. So, there was quite a lot of panic by then to get milk at any cost through the period of December and January.

In relation to prices and availability of milk, as I said, raw milk is now available. Of course, the border for dry milk is also open now albeit that it’s less in demand the prices have started to fall for dry milk quite considerably, but the price of raw milk I would say from the last two weeks have started to go down also, and we expect it to go down further because it is relatively speaking quite high, not as high as it was in 2007, I think in many ways the shortage was more acute than it was in 2007. With the measures that we took in 2007, learning from that problem was the – and we talked about this before, but basically the centralization of pricing decisions inside our company. So, we took the view that there was some volumes that we certainly would be better off not having. And therefore there was certain milk we were also better off not having. So, we had since 2007 milk while it’s bought day by day across Turkey at factories is essentially controlled in terms of pricing.

In the meantime, we have also taken some pricing. We could not take the pricing we took in 2007. As you remember, we took quite significant pricing in the fourth quarter that year, but the world has changed somewhat in 2009 with pretty significant consumer prices, you know, in terms of cash and unemployment and so on. So, we didn’t deal it prudent, we don’t and we have always said that we don’t manage our business for a quarter, we manage the business for the long-term health and in respect of that, we took the view that taking significant pricing in December in one go would have been destructive to the long-term health of the business. So, we have now taken somewhat of three price increases in sort of small, but 8% to 9% of increases since pretty much mid-December till now.

And so, we are seeing two things than we are seeing pricing revenue per liter sold going up in the first quarter and certainly we have seen very much in the second quarter, but we are also seeing the price of milk going up albeit now starting to turn down. So, our belief is that this first quarter and we pretty much said that in the introductory remarks, will also be lower than what we would normally expect in terms of margins and in terms of performance which we do see March significantly better than January or February, which was the lower end. And so, our view going forward is still pretty, pretty strong and that the fundamentals are there, volumes of recovery, and in dairy now we are talking about still, and we see margins in Q2 onwards you know, pretty much recovering to a level that we would feel comfortable with.

Operator

Okay. And your next question is from the line of Daniel Wakerly with Morgan Stanley.

Daniel Wakerly – Morgan Stanley

Hi, good afternoon everyone and hi Tony.

Tony Maher

Hi Daniel.

Daniel Wakerly – Morgan Stanley

I have got a few questions. Can you just confirm the shortage of raw milk obviously affected your traditional volumes, did it have any effects on your the volumes you sold of value added?

Tony Maher

I mean, it is here and there. Actually, some of these products require dry milk not for normalization of fats and so on, so yoghurts and some of these things, you actually have the need for dry milk, and that there were sometimes that we actually couldn’t get it at all and we ended up importing it from, believe it or not, the United States at prices which were about nearly half of what we could – if you could buy dry milk in Russia, but the United States milk for half the price of what you could buy domestic here at one point in December. So, there was some – it was very little, because we obviously, you know, we obviously prioritized that which was most profitable to us. So, pretty well, I would say very little.

Now, clearly of course as well as the gross profit per se sold items, you have to have cost absorption inside in your gross margin that will surpass the issue was volumes per se even though they were lower value products, they do also absorb some costs inside by virtue and those costs don’t go away when you don’t produce and sell those products. So, you know, there is two aspects to the gross margin side. One is purely revenue, you know, profit on the products directly, but there is also cost absorption of those products that you would normally have.

Daniel Wakerly – Morgan Stanley

The gross margin, the dairy gross margin I think was down about 400 basis points year-on-year, you are able to quantify how much of that was the cost per liter being higher and how much was that, you know, that sort of under the cover fixed cost of that leverage effect?

Tony Maher

It’s mostly, the majority of it is the price of milk higher, probably 70 odd percent or maybe 80% of this. So, there was a majority of that, but there was some cost of absorption issues as well and some of those cost absorption issues would be below the line as well of course, because of things like overhead as a percentage of revenue and so on and so forth.

Daniel Wakerly – Morgan Stanley

When you back out the guidance, you had to issue in January, looking back at it now, it seems really caused not so much by, you know, lack of being out to sell enough product, but more just the actual effects of the higher milk costs, is that correct?

