Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Central European Distribution (NASDAQ:CEDC)

Q4 2011 Earnings Call

February 29, 2012 8:00 am ET

Executives

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

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

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

Analysts

Karen Eltrich - Goldman Sachs Group Inc., Research Division

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

Julien Martin - BofA Merrill Lynch, Research Division

Unknown Analyst

Victoria Petrova - Crédit Suisse AG, Research Division

Brady Martin - Citigroup Inc, Research Division

Mark Olson - RBS Research

Ankur Agarwal

Steve Trusa

Nicola Davies

Operator

Good day, and welcome to the CEDC Fourth Quarter and Full Year 2011 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I'd 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 Fourth Quarter and Full Year 2011 Earnings Conference Call. Joining me this morning are William Carey, our President, CEO and Chairman; and Chris Biedermann, our Chief Financial Officer.

Please note that the content of this call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 29, 2012. 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 our 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, 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 the 2011 Form 10-K to be filed with the Securities and Exchange Commission. CEDC is under no duty and undertakes no obligation to update any forward-looking statements made in this call.

With that, I'll turn the call over to William Carey, our President and Chief Executive Officer. Bill?

William V. Carey

Thank you, Jim, and welcome, everyone, to our Q4 and full year earnings call. I'll be taking you through the Polish and Russian market for the quarter 4. I'll turn over to Chris Biedermann who will take you through the financials for Q4, and I'll give an outlook for 2012. To get started [ph], we also filed our webpage a presentation, about 30 pages. So that's what we'll be going over for this presentation here today, if you could follow through that presentation.

Moving to Page 3 on that presentation, Q4 Highlights Poland. Pretty much, Poland was as forecasted. We were up about 10% in volume, 12% in value. It was the first time in the year that we did highlight previously that we anticipated to have a higher revenue number growth than volume growth. The overall vodka market was down approximately 3% in volume compared to a year before, which is pretty much in line with what we predicted, around 1% to 3% reduced consumption, and yet a number of positive things for the quarter. We had a positive channel mix with increasing weight of our wholesaler trade, which is our most profitable channel.

We relaunched our Soplica full range, including flavors, which is up 27%. This is a -- and the brand has continued to really do well in the January, February. We're quite encouraged by the results that we're seeing from our relaunch of Soplica. We put into export structure in light that we took over the Whitehall Group last year and the Kauffman Vodka, Green Mark, Parliament, Zubrówka. We have an increasing global export portfolio, so we put in new export structure in place in the fourth quarter.

And the one certain negative that we did see on earnings was certainly the weaker zloty, unpredicted, which impacted not only the consolidation results but also impacted our imports -- our import business as we do import in the hard currency. So we were scrambling with suppliers to try to make sure that we've maintained a decent profitability on that import portfolio. It was very difficult and the zloty was moving down quite rapidly through the fourth quarter and through the first 2 weeks of January. And as you know, it certainly rebounded quite strongly over the last 6 weeks.

Also that -- if you remember last year, we had the Biala launch back in the fourth, quarter where we spent a lot of money on that launch. Certainly, that's been a money well spent. We had Biala which grew to 6% market share that we saw currently at the end of the year, and I think we predicted 5% over 3 years that we could reach market share with this product. So we're very encouraged. We're already having 6% share of Biala in our overall business from our just first year of full year sales.

If you could turn the page to Page 4 and breakdown of some of the categories that we -- as you see, export jumped out, turning export growth of 42%. The FX had a negative 12%, which offset the volume growth of -- or value growth of 12% in local currency. So you had a flat dollar growth, but the exports continue to perform well and also the beer decrease that was -- as written, a large promo a year ago which was not repeated this year. But pretty much we're in line with plan.

We're quite encouraged by the work we've done in restructuring our Polish business over the last 18 months. The management changed. The management we've made here in Poland, they were quite encouraged on the trend that we see coming out of the Polish business, and certainly, we anticipate the positive trend to continue through 2012 and beyond.

Certainly, a lot of negativity has come out of our spirit purchases in Poland and in Russia over the last, say, 2 years. As you can see, a chart here back from Q1 2010, that has risen quite rapidly up to the Q1 '11. So currently, Q '11 or full year '11 compared to full year '10 certainly had a large negative impact from spirit pricing, but as we currently see, around PLN 2.75 to PLN 2.80 pricing in the marketplace. We're seeing stability over the last, say, 5 quarters. So certainly this have stabilized in this range, and this is in line -- pretty much in line with what we're forecasting for this year.

