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Central European Distribution (NASDAQ:CEDC)

Q3 2011 Earnings Call

November 04, 2011 8:30 am ET

Executives

James Archbold - Vice President, Director of Investor Relations and Secretary

Christopher Biedermann - Chief Financial Officer, Principal Accounting Officer and Vice President

William V. Carey - Chairman, Chief Executive Officer and President

Analysts

Julien Martin - BofA Merrill Lynch, Research Division

Nicola Davies

Daniel Wakerly - Morgan Stanley, Research Division

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Operator

Good day, everyone, and welcome to the CEDC Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Director of Investor Relations, Mr. James Archbold. Please go ahead, sir.

James Archbold

Thank you. I'd like to welcome everyone today to CEDC's Third Quarter 2011 Earnings Conference Call. Joining me this morning are William Carey, President, CEO, and Chairman of CEDC; and Chris Biedermann, Chief Financial Officer.

Please note that the content of this call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 4, 2011. The online replay will be available shortly after the conclusion of the call. You may also view a copy of today's press release and a presentation for today's call on our website.

Please also note that statements made during this conference call, other than those related to historical information, constitute forward-looking statements within the meaning of the Private Securities Litigation and Reform Act of 1995. Without limiting the foregoing discussions, the forecasts, estimates, targets, schedules, plans, beliefs, expectations and the like are intended to identify forward-looking statements. These forward-looking statements, which are based on management's current beliefs and assumptions and current information known to management, involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements are contained in the press release issued today and on our Form 10-Q to be filed with the Securities and Exchange Commission. CEDC is under no duty and undertakes no obligation to update any forward-looking statements made in this call.

We also ask that today, questions are limited to 3 per person. With that, I'll turn the call over to William Carey, our President and Chief Executive Officer. Bill?

William V. Carey

Thank you, Jim. Welcome, everyone, to our quarter 3 call. First off, we'll be going through Poland, Russia highlights for Q3. Then, we will be going into financials, which Chris Biedermann will lead you through, and I'll take you through the outlook of Q4, and then open up to calls. And I'll be reading off and reviewing over the presentation that's on our webpage. So those of you who want to dial it up, please go ahead. Because I'll be running through the presentation that's on the webpage filed this morning.

So on Page 3, the Q3 highlights for Poland. It wasn't big news for overall business in Poland, in terms of what we expected to what we came up with. In terms of actual results, our volume growth was about 18% compared to third quarter '10, and we had double-digit volume growth in all of our key sectors, domestic vodka, led still by the strong growth of Biala, where we didn't have our new product last year. Also, the imports continued double-digit growth and our exports had a much higher growth, led by a number of new markets that we've opened up over the last 12 months.

Overall, the vodka market was certainly down more than we anticipated beginning of the year, where we thought more 1% to 2%. We're seeing the market down approximately 5% to 6%, which Nielsen's putting out in volume compared to third quarter 2010, and we anticipate that probably to continue through Q4.

We had a couple of successful launches of our new flavor, Jezowka, meeting volume expectations. This is going after the product, main product in the market -- that's in the market from stock spirits. And we anticipate that distribution gains to continue in this product over the next 12 months.

We also relaunched one of our core mainstream brands that sits above our Zubrowka product, Soplica, with a new bottle, a new packaging, which we're seeing results much better than estimated. We're seeing a key to gallons for example that were up 80%, just like-for-like sales without promotions, but we're seeing much better offtake from the consumer than our previous package that we had out.

We're seeing still positive channel mix with increasing weight of wholesalers, which is also good news. And as I mentioned in the last quarter call, I think we'll continue to see that progressing into 2012 as well. We also completed an in-depth study of our traditional trade performance, which I'll get into in a moment.

We turn to Page 4. You can see our 3 sectors there broken out, where we had growth of 16% on vodka; 12%, imports; 55%, exports; and a value growth of 7%, which was still lower than the overall volume growth. But as we'll get into Q4, that will be reversing as we move into Q4. That's our relationship between volume and value.