Tony Maher

I mean, it’s a bit of both, isn’t it, because as I said that there is a lot of cost other than distribution cost, there is a lot of cost that you have inside the business that are fixed. And so, if you drop, you know –

Daniel Wakerly – Morgan Stanley

SG&A, you mean?

Tony Maher

Yes, it was not only – but production overhead for example. We don’t just fire guys just because you know, if we can have enough raw milk to produce, we obviously we still pay our employees.

Daniel Wakerly – Morgan Stanley

Okay.

Tony Maher

So, you know, this is why I say that obviously we took a view that in, okay, some electricity cost is fixed to variable but there is a lot newer cost in the business which are fixed, and especially when you see price spikes, cost spikes in the short period of time, your ability to do something about even to any fixed costs is actually also, you know, diminished somewhat. So, I think you know, 70% to 75% of the thing is raw milk prices, but there is – the rest is quite significant as well.

Daniel Wakerly – Morgan Stanley

Understood. Thank you very much. Now, can I just ask a question about your positioning? Do you think your market share position either suffered or benefited during this period, whether it wasn’t available, i.e., did everyone else have the same kind of issues, magnitude of issues that you had sourcing milk?

Tony Maher

Well, they do and they don’t. They do in one way, but then what happened was and you will see it if you have been to stores. It will key account obviously where market share is measured more than most of the places. You know, they went and they tried to source milk from rural Russia, so you saw some products on the shelves all of a sudden in Moscow, which were taken in and so on. Some of the shelves were quite empty one have to admit, but there were some makeup by some of the regional players and so on, because clearly they could either sell cheap pasteurized milk in, I mean, just think, a lot of these companies are opportunistic. So, it’s little bit the same, some of them dry milk and sold this at 16, basically I think at one point, it was offered $5,000 a ton for dry milk in Russia when, you know, three months before, it was like $2,000 a ton. So, some of them did that, and some of them which have sold extra sterilized milk to make up for our shortfall, but the fact that, that milk normally would have been sold to, you know, in pasteurized farm and villages and small towns, you know, they would have seen that a an opportunity as well. And so, you saw some regional dairies making up some of the shortfall, but overall, there was a shortage and widely reported in the newspapers and widely reported by analysts as well as – at least a number of analysts notes during late December to early January on the same point.

Daniel Wakerly – Morgan Stanley

Okay, thank you. That’s fair enough. And one more or maybe even two, very quick, on milk costs, this potential minimum 11 rubles a liter, what’s the latest on that?

Tony Maher

Well, you know, I mean, one needs, to I suppose sensitive to how one answers this question. The fact is that it’s illegal. It’s illegal, and the anti-monopoly people, I said it’s illegal and we have told whoever wants to talk to us on this subject that we cannot sign any agreement in that way and we haven’t signed it and we will not sign it. And because it – and the anti-monopoly authority in Russia, it will have significant amount of power if you take in, what they would describe as price fixing. So, we haven’t signed this agreement. We are sensitive to the need to for farmers to make money. So, that doesn’t go away of course, and so, you know this is not very kind of a black and white story, but there is no agreement on minimum prices and you know, in the last meeting on this subject two if not three weeks ago.

So, you know, as far as we are concerned, the price of milk will be market price as demand, you know, as supply increases, as it is right now, then prices need to go down and they are right now. And you know, the market has to be the force and I think of course, like in every government, there is some contradicting or conflicting positions depending on the department and so on, but I think the department of industry and the economy and so on fully understand and fully agree that market forces need to supply, but of course, market forces also need to apply that farmers need to make money. So, it’s not just a thing that processes need to, you know, people like us make all the profit, it’s not true and it has never been either.

Daniel Wakerly – Morgan Stanley

Okay, fair enough. And so, just one more final question up on this, baby food in the fourth quarter looked to be only about 12% year-on-year is my sums are right, is that the right number, if so –?

Tony Maher

It was far, I mean, we normally don’t give out volume stuff.

Daniel Wakerly – Morgan Stanley

Yes.

Tony Maher

Just we put it like this, it’s between 15 and 20 rather than 19, and so it was quite robust.

Daniel Wakerly – Morgan Stanley

Great.

