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Executives

Marina Kagan – Head, Public Affairs

Tony Maher – Chairman and Chief Executive Officer

Dmitry Vladimirovich Ivanov – Chief Financial Officer

Analysts

Natasha Zagvozdina – Renaissance Capital

Daniel Wakerly – Morgan Stanley

Elena Mills – Alfa Bank

Victoria Sokolova – Troika Dialog Group

Victoria Petrova – Credit Suisse

Odile Broussy – Aton Capital

Tigran Hovhannisyan – MDM Bank

Wimm-Bill-Dann Foods OJSC (WBD) Q1 2010 Earnings Call June 3, 2010 9:00 AM ET

Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wimm-Bill-Dann Q1 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. Marina Kagan, you may begin.

Marina Kagan

Hello, ladies and gentlemen. And thank you for joining us to discuss the financial results of Wimm-Bill-Dann for the first quarter of 2010. 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 from U.S. The first quarter was defined by three important themes, broad base growing demand, market share gains across nearly our entire portfolio, and raw milk prices.

On the first point, volumes were up across all of our segments, testing that we are seeing demand growth driven by improved consumer sentiment. This significant change from what we have seen over the past number of quarters.

The volume growth was strong in dairy, which is especially good sign given the difficulties in the industry during the recent economic downturn. Our outperformance of the market continued in juices and baby food as well.

As the market recovers, our portfolio product is performing extremely well. In fact, we are growing our market share across the board, this is happening in traditional dairy and in higher value areas such as yogurts and desserts.

It is also true in baby food while our market share gained continue quarter-after-quarter, and in beverages, our market share increased across our juice portfolio pushing us firmly into the number two position in the marketplace.

In summary, we are not just benefiting from demand recovery, we are gaining market share in all categories.

Looking back for a moment, I have mentioned the clear message about our strategy during these uncertain economic times. Our focus has been on driving efficiency improvements, driving healthy cash flows from all our businesses to fuel our growth initiatives, and investing in our brands for more strategic and profitable growth.

Now that demand is recovering, we see the benefits of this strategy and of course, we remain committed to it. This is especially important because the improvement in demand we are seeing in the dairy segment is exacerbating to some degree the issues on the supply side of the equation.

On our last call, I shared with you that the conditions we saw in relation to raw milk were continuing into first quarter. Supply remained tight and as a result raw milk prices remained quite high.

Our raw milk purchasing price increased 34% year-over-year in U.S. dollar terms in the first quarter. We spend an additional $24 million spend on the procurement of raw milk in the period, compared to the first quarter of 2009. This in term affected our first quarter margins in dairy and overall for the group, which declined by 450 basis points versus a year ago to 28%.

I continue to believe that we will see healthier margins moving forward, as raw milk prices moderate and the price increases reached up in the first quarter fully flow through. However, we do not see raw milk prices going back to the levels of last year in the near-term.

Let me now highlight some of the numbers. Our group sales in the first quarter improved on the year-over-year and sequential basis, illustrating the impact of the importance of demand improvement.

On the constant currency basis sales were up nearly 5% over the same quarter last year and almost 6% sequentially. On the U.S. dollar basis sales were up 19.1% from the year ago quarter and 5.1% sequentially. Most important these gains were across all our segments dairy, beverages and baby food.

EBITDA in U.S. dollars was up slightly in the first quarter over the same period year ago and improved by 22.4%, sequentially to $73.5 million. First quarter EBITDA margins were down 220 basis points from the first quarter of ’09.

Now, turning to our market segments, starting with dairy segment, first quarter sales were $434.5 million, an increase of 17.7% on the year-over-year basis and 3.7% on the comparable currency basis, reflecting improvement in demand and that drove improve volumes for our dairy products and market share gains.

We have also been active in introducing new products and packaging into the markets with very strong results. For example, the launch of Domik v Derevne bottle pasteurized milk was so successful that we’ve already increased our production capacity for this product and are now considering the addition of further production lines.

Some other new products were launched in Domik v Derevne which coupled with the overall the brand image yielded improve sales and attracted additional consumers, and we successfully re-launched our Vesely Molochnik brand for processed cheese with new packaging and improve branding.

Gross margin for the dairy segment declined to 21.1% in the first quarter, due to the continued impact of raw milk, which we saw over the past several months. This compares the gross margin of 29.1% in the same quarter of last year.

In our Beverages segment first quarter sales were $108 million, an increase of 15.2% on the year-over-year basis and 1.5% in the constant currency basis.

Gross margin for the Beverage segment in the first was 42.5%, an improvement of 560 basis points, compared to the same quarter year ago. This performance is even more impressive when you consider that we continue to gain market share and strengthen our position in a somewhat declining market. For example, last month we successfully launched four flavors of our new category J7 line of juices.

In our Baby Food segment, first quarter sales were $72.4 million, an increase of 35.3% on a year-over-year basis and 19.2% on a constant currency basis, continuing with the strong performance this segment has delivered over the past several years.