We also saw spirit pricing higher in Q3 than forecasted, by 3% to 5%. And also compared to plans, we had a negative FX on our imports versus exports in terms of a negative FX on our mix between imports and exports. But we firmly believe that as exports continue to progress, that eventually, we anticipate or certainly hope that we'll be closer to the export number where we have a natural hedge, because we exported hard currency and we imported hard currency. So those numbers come closer to matching, we will have a natural hedge there. We wouldn't have this issue of moving forward once that export number would become closer to imports.

We also completed a legal merger of our distilleries in Poland, which should be saving us -- which will be saving us cash tax over the next 5 years. Exports continue to perform above expectations, that now represents about 7% of our sales. And that's really 5, 6 new contracts we signed over the last 12 months that is adding into that increased sales in our overall exports. And margin still remains quite healthy in our exports.

If you turn to Page 5, we put some new slides in for you just to show you a little bit of the channel mix, so you can better understand where we sit in our overall channel mix within our marketplace. If you look at the left side of the slide, this is your modern trade, your key account, your international key accounts. You see we made a big progression from a year ago. We have now taken #1 position in the modern trade. And that is really from the diversification of a premium portfolio that we represent in Poland. And of course, this channel is continuing to expand its presence with the likes of Tesco, Carrefour, et cetera, et cetera.

If you look on the right side, the discounters. We were certainly overweighted there a year ago, and we certainly been trying to reduce our presence in discounters, at the same time increasing our presence in other channels which are more profitable channels. Certainly overweight in this channel, is some of the reasons why we discussed before why it hurt our profitability through '09 and '10.

And our main focus as we move forward for 2012, is going to be traditional trade. As you see, this is the largest part of the marketplace, which represents over 50% of the market. And yes, we are growing, but it's not fast enough for us, and that's been our key focus. That's part of the research that we did this summer, and that's going to be led off next year -- well, actually, this quarter. But that's going to be our key focus over the next 24 months increases this channel, as this is the most profitable channel. And that's going to be through distribution gains of certain SKUs that we have, in terms of -- that we are lagging in terms of distribution gains, small sizes, also on flavors. A lot of your flavored product gets sold in this channel. And for us, this channel is going to drive us a better channel and product mix over the next couple of years. So this is something we are very focused on, and we'll be realigning some of our sales structure to target this more aggressively as we start the new year.

We turn to Russia, the Q3 highlights. First off, we closed our Tula factory as expected, with an annual operating savings of about $6 million to $7 million a year. We're still looking for a buyer of these assets. Hopefully, we have one on the hook. We'll see how it goes. Actually, we have a couple of buyers, but we'll see how that progresses over the next month or 2.

We also launched our Talka brand, which we launched at the end of June. And this is our first full quarter, and we're seeing very good rotation, not just the shipment, but rotation out of the market. And we are now estimating a 7-month volume, estimated around 450,000 to 500,000 cases. And this is priced, again, above Green Mark, below our Zhuravli brand, and we're quite excited about the development of Talka.

As discussed on the last call, we also saw the spirit price increase on August 1 of 30%, 35%, which has certainly add a big negative on our financials here, for the second half of the year. The overall domestic market remains quite soft. Production data is showing the market was down 14% in the quarter. Nielsen, showing it was down single digit. Between those 2, it's probably somewhere in between those 2.

We've continued the strong export growth to Ukraine and other countries in the former Soviet bloc, Kazakhstan, Georgia, Baltics. Green Mark is now the largest imported vodka in the Baltics. It's also the largest imported brand in the Ukraine.

We've also received all of our licenses that we've been working hard on in the first half of the year. And we received all of our last part of our licenses in the quarter as well.

We opened our own Trade House in Siberia. Q4 is our first full quarter that we're operating with our own trading house. And also, we put price increases up in August except our key brand, Green Mark, which unfortunately, because we have put in price increases through the trade from August, the excise increase in January, the spirit price increase in March, and again in August, our pricing today, competitors are only following currently, where they were also following, but not at the same pace, and they have now been more aggressive in putting up prices here currently and projected into the next few months. But we believe as we move into the first quarter, we should be more or less on line to where we used to be in terms of price positioning with our key competitor brands on some of our key brands.