Tony Maher

And it continues to be robust as we can see even as we speak now. So, it’s quite strong. There are some mixed things inside in baby food, Daniel that we have always because remember, you are dealing with dry farm at one end, which is you know, very value and lower tonnage to you know pure As and water and I guess we are probably in 10 or 12 categories in baby food in total.

Operator

And your next question is from the line of Victoria Petrova with (inaudible).

Victoria Petrova – Credit Suisse

Hi everyone, I guess four small questions. First of all, I see that baby food gross margin if my conclusions are right have growth 5% relative to third quarter and about 170 basis points relative to first quarter ’09. The raw milk price situation on shortage or there any other issues would have to continue there?

Tony Maher

Well, I think, hi Vica, firstly obviously there is milk goes into the production of baby food and not all of it, but quite considerable piece of it. Basically, it is a milk question, but we have always said that, you know, once margins are in the mid-40s upwards, we are not that, you know, baby food is really a revenue play, because the margins and themselves are quite strong. So, there will be some seasonality to margins and there will be some, you know, vary from time to time, but our prognosis would be that, you know, the margins in baby food are healthy and will continue to be healthy and when I talk about the first quarter for dairy being, the margins being continued to be under pressure, that isn’t true, baby food, the margins we see in baby food as we speak are quite robust, but you know, we are happy, and I said this actually when you and I met Victoria, but also in calls and so on, you know, baby foods, once we are in the mid-40s there about, we feel very comfortable, and if it come down on 200 basis points because of mix or because of other opportunities, you know, as long as we are driving the growth, we are not that pushed about the thing once it’s over 45% kind of level, but raw milk certainly has an impact, obviously a lot less impact in dairy, but it has an impact.

Victoria Petrova – Credit Suisse

Sure. Thank you Tony, and one on dairy margins, I see that fourth quarter 2009 was 24.9% gross margin on dairy has been the lowest in the last three [ph] years including 2007 performance, because we had 26.4%, 26.9% back then the fourth [ph] quarter.

Tony Maher

Yes.

Victoria Petrova – Credit Suisse

But what was important that, that situation was abnormal and you have taken so many measures in between. At the same time, 2009 second and third quarter margins were abnormally high, where do you see some sustainable continuation in between and would first quarter be kind of if we extrapolate first quarter ’08 and/or first quarter 2007, first quarter ’08 in this situation, this would imply that first quarter gross margin in dairy should be even lower than what we see in fourth quarter in 2008 [ph] if my logics are incorrect?

Tony Maher

Well, I can’t give you decisive data on the first quarter, we are just announcing the fourth quarter, but I would say that firstly 2007, remember, we took significant pricing between October and December in 2007. The market has definitely changed vis-à-vis 2007, which the consumer far more pricing to this given all the other things that are going on in their lives regarding unemployment, you know, there is a crisis of confidence albeit recovering but you know, the world hasn’t recovered yet, I think nobody would suggest that vis-à-vis consumer behaviors and so on that has been around for the past 12 months or so.

So, we took a view in 2007, I took a view in 2007 that given that it was really mandatory and some meat products that, you know, we are taking some heavy pricing then, and we do this and have paid up. I took the opposite view now that I felt that there was such – it’s such a price sensitive time that we could not take the same level of pricing with the same speed as we took in 2007. And so, really we have been taking some pricing as we went through January, February and March and we have done that. Now, you have to remember, if I saw some press release from one of our biggest international competitors in relation to yoghurts and desserts, they have taken a price decrease globally. And so, that also has an impact. Now, we have taken some price increase this year in the yoghurts and desserts, but our biggest international competitor has not.

So, the world has changed somewhat in relation to some pricing, I think our friends from Danone have called resetting, but you know, whatever you call it, they are selling at prices lower than they were a year ago. So, we have to respond to that. We are selling at prices higher than we were a year ago, which is good, but not at maybe as much as we would have had if we were two years ago, because all of us would have been taking higher prices. So, I think that’s the first thing I would say in relation to 2007 and 2009, you are dealing with two years later, but you are dealing with a very different macroeconomic environment.