We now – we continue to make excellent progress increasing our market share to innovative products and a successful branding strategy. Gross margin for the Baby Food segment was 47.6%, down slightly by 70 basis points versus a year ago and more importantly up 220 basis points sequentially.

We also continue to innovate in the Baby Food segment delivering products to the market that will continue to grow that business and enhance our already favorably product mix. Already this year under our Agusha brand we have introduced the first fresh spoonable yoghurts for babies up to three years old and new chase of drinkable yogurt. You will see further developments as the year progresses in this category.

Overall, we are pleased with the results in particularly and with the fact that demand is growing and we continue to gain share.

As we look forward, we continue to focus on what has made the business so successful and resilient over the past several years. Namely continue to leverage our knowledge of the markets in which we operate to deliver superior products that consumers want, thus growing our market share, maintaining our cost management and discipline, and delivering profitable growth.

Thank you for your time and your continued support to our company. Now, I’d like to turn the call over to Dmitry for more detail on the financial.

Dmitry Vladimirovich Ivanov

Thank you, Tony. Wimm-Bill-Dann's group sales increased 19% to $650 million in the first quarter over the same period last year. Sales in the Dairy segment increased 18% to $435 million from $669 million in the first quarter of 2009.

The average dollar selling price for the Dairy segment increased 12% to $1.18 per kilo from $1.06 per kilo in the same period last year. This increase was primarily caused by acute dry and raw milk shortage at the end of 2009.

Gross margin in the Dairy segment fell to 21.1% from 29.1%, compared to the same period last year. This decrease is also attributable to the sharp increase in raw milk cost in late 2009. Sales in the Beverages segment increased 15% over last year to $108 million, due to strong volume growth and positive exchange rate effect.

The average dollar selling price in the Beverages segment increased 5% over the same period last year to $0.78 per liter. Gross margin in the Beverages segment was 42.5% for the first quarter of 2010, an increase of 550 basis points over the same period last year.

Relative to the first quarter of 2009, revenue in the Baby Food segment showed solid growth increasing by 35% to $72 million. The average selling price in the Baby Food segment increased 15% over the same period last year to $1.96 per kilo.

Gross margin in the Baby Food segment was 70 basis points and reached 47.6%, due to the sharp increase in raw milk cost, which was mostly offset by solid growth in the high value categories.

I will now turn to operating expenses and other components of the P&L. Total selling and distribution expenses increased by 8.6% to $92 million, compared to 2009, driven by increase in transportation tariff. Although as a percentage of sales, they decline to 14.9% in the first quarter of 2010 from 16.3% in the same period last year.

General and administrative expenses reflected $29 million. Financial loss in the first quarter 2010 was $2 million, compared to $34 million in the same period last year. This year-over-year decline is attributable mainly to favorable ruble remeasurement effect.

Our EBITDA increased 0.5% over the same period last year to $73.5 million. EBITDA margin decreased 220 basis points to 11.9%, compared to the first quarter of 2009 due to the sharp increase of raw milk cost.

Group net income increased 167% to $33.7 million, compared to $12.6 million last year. Capital expenditures increased by 57% in the first quarter 2010 to $26 million, compared to the first quarter in 2009. We continue to maintain our debt level under great control, our net debt is $306 million, one of the lowest level in history of the company, and our net debt EBITDA ration was 1 at the end of the first quarter.

Overall, our results are solid despite the challenging environment we operate in and we continue to improve the efficiency of our business.

Marina Kagan

Thank you, Dmitry. Operator, we are now ready to take the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Natasha Zagvozdina.

Natasha Zagvozdina – Renaissance Capital

Hi. Good afternoon. It’s Natasha Zagvozdina, Renaissance Capital. Congratulations on a good set of numbers. My questions will be on two segments, dairy and beverages and predominantly about the input cost development.

In the second quarter of the year, I understood from Tony’s comment that they have been easing on the raw milk prices. Could you please indicate what you see on the quarter-on-quarter basis, second quarter versus first quarter of this year? What’s happening with ruble base dairy milk prices and what you also see for beverages division?

I understand in the first quarter, you had quite a good tailwind from strong ruble versus where the ruble was in the first quarter of last year but what’s happening was that sugar prices that which we’re buying risk commodity and juice concentrate prices? Thank you.

Tony Maher

Hi Natasha. While raw milk prices in the second quarter are easing versus the first quarter. Now, the quarter isn’t over yet and June is, obviously, a key month. I would say there will be a significantly up than last year, that’s for sure but they will be lower than what we had in the first quarter.

So, we should see gross profit margins in the second quarter stronger than we saw in the first quarter for dairy event. That’s the best guidance, I can give you but as I said when we did the road show, when we met -- I met various analyst and so on and that I don’t believe the margins in the second quarter will be like the margins in the second quarter last year but better than the first quarter, for sure.

I mean the market is quite tight, clearly driven by increased demand and interestingly, I think our second quarter volumes again as the quarter is not over, so June is the key month, of course, but May for example, the rate closes in dairy is very strong, stronger than what we even saw in the first quarter.