On Page 8, if you look at our volume numbers, certainly the 3% growth in our overall vodka market, we expected more in the range of 12%. And the main reasons for the lower growth rates were the fact that, again, that the overall market was certainly not lining up with mid- to high-single digit probably declines. We did less discounted volumes in key accounts. Still, we have some gaps in our route to market in terms of the relicensing of certain wholesalers, which I'll get to in about Q4. And again, our prices, that we remained about 5% high or 6% higher than where we probably should be. But again, our key competitors are now with quite aggressive price increases coming through, and we'll see that stabilizing here in the next few months.

We had a good number of value. We increased our value 25% in Russia, and it's apparently led by our price increases over the last 12 months. And again, less heavy discounting to the key account trade, where a lot of your heavy discounting there goes at really no profit. And our RTD business continues to perform quite well.

If you look at our market share in Russia on Page 9. We have lost some market share this year, according to Nielsen report June, July. We should be getting a new report here in the next couple of weeks for the August, September period. It usually comes about 40 days or so after the end of the 2-month period.

Clearly, we still have a clear leadership in the market, but we have lost numerical distribution, mainly coming out of wholesalers. We did not get some of their relicensing, where we don't have our own sales force. As you know, we have 1,300 salesmen working with various wholesalers in the market. But there is a part of the market, around 20%, that we don't have our own sales force. And this is where we've seen the biggest drop of our numerical distribution that we are trying to bridge with other distributors, and this is where we're seeing the biggest drop of some of our numerical distribution. And of course, some of the other factors that I mentioned. And also you see some of the economy producers that have come online, Bashspirit, Crystal, with the cheaper portfolio, have gained a bit of market share.

On Page 10, this is our market share in Ukraine. Ukraine, as you're aware or not, is the third-largest vodka market in the world; Poland being fourth. We're now up to 6.7% share. We're making some pretty decent money now in Ukraine. And certainly it's not on the same per liter level as Russia, but certainly we've moved along the way here with our first full year operating in terms of 2011. And that's really led by Green Mark, which is now the biggest imported brand in Ukraine and it continues to do quite well. So we're anticipating quite good things coming out of this market over the next 12 months. And we're also starting now with a number of our Polish brands also putting in to our distribution in Ukraine, like our Zubrowka Grass as well as our Zubrowka White, our new product in Poland.

I'll now turn it to Chris Biedermann to take you through the different financials for Q3. Thank you.

Christopher Biedermann

Thanks, Bill. We'll start on Page 12, which gives us a view of our GAAP results. And within those GAAP results, there are a number of significant onetime items that I think are worth discussing today.

If you look at the page. The first column is FX. And you'll see there's a $170 million FX loss there. Thankfully, that's the reevaluation of our long-term debt, which is in euros and dollars, and it's on the books of [indiscernible] entities, which needs to be revalued in each period end, quarter end of the balance sheet rates. Now since quarter-on-quarter, the currency devalues, you have to take an FX loss. Over the last few years, we've had significant gains and losses in this area as we continue to have to revalue the debt in local currency terms.

In the next column, in terms of restructuring and licensing costs there. The more significant item there is, during the quarter, we closed down one of our production plants in Russia, Tula. We wrote down the asset value effectively to almost 0 to net realize of its value. Although we still anticipate selling it, we took a conservative approach and wrote down the value there, which is included as roughly $8 million. There's also cost and expenses associated with the shutdown there.

Additionally, there were some remaining costs in the operation related to our relicensing and particularly, some costs in our import business of realigning our warehouse which is in there, and that's included in Column C. Finally, in Column D is a impairment charge of $674 million, and I will jump to the next slide to discuss that a bit.

So if we go to 13, I guess to put it in simple terms, the goodwill. We recorded goodwill upon acquisition of some of our entities in the past, which is a difference between a price paid and the net book value of the entity. During the course of the quarter, we identified certain impairment indicators, and we determined that an impairment charge is necessary. So what that meant was we had to effectively write down the value of this goodwill asset.

But during the quarter, we took a $547 million charge for goodwill in total: $88 million to our reporting in Poland; and $459 was for reporting in Russia. Additionally, as a way to testing, we identified certain IP, capitalized IPR or trademarks that were capitalized that we wrote down as well. That represents $128 million, and that was primarily the Bols Vodka brand in Poland. Now as we've seen in the last 2 months since we've launched the Zubrowka Biala brand last year, we've seen our Bols brand cannibalized in volumes. So the volume of Bols has been taken up by sales by some of those brands, particularly Zubrowka Biala, thus leading to an impairment charge for that brand.