The second question vis-à-vis margins in Q1, my expectation in Q1 margins, and I said this in the opening remarks, will be a bit lower than 2009. But the good news is that if I look at March, it looks and March is still work in progress and you know, our systems are not such that I can give you, you know, up to the minute margin data, but I do think that our margins in March look to be significantly stronger than our margins in January and February, and our prognosis going forward into Q2 is significant higher margins in Q2 than we had in Q1 are indeed in Q4.

Victoria Petrova – Credit Suisse

Thank you. And my last question would be what’s your outlook on concentrate, there you have seen many increases, because actually your beverages margin have strengthened, and have you seen raw milk prices really in the first quarter from the fourth quarter level. That’s it, I will not ask any more questions.

Tony Maher

Okay. Well, the raw milk prices, Victoria, did rise in the Q1 over Q4, absolutely. And from pretty much last week onwards, we have seen them go back robust. And in relation to concentrate, our juice business has been termed as being going the right way for a while, margin wise and sales wise and indeed market share wise. We have gained something like 220 basis points of share last year. That’s you know, market share is always bit of a funny one, because it depends on which audit company and so on, 100% accurate, but directionally, all three other firms, Business Analytica, Nielsen or Kennedy [ph] are all showing 200 plus basis points improvement in our market share in juice.

You know, the hard work that we have been doing the last couple of years reducing substantially our cost space, reformulating products and you know some packaging initiatives and so on, are paying off. So, you know, we have more than doubled the dry milk in the last couple of years, we have gained market share and we have invested heavily in marketing, actually this is a good example of where marketing is paying off, because while some of our international competitors cut marketing in 2009, we increased ours, and it’s paid off.

So, in relation to concentrate, there is some movement upwards, and we have hedged for most of the year forward, we haven’t hedged for quite all and in fact as we outperform bit of our expectations there, that hedging gets narrower, but still we are hedged well into the last couple of months of the year. There is something that you will, the last couple of weeks, sugar prices started to come down again. So, that’s kind of good news, but orange prices definitely have gone up, but we brought forward, we could see the commodity prices, could rise this year, and we saw that and we brought forward towards the third quarter of last year for most of 2010. So, I would say, you know, we are in pretty good shape there.

Victoria Petrova – Credit Suisse

Thank you very much.

Operator

And your next question is from the line of Taras Shumelda with American Century.

Taras Shumelda – American Century

Hi. Going back to the dairy price negotiations or milk price negotiations, I am sorry. Can we talk a little bit in terms of – you already mentioned that the price fixing by milk producers would be legal, but there also seems to be a lot of support for them in certain parts of the government. Can you provide a little bit more clarity on how that has broken down and what leverage if any the government can apply to force milk buyers to agree to higher prices. And second, what is your ability to import milk into Russia, and what tariffs or other obstacles that are in place that would make it less attractive than it would otherwise be? Thank you.

Tony Maher

Hi Taras, I guess first of all, importing milk, you can import some raw milk I guess from Belarus, maybe because of distance. Beyond that, probably maybe the Balkan states, but beyond that, you can’t really because distance is just too far. But you are going to import dry milk, but typically dry milk is as I said, it’s more for the non-dairy industry than it is for the dairy-industry, albeit of course that the two things are linked, the milk is dried domestically. It’s an interesting question. I don’t know if I want to comment on what levels government can take place that you know that can implement to make somebody do something, I guess there are many and probably more than I can – I want to even consider, but I have to say that, you know, we have always found the government to be quite honestly, very balanced in relation to, if I take the overall government into understanding how business works, and I think the government clearly has a concern that make sure farming makes money.

I don’t think that can be denied and I think it’s right. That’s no different to the governments in the EU countries as well incidentally, aren’t you the government in the United States who have a pretty complex milk regime, and I am not so sure I even understand the one I say. But in relation to other aspects of the – other areas of the government, they also understand that the business is to make money.