So our volumes in the first quarter were in the single digits. Let say the low-single digits -- mid-single digits, let say. The second quarter stronger than that, it looks like. Again, we have to see how June does but May, really very, very good month.

In the case of beverages, a couple of things there because if you look at revenue and so on, clearly there is a mixes of thing in beverages but we are selling more of lower price that goes because our volume was in the, let’s say -- let's call it the high-single digits or they’re low-double digit to be, just give you some flavor. So quite good but the market itself is down about 3%, 4% various estimates.

In terms of, we are selling more of the lower price juice but the margins that we have in this products are quite good. So overall, as you can see our growth profit in beverages is excellent. That’s result of number of things. First of all, we have been for a long time moving juices not just to save our concentrate, apple and flavors but mostly flavors. They gives us lot of flexibility in terms of formulation. And the other workforce, we have taken out a huge amount of production cost over the last number of years which also helps us on the growth profit side.

In the case of concentrate, there is an edging of global concentrates. We have hedged forward for a lot of the year, while we might see margins in the back half of the year in beverages slightly down versus what they are in the first half of the year, I think the second quarter margins would be excellent beverages.

I think the fourth quarter margins will be also at pretty high level, I mean, more than 40% as far I’d expect, even with the increased price of concentrate and that’s without even affecting in any potential price increase at the end of the year. And for sugar prices, for the gain -- they are going down and they were going up a year ago and because there was a lot of speculation in the sugar market with firms buying forward and so on but sugar prices have fallen may be 30 up percent.

Now, we have hedged forward not the full year because sugar prices were high. So we expect to get the benefit of that sugar decline in price feeling through, which would offset some of the concentrate stuff as well as we go forward.

So I would say commodities as they are generally not just in our business but edging upwards, that path is correct but at the same time, I think the fundamentals have right -- on the juice business are very strong and we are seeing -- we're going to continue to see pretty healthy margins perhaps not as strong as we’ve seen in the first two quarters but they are exceptionally strong but nonetheless when you coupled the growth and pretty good margins with the overall, this business is probably going to deliver record profits we think this year.

Natasha Zagvozdina – Renaissance Capital Group

Thank you. One clarifying question, everything is clear on your view on the input cost. When you -- we're discussing the dairy division in four month, you said the decline in gross margin was due to price and raw milk prices but was there any impact positive or negative on the mix in the dairy division that you could attribute? Was it the -- something you said that the demand is recovering?

Dmitry Vladimirovich Ivanov

Yeah, I think -- I mean, I don’t know what you’d say positive or negative. The fact is that we were losing some share which we talked about in previous calls in traditional dairy for while. We’ve starting to see that come back. So the fact is that we are making up some lost ground with slightly lower value products in terms of value per liter but the margins are actually quite good in themselves. I mean, we are talking about Domik v Derevne pasteurized milk which we sell at pretty decent prices.

So I would say the mixture is slight change but it’s not -- it’s not causing, it has nothing to do with the margin where the margin is exclusively a raw milk issue, if you kind of factor in $24 million into our topline, if you like into a gross margin of dairy, we can see the site of the raw milk and so on. So it’s exclusively raw milk.

A fact, that the everything else the dairy is very positive but as we go through the year because we did talk about before that we were making investments against traditional dairy, those investments will stop delivering and they are already starting to deliver some volume growth for us.

So we'd expect traditional Dairy to grow faster than yoghurts and desserts because we are making out some share lost that we had in the short-term which we said we’d bake it of and we knew there are some opportunities there around packaging and so on that we’re doing.

There is a lot of parts of traditional dairy which is of a little value but we are not worried about at all and it doesn’t, it focus far as but so that’s a traditional dairy, like expensive pasteurized milk is definitely an area of focus.

Natasha Zagvozdina – Renaissance Capital Group

Thank you, Dmitry.

Operator

Next question comes from the line of Daniel Wakerly.

Daniel Wakerly – Morgan Stanley

Hi. Good evening. Hi Tony.

Tony Maher

Hi.

Daniel Wakerly – Morgan Stanley

Hi. If I can just begin to couple of wise answers on the dairy business, I think you said in the last quarter, you are going to take sort of high single digit pricing in dairy. Is it right to think that hasn’t really affected first quarter average price in dairy and we should see that come through in 2Q on top of what seems to be very good volume momentum as well?

Tony Maher

You will see it come through fully in the quarter because let’s say April is in phase by the end of March but as I think I touched on earlier when we did the full year results announcement, we topped in three different tranches. So there would be some aspect of it inside in the period but not a great deal of us.

So the majority is really, I mean, I think we took a lit bit in January, little bit in late February and then may be almost half of it in as entirety towards the third week or second week -- second, third week of March by the time it took.

So some impact on it for sure but not as much as you will see in the second quarter surely and that’s one of the reason, I’m saying the margins in the second quarter for dairy will because of two reasons, one raw milk prices coming back somewhat, but secondly, the benefit of the full period for a higher price per kilo.

Daniel Wakerly – Morgan Stanley

So you re-expect dairy year-on-year sales price on rubles to be even double digit?