So now moving to Slide 14. This represents our P&L on a comparable basis. So it excludes some the items I just discussed namely impairment charge and FX, and it gives more of what the P&L and our underlying business there. Now we've discussed the top line, Bill went through some of the top line in terms of net sales revenue. We have managed to reduce operating expenses, the percent of sales has gone down from 28% to 25% of sales.

Looking down, the EBIT line. What we'll do is we'll jump to the next page and look at our EBIT, both by segment. And on the next page, we'll look a bit of a walk with EBIT, how we came from last year's EBIT to this year's EBIT.

On Page 15, we have a breakdown there of our sales and operating profit or operating income by segment. Again, the top line sales were driven primarily by the volume increases in Poland, as described earlier. In Russia, the volumes were up, but also the significant price increases that we took in Russia in January and March and August, as well as certain prior-year price increases, those were offset by some slightly negative product mix in Poland. For example, the Bols brand which I mentioned earlier, is at a bit of a higher price point or sales per liter than the Zubrowka Biala, as well as the 2011 sales. And while the full P&L includes the consolidation of Whitehall this year, which was not included in the numbers last year.

In terms of operating profits, given our lower SG&A as the percent of sales is lower. We had, however, higher spirit cost, both in Russia and Poland, and we'll see that quantified in the next slide in a minute. And we also had negative FX for the period on gross margin as the import costs were, in currencies of euros and dollars, were greater than the revenues we have coming in euros and dollars, as Bill discussed earlier. All that was impacting the margin, operating income margins for the quarter.

If you move to Slide 16, what that does is walk us for gross margin, SG&A and operating profits of last year to this year in the major areas. Again, if you look at operating profits starting from last year of $32 million, we do have the inclusion now of Whitehall, which is $4.6 million for the quarter. On an average basis, the average P&L rate versus prior year was actually, on average, greater -- we have a slight FX gain, which appears a bit contradictory to what I mentioned about the FX losses. However, the FX losses were calculated based upon the period end, and the currency is significantly devalued during the last 40 days of the quarter. However, on an average basis, you still have an average P&L exchange rate, if you will, improved year-on-year.

We had a net $2 million gains from the volume, and where volume and value impact on the top line sales. And then a higher spirit costing, cost of $6 million under the operating profit. And then all the other factors was another million, $1.3 million positive, to get us from the $32.4 million to the $36.2 million operating profit on a comparable basis.

On Page 17, turning first to cash flow. During the quarter, our cash generated--or during the year-to-date 9-month cash flow was $46.1 million for the quarter. We had roughly $3 million positive cash flow. For the quarter our CapEx, both in the 9 months our CapEx was $6 million for the full year, year-to-date, which is still in line with our full year -- with our plans we gave earlier.

In addition, if we look at the movement of cash from the end of the period to the beginning of the period, particularly Q4 alone, we saw the cash balance in dollar terms go down by $17 million, simply because the exchange rates, again, changed from the period end Q2 to period end Q3. Generally speaking, we believe our cash balance currently is adequate to meet all of our upcoming obligations.

Having said that, I'll put it back over to Bill who will discuss a bit of our outlook for the remainder of 2011.

William V. Carey

Thank you, Chris. If we turn to Page 19, looking at the Poland outlook for fourth quarter. Beyond the overall market, we're expecting a similar trend as Q3, down around 4% to 5%. We don't really see anything different here in the first month to say that something has really changed into that fact. We also expect our volumes up about 6% to 10% for the quarter, and our value up 10% to 14% in the quarter, as compared to prior year.

So again, it's our first quarter of the year that we've been able to see the value percentage is higher than the sales volume percentage. Though again, it's been a lot of hard work the team has done here to really turn this business around. And I think, again, that we're off to a good start and looking forward to increasing our profitability here in Poland. Certainly, yes, we all know it's come at a lower EBIT that we had 3 or 4 years ago, but we've come a long way over the last 18 months here. I think the team has done a great job of really focusing on where we can drive this business in terms of top line and profitability.