So, what I think the government will want is a balanced relationship, with as much predictability as possible between all forces and you know, we won that too quite obviously, and our relationship with these farmers including some of whom are in government is very good, and you know, I don’t think you will see anything in the newspapers negative about Wimm-Bill-Dann and farmers or that, I don’t see that. So, many of them are our suppliers, and we have, you know, many, many relationships with them. So, I think you know, quite honestly, the government with us has and I am in this company for the last four years through Presidential elections, through government elections, have always behaved very professionally. Yes, they try to understand the relationship and they try to make sure there is some balance in that, but that’s very much what we have seen in other countries as well. And I don’t see that as long as we make sure that our suppliers are making money as much as we are making money that, that is dysfunctional. I think is quite functional. And I quite honestly, I don’t see that as price fixing. I think the market decides how the market defines, you know, how it works. And that’s the view of the anti-monopoly who is also incidentally an arm of the government.

And they have been quite vocal in relation to saying, you know, you cannot have price fixing arrangements. And so, you know, that’s kind of where everybody stands and in the meantime when there was a shortage of milk at the end of the year, what happened, the price went up. While if there is a surplus of milk some other times, I believe the market will decide that the prices need to go down.

Taras Shumelda – American Century

Just a follow-up to that, is there any sort of a fine line that you are aware of by when either the government or the milk producers would like to have an agreement or a resolution, however you want to verbalize that in place?

Tony Maher

No.

Taras Shumelda – American Century

There is not. So in principle, this could go on for a while then. At what price, can you disclose at what price are you buying milk now?

Tony Maher

It’s a complicated story, because again it’s not like the US, we buy milk from farm to farm and it’s different from region-to-region. And also, bear in mind, here you have got huge farms with thousands of cows and therefore very little logistics costs and also very high quality. And we tend to be buying from the larger farms, so because we want large supply base and also the quality is better.

So, it’s a complex question, but I can tell you that the average price of milk in Russia right now is significantly higher than it is in the United States. If that’s any indication of you, and this is why I guess the confidence to say that the milk prices will come down, because it doesn’t make any sense that you know, if actually if they continue at the current level, it would be probably cheaper for milk companies to actually, you know, produce in Germany or somewhere then ship into Russia because there the prices are too high and this is where I think market forces, you know, find their own rules.

Taras Shumelda – American Century

And last question, as part of this debate, has there been any sort of analysis presented publicly by any party showing that here is why we think that price access far because here are the cords, here is the required current capital or is it more of just generic, farmers need to make money.

Tony Maher

Well, there’s been anything. The union of which we and you know lots of other daily producers or members have produced or have put forward their point of view, both in the public demand and in tripod type meetings with government and foreign bodies. So, there is debate and of course, you know, at the end of the day, many of these things also become emotional and so on, and so, you know, I think you know, it sounds like there one have to relay that you know, these are complex questions and you are going to have a farmer making money at price A and farmer not making money at price A plus, you know, whatever you like.

And a lot depends on the farmers’ costs and how efficient they are, etcetera. So, you know, these are complex questions, and I think the big question or big issue here is, one, our predictability and of course, farmers would love predictability, not only in milk but what about the price of green for example, and all of these things are the price of sugar right now rising, but you know, it’s still the price of grain, two years ago it was very high and now it’s significantly lower. So, these are and the weather aspects and so on. So, I think the very nature of farming is that one would love predictability, especially if you are a farmer, you want predictability on the high side, and you also have this huge swings in supplying demand, which especially on the supply side, and you know, these feed into the milk production. The feed for example is a key ingredient in costs. Fuel is a key ingredient in costs, maneuvers are a key ingredient in costs, and all of these things are also, some of them are also unpredictable, from the price of oil to, especially the price of feed. Price of feed has varied hugely in the past two years.

Taras Shumelda – American Century

Okay, except the last question, I was definitely let. In the previous person’s questions, there was a discussion about baby foods in a number of 15% to 20% was mentioned. I missed the answer a little bit, can you remind what it was in reference to?

Tony Maher

The way we put volume growth.

Taras Shumelda – American Century

Okay, thank you.

Tony Maher

Okay.

Operator

And your next question is from the line of Margaret Kalvar with Harding Loevner.

Margaret Kalvar – Harding Loevner

Yes, hi. A couple of questions here also, first of all, are you seeing any actions being taken or discussions within the confectionary industry about how to prevent a replay of dry milk shortage or then being effectively under stocked if they have shortages over the key Christmas, New Year period. Again, because it’s fourth quarter, raw milk is tight normally anyway. And I was just wondering if we can kind of expect a hopefully more minor but still some kind of impact that this is an annual event. And another major question of my concerns, the currency, I am assuming that you are, you know, using average ’09 versus average ’08. And what kind of currency impacts are we looking at now, much more or rather less volatile flatter kind of ruble performance. And might we see more in line dollar on ruble results this coming year and certainly first quarter?