Tony Maher

I would, given that we are nearly half the quarter still to go, practically, as we are slow to give you that kind of guidance but you will see pretty good ruble growth, I think in dairy in the second quarter.

Daniel Wakerly – Morgan Stanley

Okay, sir. Fair enough. Just for the try. Thank you. And on the milk cost, you talked about the 34% increase in the first quarter which in my calculations means up 18, around 18% in rubles. Can I just make sure and you said, up significantly still in the second quarter? Can we just -- give us a stare, we talking about low teens or high single digit?

Tony Maher

I mean, remember, there are two things going on here. You would have had the price of milk going down last year and going down this year. You know, what I’m pointing on.

Daniel Wakerly – Morgan Stanley

Yes.

Tony Maher

So, I would say to you -- I'm not so sure that the rate of increase will be all that much lower than it was in the first quarter. It firmly will be little bit lower. I don’t want to mislead you. I mean, here the fact is the price of milk is significantly higher than a year ago in the second quarter too.

Daniel Wakerly – Morgan Stanley

Yeah.

Tony Maher

But -- because the comparisons remember change as you go through quarter-after-quarter, right? So clearly, the second and third quarter last year, the prices of milk were lower than were in the first and certainly have been lower than they were in the fourth. So as you go through the year those comparisons change. So I think -- I don’t want to give you a figure because if June is still out there but the fact is…

Daniel Wakerly – Morgan Stanley

I understood.

Tony Maher

Yeah. Demand just open and I think we are seeing -- that's one of the reason actually why the price of milk is not probably going down as quickly as otherwise would but it is going down and that’s couple with our pricing initiatives which have stopped which is good news because it hasn’t came back to demand that all in the second quarter. We think as go forward we are getting back to still where we wanted to be in addition to the gross margin.

Daniel Wakerly – Morgan Stanley

Got it. Thank you and that’s very clear. And just couple of quick follow-up, quick easy ones, I think. On working capital with a side flow of $39 million, was that just timing or is there any sort of affect we should be thinking about that in the first quarter?

And on depreciation and amortization, can you give us a stay on the full year number because it seems to, I think, quite changeable. I think it was around $36 million or something in the fourth quarter and only 26 in the first quarter. So can you just tell us what you wish to expect for the full year? Thank you.

Dmitry Vladimirovich Ivanov

Depreciation for the full year will be around $100 million…

Daniel Wakerly – Morgan Stanley

$100 million.

Dmitry Vladimirovich Ivanov

And for the working capital, we invested in raw milk is that on the stock quarter to satisfy growing demand but in terms of addressing cycle, it is about 26 days working capital turnover. It’s the best addressing cycle company ever had, 26 days.

Daniel Wakerly – Morgan Stanley

Okay.

Tony Maher

As you see cost of good, of course, Daniel is going up obviously and sale is going above and that has a monetary change in working capital clearly.

Daniel Wakerly – Morgan Stanley

Yeah. Yes.

Tony Maher

And in fact, we jumped in this region. We had a -- we sold even through the fourth quarter. Actually, we saw demand in June especially was surprisingly stronger than what we had anticipated and we just have to reach because you have to buy concentrates in from China and South America and at lead times are along and we took the risk to bring stocks higher because we said this demand from the December might that and it has. So actually, there was a bit of stock building going on there as well.

Also securing a bit more dry milk than we would have otherwise done and so on and but Dmitry’s find that we look at it not just in terms of absolute amounts because they will change with sales and the valuations, obviously as they would, exchange rate even will change.

Daniel Wakerly – Morgan Stanley

Yes.

Tony Maher

But you the number of updates of in which the capital implies in the business, that has dropped dramatically. It used to be at one stage, it was up near 60 days. That’s now down to 26. So that change we made in relation to both tables receivables and then predict their inventory is a real and sustained change.

There might be occasions that you want to for hedging purposes that you might want to increase inventories especially if you know that things are going up in price or whatever. They will be change but there will be conscious changes as oppose to, let’s say accidental changes.

Daniel Wakerly – Morgan Stanley

Brilliant. Very clear. And again just one very final quick one, advertising and marketing spend. Can you tell us what that was in the quarter? And I'll leave it there.

Tony Maher

Yes. I think it back on the advertising.

Dmitry Vladimirovich Ivanov

I think it was on the -- it was…

Tony Maher

Marketing and advertising was a $1 million.

Daniel Wakerly – Morgan Stanley

Sorry, I didn't catch that, the line went a bit funny, sorry. Could you repeat the number?

Dmitry Vladimirovich Ivanov

$26 million.

Daniel Wakerly – Morgan Stanley

$ 26 million, brilliant. Thank you very much.

Tony Maher

Thanks you, Daniel

Daniel Wakerly – Morgan Stanley

Thanks.

Operator

Your next question comes from the line of Elena Mills.

Elena Mills – Alfa Bank

Good afternoon, Tony and Dmitry. Could I just follow up, please on the working capital question? Thank you very much for your detailed explanation which I think is very helpful to understand what you are doing operationally there.