The imports are expected to certainly continue to grow. These eclipse, we're expecting a record volume expected for export, are primarily going to new markets. And that's where the number of our new contracts that we have signed over the last 12 months. So again, a great job for the export team to hit a record quarter. Spirit prices are expected to be around 3% to 4% higher than Q3. We're not expecting, right now anyway, we haven't seen anything over the course of October to warrant anything different than these numbers.

The company has continued to focus, as I said before, on a better product and channel mix. That is our main drivers. And that again is coming from numerical distribution, our key SKUs and improvement of our overall packaging mix.

We turn the page to Russia, outlook for the fourth quarter. Again, the overall vodka market is expected to be down around 3% to 6%, probably not much different than the third quarter. And again, this is in retail, which means consumption. We expect our sales volumes to be down roughly 2% to 5%, and value up 5% to 7% in Q4 as compared to prior year. And again, this is -- and we took down these volumes roughly the same trend as we saw in Q3. The expectation of around a 10% drop in expectations versus actual Q3. We took down Q4 volumes on a similar trend.

We saw spirit price increase 8% on October 1 across all trade. Again, there wasn't much we can do to offset that this year in terms of pricing, which we will look to do in 2012. With good news, as I said before, key competitors have recently started with price increases, quite aggressive, which will level the playing field on shelf prices. As we took pricing earlier in the year, with January, March and August. And they also took price increases a bit earlier, a little bit less, and they're moving more aggressively currently at the level playing field soon.

We still see wholesalers going through license renewals at a slower-than-expected rate, mainly again in areas like I said where we don't have our own sales force, currently where we're hit the hardest in the 20% of our business.

Exports are continued to remain strong. And also in Q4, we're not doing as heavy discounting, as was evidenced from last year when we had the staff issue. And we did more heavy discounting in December than, certainly, than we wanted to because of the staff issue. And that's something that, this year, we are looking at around 34% of promotions as compared to over 50% in 2010. And the main reason, there's a lot of this incremental volume does not really come with a lot of profit. A lot of this deep discounting in key accounts does not really come with really legit [ph] at all any incremental profit.

To look at what's happening with the government regulation on Page 21. The government continues to crack down on black market offenders, producers, wholesalers, spirit manufacturers across-the-board retailers, et cetera. They are very aggressive. The number of wholesalers, producers have dramatically reduced due to this relicensing problems. We should know, in the next few months, a number for the year of really how many producers and wholesalers have reduced this year.

The excise is expected to increase 10% on January 1, '12, which is in line with the other 5, 6 years that we've seen in Russia, where there's been roughly around a 10% increase on January 1. But this year, they're also going to increase another 18% on July 1, 2012. And we expect this increase to result in more consolidation, factory consolidation in the industry in the coming years, much like we saw on Poland when it was aggressively increasing excise up through '98, '99, 2000, 2001. We saw a rapid consolidation in the overall market. And that's something that we would expect in Russia, the same.

And even with the 2012 increases, it still puts Russia at approximately 65% of our current rates in Poland. So we think over the next 5 years, Russia will probably to slowly catch up to the Polish excise rate. But again, we think overall that certainly the market can absorb that over time and certainly from a consolidation standpoint. We think there'll be a faster consolidation with less players certainly in the overall market.

To turn to Page 22, on the guidance update. Some of the main factors behind the reduced guidance. Some of what I described before, some things that Chris had mentioned. Certainly coming from Q3, the lower vodka volumes in Russia, roughly around a 10% lower vodka volumes than we were expecting. And the negative FX on the imports and exports. Spirit pricing. In Poland, change of FX rates from mid-August to current rates on translation of earnings, around $14 million. A lot of that coming in our big quarter, fourth quarter. Unfortunately, the rates have gone up, as Chris said, around the end of August. And today, they haven't really moved off of those numbers. And for us, coming into our main quarter, that has impacting us approximately around $14 million on sort of current rates.

And also from fourth quarter, we've taken down our volume numbers in Russia. Again, in line with third quarter, roughly around 10% lower than we had estimated previously. And that's really the key. And of course, it is a bigger quarter, the fourth quarter. That's why the numbers are slightly higher. But those are the key factors behind the reduced guidance.