Tony Maher

Hi Margaret, Dmitry will give you the currency from 2009, but I mean, I think the ruble certainly is right now doing very, let’s say, very stable against the dollar, and against the dollar, which you know, will be speaking since most currencies – ruble has actually strengthened some. Our view is that the ruble this year should be fairly, you know, looks like it’s being fairly stable, obviously it’s linked to some degree, and the price of oil as well which is another piece of it and we have seen that move a little bit down a few days and then for few weeks it was going up and so on.

Obviously, you know we are primarily ruble-based, we sell in other countries as well, but most of our currency is in ruble. In relation to the dairy, dry milk supply for confectionary and it’s not only confectionary, the ice cream companies and so on. There’s quite a lot of such companies actually, but our expectation is that they will probably be buying a lot more of their needs, a lot earlier in 2010 than they did in 2009, actually the border with Belarus didn’t just close in the fourth quarter, it closed, I would say in the last half of the year, where people, you know, these companies were kind of just waiting and waiting because there was – it was to be opening next week, next week, next week and next week we are done until middle of December, and thereabout. So, you know, I think I would foresee that some of these companies will, especially the bigger ones and some of them are international companies. They will try to mitigate some of their supply side. When there is significant quantities of dry and raw milk available throughout the summer.

I would imagine that, that’s what they will do, that I haven’t seen any debate on this subject, but I think, you know, common sense would probably suggest that they hedge a little bit earlier in 2010.

Margaret Kalvar – Harding Loevner

Can we really from a secular basis look at the trend in both raw and dry milk prices is probably higher – rather towards higher rather than towards lower on an annualized basis over the next few years then?

Tony Maher

Well, I would be inclined to think that, I mean the price has been moving up over the last number of years anyway. I would expect some, you know, upwards if you take the next three to five years, yes for sure, because production costs increase and so on, equally I would expect our revenues (inaudible) to be increasing as well. So, I don’t think that’s the problem, I don’t think that’s ever the issue, and if you just look at our margins, when you don’t have these crazy spikes like we had in Q4, Q1, Q4 ‘07, Q1 ‘08, and again now Q4 ‘09, Q1 ’10, and when you don’t have these spikes, we do quite well margin wise and because we are able to predict and you know, we are able to have our pricing strategies and so on. And you know, you can take pricing in a more orderly fashion than deal with the kind of normal evolution.

It’s the spikes are the things that you should try to deal with them to solve the margins, you really hurt bad the revenue and the long-term help of business. And so, and especially the time of, you know, lower consumer confidence than you know, probably the lowest we have seen in, certainly in Russia, it’s the lowest we have seen since 1998. 2009 would have been the lowest since in 10 years. So, I think then you got to be even more sensitive to taking final pricing.

So, what I do think that the normal evolution of dry milk out of raw milk is probably upward switches, because it also allows us to take some pricing and I don’t think that’s a bad thing. On the currency one, Dma can give you an answer.

Dmitry Ivanov

Average rate for 2008 is 24.84, average for 2009 is 31.73.

Margaret Kalvar – Harding Loevner

You happen to have what fourth quarter versus fourth quarter looks like however?

Tony Maher

Yes, we have, if we don’t, we have only got one more question to take, we can send it to you Margaret if we don’t get in one second.

Margaret Kalvar – Harding Loevner

All right, sure.

Tony Maher

We have it.

Marina Kagan

You will see Margaret anyway.

Margaret Kalvar – Harding Loevner

Thank you.

Tony Maher

Yes, I will see you actually next week.

Margaret Kalvar – Harding Loevner

Yes, that’s right. Okay, thank you.

Tony Maher

Yes.

Marina Kagan

Operator, we are going to take the last question now please.

Operator

And your final question comes from the line of Howell Famaninko [ph] with Merrill Lynch.