Can you just give us a stare on whether you think this is a higher level of stocking is something that you see as continuing to the rest of the year because of your expectations around inputs or do you think this is like the deliver as we move through into the second half? That’s my first question. Thank you.

Tony Maher

I think the working capital in absolute terms, it will obviously be higher because with sales growing, you will have more capital in the business but as I said, Elena, we look at it in terms of the number of days in the business and that’s the operating inside is down to 26 days which we think is a better measure.

Now that’s obviously translates into an amount of money but I would expect to see more working capital in the business this year but when you factored into the revenue, I wouldn’t expect it to be different in terms of maybe better where it was before.

In the -- there will be quarterly changes surely. I would say the third quarter -- I am moon walking here but I would expect the third quarter to be highest because we’d be carrying inventory out of the summer months into the winter months when demand is growing and we would be carrying lower cost raw materials and so on.

So and typically the third quarter, September balance sheet would be, there would be more inventory in it that would, let’s say at the end of the first or second quarter but it’s driven by obviously changes as well in terms of big issue whether or not inventory to meet demands and with the sales growth that we are seeing and expecting that we will be carrying more money in the balance sheet as a result of that.

Elena Mills – Alfa Bank

Thanks. That’s very helpful. And if I could just ask a question on your operating cost control, which again was very impressive in the quarter. I am just wondering, Tony, if you could talk about what specific initiative you’re currently employing because you continue to sort of deliver very, very good results on in terms of buybacks and talks specifically in the context of what you said earlier about A&P whether you think that’s gives you better scope to increase marketing activity because you are getting such good efficiency on some of the other G&A, I don’t think.

Tony Maher

Yes. There are bunch of things and still going on for while and we have a lot of initiatives going on which are to take our cost, some of which we obviously we would be reinvesting and certainly advertising and marketing, I think we don’t understand that by quarter and I think that will change in quarter-to-quarter and from month-to-month because it’s that we buy advertising space that consumer doesn’t think things by quarter right. We buy it by just for various marketing programs, et cetera. So that as a percentage of sale in a reason and will vary.

But the overall, I mean we have taken out a lot of cost. We have taken lot of -- certainly reduce significantly number of employees in the business. We have a lot of initiatives going on around like weighting of packaging, reduction of waste, just more productivity, electricity usage, transport usage, but we need to have those as well because we are going to start seeing price of oil and it’s definitely higher than it was a year ago which is one of the reason that Russia is going that it was a year ago. But of course, that’s going to be enough common tax on the price of transport. So those efficiencies need to happen because otherwise, we are going to start seeing some cost inflation coming back into the business and we are already seeing some of it.

So we’ve got to have those efficiencies to help to mitigate those and the good news is that we continue to find areas for improvement. I have said before, I think the beverage business is probably well set up. I think we’ve got a cost space there right still opportunities for improvement but they are not these big chunks of change that we had in the years in the last couple of years because we have done a lot of a heavy lifting already.

But the dairy business still has opportunity to take our cost and we continue to do as we’ve also reengineered our head office. There is a lots less people in the head office and they used to be. We consolidated lot of functions, departments, many of those things, all taking out cost but I hope also delivering value because somehow when you streamline your functions, you also get faster and better decision making and so there is some, it's not just a cost play, it was also removing bureaucracy and many of these other things as we have been working on. So it’s a mixture of stuff and I think, I can’t think of a single area really where haven’t focused on continue to focus on removing cost. That’s all we’ve got.

Elena Mills – Alfa Bank

Thanks very much. I’ll get back in the queue for my other questions. Thanks.

Operator

Your next question comes from the line of Victoria Sokolova.

Victoria Sokolova – Troika Dialog Group

Hi, everyone, and hi, Tony. If -- we discussed costs. The SG&A percentage of revenues or let's just say selling and distribution expenses. Would it be fair to assume the struggle for the remaining of this year or should we be more conservative?

Tony Maher

I think we should be more conservative, Victoria. Hi, good afternoon to you.

Victoria Sokolova – Troika Dialog Group

Hi.

Tony Maher

I think we should be more conservative. I think we are seeing some inflation coming back into transport costs. I think marketing is not deliberately low in the quarter, but it is certainly lower than we’d expected for the year, because it seem to, we expense marketing as we – if it's new ad, because we add the ads than we expense it, otherwise as we have various media campaigns going on.

So, I would tend to be more conservative there, but I think, certainly, we are seeing some inflation in transport costs. The good news is that, we are offsetting a lot of that by more being -- more efficient with transport than we were before. And also, the fact that we move quite a bit of production, not just in Moscow but in other regions, it's also helping us there to manage some of that as well.

Victoria Sokolova – Troika Dialog Group

Okay. Thanks. Fair enough. And, could you please give us a figure in terms of what was the hedged concentrate purchasing price relative to last year, or can you give us a difference in terms of the difference in price of concentrate between last year's and this year's?