And just to summarize, we recognize the past year has been extremely challenging, as written in the press release, for a number of factors: Of raw spirit prices, FX movements, government regulation, relicensing, et cetera. We think we've turned the corner and a number of our core markets have continued to perform quite well. And certainly that we're looking to increase our profitability in our local currencies. And we've taken a lot of steps to streamline our Russian operations, as evidenced from a lower SG&A cost as a percentage of sales. And that will continue into '12.

And certainly, we are still working very hard to better align our operational structure to current volumes and improve our route-to-market execution. For us, that is our main challenge today, is improving our route-to-market execution. And that's something the management team is fully focused on. And that's also why we did a full report, a management report, that came out this summer that highlighted where we believe that we should be having a better route-to-market execution in terms of a deep analysis in the marketplace of our performance versus other leading FMCG companies, versus competitors, et cetera. And that's something we're moving as quick as possible on to implement, and that will be implemented to 2012, which we certainly hope will get us back into a stronger top line growth in terms of volumes. Thank you. And I'll now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Daniel Wakerly from Morgan Stanley.

Daniel Wakerly - Morgan Stanley, Research Division

Bill, my first question is on your revised view of your volumes in fourth quarter of this year. Is that driven by a change in your expectation of industry? Purely by a change in expectation of industry trends or is there any change in expectation of your market share development as well?

William V. Carey

No. I mean as I said, I think the market share is, like I said, we anticipate the market to be down 3% to 6%, and our volumes to be down 2% to 5%. And that was previously guided at 5% to 7% increase. So within that context that we should have a little bit of market share gain. So yes, the market is down more than we anticipated from beginning of the year. No, we don't envision any pickup, really, from the third quarter in the market, but it's also looking at our performance in Q3 and looking at where we see our performance in Q4, and not to chase volumes at some discounted levels where -- so the volumes might look better but the financial results wouldn't look any better.

Daniel Wakerly - Morgan Stanley, Research Division

Okay. My second question is on your guidance. Kind of back to the envelope, it looks to me like the midrange of your EPS guidance at least is implying something like a mid-20s percent EBIT margin for 4Q? Assuming that's sort of ballpark in the right area, can you give any color on sort of what their margins might be by division? Or should I see a resemblance of margin in Russia and Poland?

Christopher Biedermann

This is Chris here. Generally, the 20% is more broadly in line with...

Daniel Wakerly - Morgan Stanley, Research Division

Mid-20s? Or 20?

Christopher Biedermann

No, 20%. 20% roughly in line. In terms of the trend, I mean we view the similar sort of allocations. If you look at our year-to-date margins of our segment, basically, it would all be pumping up by a similar amounts in Q4 with a higher volume to get to this blended average that you mentioned.

Daniel Wakerly - Morgan Stanley, Research Division

Okay. So just to be clear, you said 20%? I should assume something like 20% for both divisions, both main Russia and Poland?

Christopher Biedermann

[indiscernible]

Daniel Wakerly - Morgan Stanley, Research Division

Okay. And my third and final question is on the Green Mark relaunch. Can you just give a bit more color in terms of when it was relaunched, what sort of promotion you did? How did the price point compare to the old Green Mark, the old bottle? And then how much longer will it carry on? Are you selling it in the special price now and will that price end in a month or 2? I just want to understand a bit more of the dynamics about the Green Mark relaunch.

William V. Carey

We put out the new packaging, that started to come out in August. And of course, we had to work out the old packaging out of the market in September. I think probably when you're looking today in the marketplace, you'll probably only find the new packaging. Generally, it's pretty well-received from the consumer. We don't hear any negative feedback. We hear only positive things, and we haven't seen any revolution certainly in sales volumes, clearly. But certainly we believe it is perceived very positive. There wasn't a huge promotional budget and deep discounting to put it out of the marketplace. Because we have pretty solid distribution in the marketplace, so we do still have the highest weighted numerical distribution in the marketplace of any vodka, our Green Mark. So for us it was -- generally, it's pretty well-received. But certainly it's not certainly taking off the shelves. But nor did we anticipate it to have a huge impact on our overall Green Mark performance. Also, in the export market, it's also looked at quite positively. We were a little bit nervous because when we took off the string off the bottle, which was sort of a key point for the consumer, we're a little bit worried on that, but that seems to have been not a problem for the consumer. And we believe the packaging that we put out stands up to the competition today stronger. And I think when you look at the price point today, we're sitting around RUB 10 higher than say our key competitor, Belenkaya, on shelf. And we're, typically in the past, we might have been RUB 2 to RUB 3 higher. And that's RUB 7 certainly that we would like to level off here over the next 3 months.