Howell Famaninko – Merrill Lynch

Hi, I actually have three questions if I may. First one, could you give us concrete examples of measures, how you plan to kick start volume growth (inaudible) 2010?

Tony Maher

Well, it’s a number of things. First of all, we are seeing volume growth in 2010. We saw volume growth in 2004, Q4 versus – Q3 actually. We are also having some new initiatives coming out. We have a new bottle launched, a PET bottle for our pasteurized milk, which I understand just one an award that the Russian theory union conference last week. So, there’s a number of things. We have all together all the new packaging initiatives on order areas of traditional dairy, which are also being launched.

I think we have continued to see some volume growth in yoghurts in desserts actually even throughout 2009. I am again into the first quarter. So, I think there’s lots of initiatives that we are doing both above the line in terms of marketing spend and below the line in terms of packaging upgrades, formulation upgrades and so on, and nearly for example is a very good example. This is our probiotic product where we gaining substantial market share, and against active milk and we are – we just had the highest sales in the history of the company just last week and significant double-digit volume growth this year.

I think in the case of, you know, we prioritize our investments the same as anybody else’s, we prioritize, you know, the use of scarce raw milk in the four quarters, and when I mean by that in relation to investments is that we have invested a lot over the last couple of years in our baby food business, in our value added dairy products, and in our juice business, and in some dairy as well. And I think we are now – we are continuing back and into now into some the finished milk products.

But again against profitable opportunities, there is milk for sale in this market at 20 rubles per liter. And maybe even less. And that kind of this market share honestly we don’t want to have. So, there’s always a balance, we have always said that the market share is 1 kbi for our business and for our management. But you know, profit is another one, and it’s not about profit per quarter, it’s profit for the long term. So, our, you know, like any healthy business, we have a number of measures that we judge the business success again.

But profitable volume growth and profitable share growth is for sure up there high end on the ranking, Howell.

Howell Famaninko – Merrill Lynch

Okay, thanks. So, second question, how much for that sure is there to reduce cost further in 2010 given the progress you have made in 2009, (inaudible)?

Tony Maher

Well, I would say in beverages. It’s really small, because we have done the heavy lifting there. We have had the number in place in that business. We have now got really, really good with the utilization of assets, the utilization of you know, of energy and raw materials and so on. In the case of dairy, still a lot of work to be done, which is a good news. So, I would say – I don’t know, we are probably, maybe halfway there. We have a project going on right now in two of our factories, which is basically, you know, on supply chain cost reduction. We have made a lot of progress, you know, don’t get me wrong, but we, in dairy, while I take you honestly in beverages, not too much more – I mean, there is always opportunity to get better, but not big step changes. But in dairy, we still have a lot to do and we continue to do.

The good news I guess today compared to a number of years ago is that our people believe that it can be done and that’s a big start to getting it.

Howell Famaninko – Merrill Lynch

Okay, thanks. And last question, is there any chance that your dividend policy becomes more generous taking into account low level of debt and fairly high free cash flow?

Tony Maher

Well, I guess I can say that the dividend policy, I don’t think it was either generous or non-generous, because we weren’t paying dividends. But our intent is and we would be having an AGM on the 14th of May, I think it’s Friday if I got the date right. And we will be recommending to the AGM to be paying a dividend for 2009. So, that dividend will be again it has to be voted on by the AGM, but I can tell you what we are going to put to the AGM and we would be putting to the AGM 30 rubles per share, per ordinary share, now, okay. So, bear in mind that there is four ADRs for one ordinary share. So, and it has to be in rubles, but it’s Turkey rubles but that equates to a little over $1. So, (inaudible) given that it’s – we think it’s pretty good, and the commitment by the way is that the dividend policy should be progressive. So, we won’t be paying a dividend for 2009 and stop after that. Our intent would be and my intent certainly is that we have an ongoing dividend payment from 2009 onwards. Okay, thank you very much. Marina?

Marina Kagan

Ladies and gentlemen, once again, thank you for joining us today. A replay of this call will be available through April 6th. All the information to access the replay can be found on the invitations that were sent to you or on our Website. Should you have any further questions, please do not hesitate to contact us. Thank you.

Operator

Thank you for participating in today’s call. You may now disconnect.

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