Tony Maher

Not so sure, I could give you everything you are looking for there, because some of these things are competitively sensitive. But I mean, generally, it is well known that the price of oranges, for example, is gone significantly versus two years ago, significantly kind of – it's not quite doubled but it's, not far away from double.

Now, we --over a year ago, we felt because demand globally was falling. We felt concentrate prices were going to fall and so we didn't lock in our prices of concentrate at all last year, for the first six months, and we gained significantly from that.

And then we felt that when they were at such low level that we could lock in, really, towards, I guess, the back half of last year for most of this year, because we felt even if they went down a bit more, which we didn't think they would, they were already at pretty good prices. So we lost gain a lot of our concentrate for this year.

Now, demand is definitely stronger than what we expected. So we are not locked in for the full year, but we -- which as why I said in, we'd see probably, a little bit of change as we go through the year. But we also haven't taken any pricing at all in beverages. So there is some, probably opportunity to offset – maybe even all of that as we go forward.

In other areas of concentrate, there has been slight changes, apple has gone up slightly but still, historically, pretty reasonable levels. And also our procurement has got better. We up to two years ago, we were buying most of our concentrate through – I don't know what you call it, agents, it's called the more middle, brokers or whatever. Now we go directly. So we buy everything from growers and that also made a big difference to us.

And it's also helping us, because in the past, if we wanted to hedged forward, we had to carry a huge amount of – we had to carry the stock. We couldn't do – had the option and then take the product as you needed. By going directly with the big global players, we were able to that. So we don't have to carry a year supply of concentrate in our warehouses. It wasn't anything like that. Two years ago we did had to, because we wouldn't be able to use these guys for hedging, so this also is a change for us.

Victoria Sokolova – Troika Dialog Group

Okay. So, perhaps, I can then ask you to give us a feel for what was the effect of the concentrate in the gross margin evolution, in the first quarter this year and the rest being made up by mix and other factors?

Tony Maher

I mean, it's only concentrate. And if you look at it actually our gross margin in beverages, for the first quarter are stronger than our gross margin in beverages for the fourth quarter last year. So I think that's when the concentrate prices would not have been different, so maybe that's the best way I can answer your question. So you can see there that the margins in the quarter are stronger than they were in the fourth quarter.

So, mix is helping in there. And, yeah, I would say mix is probably pretty good contribution to the stronger gross margins in the first quarter versus fourth quarter. It might be a good way of looking to versus year-on-year, and then I would say the growth in margins half it is probably concentrate and half it is probably mixed.

Victoria Sokolova – Troika Dialog Group

Okay. Perfect.

Tony Maher

You see it, probably, a way of looking as you felt, yeah.

Victoria Sokolova – Troika Dialog Group

Okay. Great. And just a technical – a couple of technical questions. Can you just give us the revenue figure that you saw in the Agro part of the dairy division?

Tony Maher

Oh, it’s nothing. Don't even worry about it. It's nothing.

Victoria Sokolova – Troika Dialog Group

It's not material at all.

Tony Maher

No. Because it's all inter-company sales this time of the year where they supply milk, and I mean, there might be something in there, but if there is a peanuts, and mainly that will be in the target for quarter where we sell grain, we sell grain and we sell sugar and sugar beet, this kind of stuff. So we don’t do any of that in the first quarter, so it's nothing. All the inter-company sales are washed out, obviously, so the milk we sell it ourselves, we don't recognized it as revenue.

Victoria Sokolova – Troika Dialog Group

Okay. And, I just want to see what’s the distortion on the gross margin or on the volumes basically and from…

Tony Maher

Nothing, Victoria. Nothing.

Victoria Sokolova – Troika Dialog Group

Okay. Great.

Tony Maher

And you should -- you won't see it in the second quarter rather. The Agro, the only time you will see any revenue there really will be in the third and fourth quarter, where as I said, we sell grain and we sell sugar as in beet and we sell various other things, externally, that is.

Victoria Sokolova – Troika Dialog Group

Okay. And any reason for the hike in the tax rate?

Tony Maher

There is, again…

Dmitry Vladimirovich Ivanov

There is no hike. It's a little bit lower than in the fourth quarter of the last year.

Tony Maher

There is of course some, obviously, we have businesses in Ukraine. We have businesses in Central Asia. So they play part as well. But I think on a full year basis, my expectation is tax will be pretty much as it was, the effective rate of tax will be pretty much as it was. Lower maybe, even, maybe lower than last year. I don't believe it would be higher, I mean, just to the pipeline something in the quarter.

There is going to be, something, but they are not. Russia is, obviously, get a lower corporate rate of tax, but other jurisdictions and then we, when we have losses in jurisdictions which we had offset and so on. But over a period of time they wash out. So I think for the full year, there is nothing to think about there, really.

Victoria Sokolova – Troika Dialog Group

Okay. Thank you very much.

Operator

Your next question comes from the line of Victoria Petrova.

Victoria Petrova – Credit Suisse

Hi. Thank you very much for a very detailed presentation. My first question is related to still to dairy margins. First of all, as far as I know, the ruble price – average ruble price for dairy in the first quarter was down year-over-year. Am I right or not, and is it only the impact of the mix? Should we expect any reversal, once you increase prices as you mentioned?