Operator

We'll take our next question from Edward Mundy with Nomura.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

A couple of questions from my side. Just on the guidance again, can you confirm what tax rate you're using? Because on my calculations, the bottom end of the guidance, the $850 million would imply a Q4 EBIT margin of near to 30% rather than the 20%. I just want to make sure I'm not missing something on the tax rate?

Christopher Biedermann

On the tax rate, I use a more normalized rate of around 21% or so.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Okay. And assuming the Q4 interest number is not that dissimilar from Q3. On my calculation, that would imply an EBIT of about $136 million?

Christopher Biedermann

No. I think that seems -- you're talking about Q4?

Edward Mundy - Nomura Securities Co. Ltd., Research Division

For full year.

Christopher Biedermann

For full year, I mean probably in that range, EBIT.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Which, for me, with my numbers that imply EBIT of about $75 million for Q4, of revenues of about $250 million. If my math is right, is a margin of about 29% as opposed to close to 20%. I just want to make sure I'm not missing something. I know last year you have the...

Christopher Biedermann

Maybe the revenue number is a little bit, could be a little different.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Okay. So if we're at the top end of guidance for the $950 million, we're looking at margin sort of mid-20s on that basis?

Christopher Biedermann

More in that range, yes.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Okay. Secondly, on minimum pricing in Russia, are you able to price [indiscernible] any more visibility on what the government intends to do for 2012? Is it going to be a 2-step process similar to the excise?

William V. Carey

We're assuming now the government would increase in line with excise. Certainly, there has been some discussion, but nothing confirmed that they would like to go higher than excise. But to be honest, within election year, we don't really buy into that. We think that they're probably go in line with excise as a minimum price. Which certainly will, probably hit the economy [indiscernible] a bit because of the percentage and [ph] difference between that and [ph] become a bit closer, but we'll have to wait and see. There's nothing out yet from the government on exactly what they want to do on the minimum pricing.

Edward Mundy - Nomura Securities Co. Ltd., Research Division

Okay. Sure. And my final question is really on the Russian market for 2012. I mean, I think your strategy in Poland seems to be paying off some benefits now. In Russia, you're taking pricing ahead of your competitors. But in terms of the actual Russian vodka market outlook, I mean assuming that the market is going to be flat to slightly down next year, could you just elaborate a little bit more on your plans to gain market share and grow the top line in Russia?

William V. Carey

Yes. We think the market is going to continue going through a rapid consolidation. The government is really, really pushing hard to limit number of players in the market. And again, I firmly believe that with this rise in excise, it will push people further out of the market. As we saw what happened in Poland, when there was like 1,000 wholesalers in a day, you have about 40 over a 14-year period. So I think that in Russia, you'll see similar trends, that certain wholesalers will become larger. We think the market will be down somewhere to single digits, probably next year with the excise increases. But I think that the number of players will become smaller and the consolidation will quicken. And with the price increases taken this year and annualized into a full year next year, we should still see some pretty decent value coming out of the market next year. Again, for us, we have got to improve our route-to-market execution in terms of our volumes. Certainly, there are certain things in the market place that have challenged us, but certainly there's other things that we need to improve internally. And that's something that we are committed to achieving.

Operator

Our next question comes from Nicola Davies with BlueBay Asset Management.

Nicola Davies

I wonder if I could just ask you what your EBITDA range is based on your new guidance?

William V. Carey

We don't give out a EBITDA range. But I'm sure from the information collected, you can probably back into a number.

Nicola Davies

Okay. So I'm assuming it's sort of between $140 million to $160 million. And just of your fixed cost base being...

William V. Carey

That's probably fair.

Nicola Davies

Okay. And with your cost fixed base being sort of around that range, your free cash flow this year will be 0 I'm assuming for the full year? And you've got some fairly significant debt maturities coming due in 2012. I think you've got $60 million and you've got your converts coming due in 2013? So I'm just wondering...