And my second question is basically with what we are seeing the seasonality in raw milk prices, in good years and in bad years. So basically fourth and first quarter’s were always lower in terms of margins. Should we expect the similar trend and do we expect second quarter dairy margin to be higher than first quarter of 2009.

And my third question and this would be final, is related to the difference between gross profit and EBITDA. Should we expect that basically, as a compensation of the gross margins losses on EBITDA line would be similar in further quarters to the first quarter '010? Thank you very much. Sorry, for so many questions.

Tony Maher

That's okay. Victoria, I’ll -- Dmitry will answer the price of ruble – price for liter and he’ll come in a second. In relation to raw milk -- your second question was in relation to raw milk?

Victoria Petrova – Credit Suisse

My second question was basically is…

Tony Maher

Yeah.

Victoria Petrova – Credit Suisse

… do we expect the mix to reverse?

Tony Maher

Yeah. I mean, we will see. I said it here, that we will see gross margin in the second quarter in dairy stronger than in the first quarter. That is for sure. How much stronger, we have wait and see, because we still have June to go. And June, to your point is, one of the months where you see a sizeable decrease, sizeable, but anyway decrease in the price of milk. So I think, it will be stronger, that is there.

In the case of EBITDA, obviously, we like to have the strongest margins possible at every line and, but most of all the bottom line. So clearly, as we – but also we managed the business not just for a quarter, we try to make sure we do the right things over the long-term.

So in rate respect things like marketing spend and so on, our intent is to continue to support our brand in the way that we need to do it for the long-term viability of the business.

So, I would expect that we will mitigate some of the gross margin pressure, when you get down to the bottom line. But I would say more on a full year basis rather than quarter-by-quarter basis. We still expect to for the full year to be there about EBITDA margins to last year.

It’s slightly lower -- slightly lower not significantly, that’s what we are aiming for. Clear cost management is art of that drive because the consumer is definitely more price sensitive than they were when I offset that in the past. So in that respect, our first thoughts are not just taking price increases to offset some of the margin pressure.

More around making sure we’re doing things on driving volume, but also driving down cost. But the fact, we have taken some price increases in the first quarter. The second quarter volumes look like being quite good, obviously we have to see how June goes, but May was very strong.

Then, we think that getting the balance between pricing and volume is important obviously. We are remaining the strongest dairy company in Russia important to us. So we want to keep that balance right. In the case of revenue per kilo, Dmitry, do you want to answer that in detail?

Dmitry Vladimirovich Ivanov

Average price in dairy in 2009 first quarter was 34.5 ruble and in first quarter 2010 34.9 ruble, so it increased.

Victoria Petrova – Credit Suisse

Okay.

Tony Maher

Not decreased.

Victoria Petrova – Credit Suisse

And just, yeah. Thank you very much. And just let me put the one of the question a little differently. In the first quarter ’09, which was, the first quarter was raw milk price inflation. We have seen basically one year -- one month of very high raw milk prices. In the first quarter we have seen three months of high raw milk prices. Should I expect that second quarter will be a quarter with two months of high raw milk prices purposely?

Tony Maher

The second quarter, I think all three months in the second quarter will have higher raw milk prices than last year. In fact I -- that I can tell you. Now how high it hike, one definition of high, Victoria, could be different to other. If you’ll ask the farmers they’ll probably tell you it’s not high…

Victoria Petrova – Credit Suisse

Exactly.

Tony Maher

… if you ask me, I would say they are high. So, just, one man's meat is another man's poison kinds of thing. So we just have to be – with words like high, we have to be careful, what we define. So, I think, look I think, how can I give you some -- I think the second quarter gross profit in dairy will be higher than the fourth quarter gross profit in dairy.

Victoria Petrova – Credit Suisse

Thank you very much.

Tony Maher

I mean, that’s, I think, that’s the best I can do for you.

Victoria Petrova – Credit Suisse

Yeah. Thank you very much.

Operator

Your next question comes from the line Odile Broussy.

Odile Broussy – Aton Capital

Good afternoon. I have another question on the raw milk price trend. Talk about Q2 price is being above Q2, 2009. But can we look at further H2, I mean, is that the case that we are now, actually more normal raw milk price, which is going to be permanently into the next half 10% to 15% to what it was in 2009. Have you reach the new normalize higher raw milk price and can we talk about -- can you talk about the underlying factors beyond Russian issues?

Tony Maher

Well, firstly, I think, a couple of things. Firstly, we will be cycling in Q4 very high raw milk prices from last year. And so, I don’t think you can treat the core -- the half year in the same way as you treat a quarter, because the comparisons will be different. The fact is that milk prices in Russia are still high. They are higher than Germany today.

So, it’s not like and the price in Germany is higher than 12 years year ago by the way. So it’s not like that we but Russia is quite specific in terms of all these things that create, it take time to rectify and so on.