Christopher Biedermann

When you say free cash flow, again, I exclude the Q1 cash out for the Whitehall acquisition. But if you exclude that, our free cash flow is positive for the year. If you look back to our cash flow statement in the presentation on Page 17, our operating cash flow for the 9 months was $46 million and then Q4 cash flow is going to depend a bit on how excise cash payments work depending on when we ship. So cash could be moved between Q4 and Q1. But generally speaking, no. I don't see it's free cash flow neutral or flat, as you mentioned. Again, I exclude the Whitehall cash out as not from coming at the free cash flow.

Nicola Davies

Okay. So could you provide us with an expectation as what your cash balances will be for the full year at year end?

Christopher Biedermann

Yes. I can't really give guidance on that. All I can say is if you look at our 9-month cash flow, our operating cash flow of $46 million, as I've said Q4 will depend at this point in time, on how the shipments go. As we may have discussed in the past, the fourth quarter cash flow is driven by a large extent when we make our excise payment to the shipments. So shipments go out earlier in the period, for example, in November, you have a large cash out for the excise at that point in time. If shipments come out in January, you have more cash com out in January, which then better matches the cash coming in from receivable collection in Q1.

Nicola Davies

All right. And you previously mentioned on your call that you were looking to potentially do something with your converts in Q1? Is that still the case? I mean it's a fairly large debt maturity coming due?

Christopher Biedermann

Yes. We're still exploring all options to find the most efficient and effective manner available for the company.

Operator

Our next question comes from Julien Martin with Bank of America.

Julien Martin - BofA Merrill Lynch, Research Division

I was wondering whether you could actually say whether you are in talks with any strategic buyer partner for any merger or sell off your assets in the market right now.

William V. Carey

Yes. There was some rumors that you probably saw in some of the Russian press about some speculation on some mergers or something. But to be honest, we don't really comment on this speculation.

Julien Martin - BofA Merrill Lynch, Research Division

Okay. But can you say whether you are in talks with these potential buyers or whether there are no talks?

William V. Carey

Yes. Julien, I really can't comment on any strategic things that we're doing or not doing.

Julien Martin - BofA Merrill Lynch, Research Division

Okay. Second question is on the outlook for 2012. You mentioned volume down in Russia potentially, mid-single digit. Do you expect it to do better than the market, but in line much expectations there?

William V. Carey

Yes. We would expect to -- we certainly would expect to be better than the marketplace, yes.

Julien Martin - BofA Merrill Lynch, Research Division

Okay. And the last question, just going back to the previous question on the free cash flow. For the fourth quarter, we should expect working capital to be quite negative. I mean I've seen that this quarter was actually fairly negative on the working capital side versus last year, which was a positive figure. So have we seen like a reversal of what's going to happen in Q4 or should we expect a negative working capital number?

Christopher Biedermann

To be honest, it's impacted a bit by Q1 and Q2, well a bit of Q2 in Russia, as we had the business down in Russia during Q1 and Q2 in the teens. But in Q3, you have a pickup. So you generate, you increase your receivables on a period as the volumes were positive in Russia for Q3 versus negative. So that was a bit of working -- of a significant change in the way the underlying business ran. So that meant your receivable balances were growing which is why you saw negative working capital, which is why cash flow this year '11 is a bit under last year and is driven by the prior quarter. And in terms of the Q4 cash flow number, again, I can't give guidance on the exact number. As I said it depends very much, and the working capital movement, depends very much in terms of how the timing of excise payments work which is a significant number in terms of our cash forecasting.

William V. Carey

Because certainly that we'd like to ship more product out in November, which means you've got to pay excise in December. Because it's easier on overall logistics infrastructure if we can get part of that a little bit earlier. But then it depends if the client wants to take the product or not. And what you got to do to incite the client to take the product a bit earlier. So all that is still in the discussion with various clients of how much you're going to ship out in November versus December, which impacts quite largely the excise paid in December or it is paid in January.

Operator

And that does conclude today's question and answer session. I would like to turn the conference back over to Jim Archibald for any closing remarks.

James Archbold

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

Operator

And that does conclude today's teleconference. You may now disconnect.

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