So I don’t think we’re -- I don’t see it’s going back to the prices that we had in Q2, Q3 up 2010 – ’09, in immediate future. And but, the fact is, that the price of milk in Russia today is probably 15% to 20% more expensive than in it is Germany. Now, that doesn’t make long-term sense.

So I think it’s, I don’t know, when you say more normal, I think it’s not -- I wouldn’t call it normal at the moment. The fact is, we are managing through it and I think that’s the, basically our job is to make sure that you write these kind of ways and troughs, and but you do it not for the quarter-by-quarter but you do it overtime.

And I think that’s what we are trying to do is to make sure that we are doing right things for the business we could have taken heavier pricing in Q4 last year. If we hasn’t long-term in mind, I think, we did the right thing, we manage through the fourth and the first quarter. And as all this subsequent quarter goes on, I think our results which show that they are getting stronger.

So, it’s a question of being able to do the pricing initiatives in a way they doesn’t have demand to offset some of these inflationary pressures. And I think, but I wouldn’t say today the price of milk in Russia is normal whatever but, what we define normally.

Odile Broussy – Aton Capital

I mean, the new benchmark kind of level than normal but?

Tony Maher

No. I wouldn’t say so, I mean, I think, they would be higher than before for the foreseeable future. But I don’t think you are going to see -- I don’t think the benchmark has been designed at where it is right now.

Odile Broussy – Aton Capital

Okay. And could you say whether between March and now, you’ve made any additional selling price increases in dairy?

Tony Maher

No. We have not.

Odile Broussy – Aton Capital

Great. Thank you very much.

Marina Kagan

Operator, we’ll now take the last question, please.

Operator

Okay. Your final question comes from the line of Tigran Hovhannisyan.

Tigran Hovhannisyan – MDM Bank

Good afternoon, ladies and gentlemen. Congratulations for the good results. The question is, if you could please comment on the impact that your retail low regulating this, I mean, the food retail had on your operations since working capital and this supplier bonuses and marketing charges you have to give to retailers?

Tony Maher

Well, we think, we are not budgeting or expecting any benefit from it, because while, we actually, we think administratively, it’s actually, it is the challenging because we now have to collect our, I’ll just give you a simple example.

We -- the new law products of 10-day sales life, in fact we pay for 10 days. Now we put all these products on the same trucks as the products with 30-day sales life. So, administratively that means we have to separate invoicing and so on. So actually it’s more hassle than it worth, to be honest.

And overall, our credit terms before, we were very happy with them, so it's not like we want to gain any benefit there from our customers. I think overall we’re not expecting any benefit. In fact, we are obviously working with our customers to make sure one that we are all compliance with the law they end-up.

And but it’s not our ambitions to get any benefit from as we most of this things that such degrees of interpretation that one has to try to put on them to make sure, we can execute then as it deemed by the authorities we, there is a lot of interpretation. We have -- I would say, we have probably above nine or 10 people almost full time working on, making sure we are compliance and our customer agreements are compliance as we speak.

And they are over in fact with our biggest customer relation to trying to make sure we end-up, as I said, in line with the expectation of the law. So we are not expecting any benefit from the balance sheet, not from the working capital writing I said, that’s nothing in our thinking.

And, we are not seeing any downsize from that, I mean, we have terms and conditions with our customers, which we gained to be fair and winning for us and winning for them. So we may have to – we are writing some of the agreements to make sure that they either talks of these cost in line with the legislation, but we don’t expect any change to our overheads or our working capital as a result.

Tigran Hovhannisyan – MDM Bank

I see. Thank you very much. And, if you could comment on the change or April figure of the packaging cost for this quarter by per liter of milk or juice?

Tony Maher

Well, we don’t really give out that information, but by and large packaging costs are pretty much flat year-on-year, maybe slightly cheaper, I would say. And we obviously have one very large supplier, Tetra Pak, and then we have several other suppliers for plastics and various goods and it’s not -- it’s hasn’t change I would say year-on-year overall as a broad type if you are modeling something, I wouldn’t say packaging as any if it has made a material difference.

Tigran Hovhannisyan – MDM Bank

I see. And in term of cost per liter of, I mean, product, what’s the percentage would be of packaging profit, it’s still like half or less?

Tony Maher

Half, no, not at all. But in diary, I mean, juice it’s bigger than it is in dairy. And I mean in, I don’t know in diary it varies from milk it’s bigger than it would be yogurts, it’s not even a number of we think about, because it’s like I don’t know taking 20 different variables and naming it something, because they are all different kinds of packaging.

And but packaging is a percentage of our cost in dairy and baby food relatively speaking, it’s not immaterial, but relatively speaking small. And in juice just relatively speaking big, I think, is the only answer I can give you, we don’t actually give out packaging per kilo whatever because it’s, they are very different, right, they are just very different.

Tigran Hovhannisyan – MDM Bank

I see. Thank you very much. That’s all the questions I had.

Tony Maher

Thank you.

Marina Kagan

Ladies and gentlemen, once again thank you for joining us today. A replay of this call will be available through June the 17th. 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 your participation. This concludes today’s call. You may now disconnect.

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