Turn to Page 6. Here's a market share data over the last 3 years. As highlighted last year, we had to make some drastic changes to the business to bring up a more profitable not only market share but also the right mix. We were working very hard not only on just share gains but profitable share gains, which is also coming from more profitable mix, client mix, volume client mix, SKU mix and channel mix. And that's something that we're working very hard throughout our management team and sales force. And we're continuing to see improvement over those 3 SKU mix changes. As you see from the competitor landscape, Pernod had a quite rapid decline from a small base. Sobieski is growing off the Krupnik vodka which they launched about 3 years ago, which is pricing at the low end of mainstream. Our Biala, for example, is priced at the top end of mainstream, and then Stock has also lost some shares, mainly to us and Sobieski.

Getting down to Page 7 and to the different channels that we operate. One of our key areas of concern, moving back a few years ago, was the share in our discounter share of CEDC share. You see that chart in the middle, where we have 47% share in discounter volume, today, it's around 37%. So a drop of 10% where we still are able to increase our market share. We attained the #1 position in modern trade, which is your Tesco, Xan, Metro, et cetera, where a lot of your high-end products are sold. So that's also very good news because a lot of our import products are sold there. And the traditional trade, which is the most positive -- more profitable channel, that's the channel -- as we said on the last quarter call, that's a channel that we're most focused on this year to drive a more profitable or share growth in this channel, which is the most profitable channel.

Before I take you to Russia on Page 8, generally, in Russia the overall domestic vodka market remains quite soft. Our overall volumes were down 10% in Q4 with domestic volumes -- vodka volumes down around 19%, partially offset with higher export and our RTD volume. We saw continued strong export growth to Ukraine and other countries in the former Soviet bloc. Green Mark is the #1 selling imported products throughout the Baltics, Ukraine and other countries in the former Soviet bloc. We launched Talka back in the summer, which is priced above Green Mark, and we're seeing fantastic results. It's currently -- that we're seeing today outselling Parliament and Zhuravli, and we're targeting $1.2 million this year with the first full year selling this product.

We saw a 10% -- an increase of spirit pricing October 1, which we had highlighted on the other-- on the third quarter call, which is going to negatively impact our business in the fourth quarter as we weren't able to get pricing increases to offset that spirit increases. We had to wait till our price increase in January to effectively price it from that spirit pricing that was effective from October 1.

Our sales execution and relicensing issue still impacting our route to market execution, we'll discuss on the next few pages, which is still impacting our numerical distribution, and that's something that we continue to work on work. And with the management changes we're making, we're looking to address this in a big way in 2012. And of course the weaker currency, along with the slide of ruble also dropped a bit more than expected during the quarter.

Turning to Page 9. That's -- as you see here split between the channels that the export volume you see is up 45%. RTD's offset by the lower domestic volume, and the lower domestic volume was mainly due to a number reasons. First off, there's lower inventory levels at the end of '11 versus the end of '10, which is benefiting January sales. It's sort of a one-off in January. Overall, it's been a pretty weak overall consumer market in vodka, more than we had predicted, and mainly pricing, that what we see in the markets that our pricing, with our price increases we took in March and August and our competitors took around half of our price increases that we took, and they're big price increases our competitors took in January 2012. What we see coming in the first quarter is that our competitors be more or less in line with where we are in pricing, and the fourth quarter consumers were more than happy to take lower pricing from a consumer standpoint in the marketplace. And certainly, that impacted our rotation in the marketplace, because our prices were put up earlier than our competitors.

In the Whitehall, value, as you see, is down mainly because of the Moët Hennessy sales, which comes with a very high value, but as -- we're compensated by fixed annual $5 million payment from Moët Hennessy for 2012 and 2013, $5 million annual payments to offset some of that volume loss. Exports are higher volume than forecasted, mainly driven as -- by the former Soviet bloc countries, and our ready-to-drink products continue to perform well, not only in volume but also in value.

Spirit pricing has been one of the biggest drags on our operating profit in Russia over the last 2 years. As you see, it's coming up from a pricing of around RUR 20 per liter back in Q1 '10. And in Q -- unlike Poland where it stabilized in 2011, again, we've seen a rapid increase quarter-by-quarter, which has made a difficult forecasting results in Russia. And currently, this is the average -- quarterly average. So the RUR 38 is the quarterly average because we had some stock at the beginning of October. As you look at the current pricing that we're seeing today in February or at the end of February, it's RUR 40 per liter. And we're forecasting this year around a RUR 44 -- average RUR 43, RUR 44 average for the year.

We've been working with the spirit producers, as well as our competitors, in terms of understanding their pricing positioning, what they're doing on the spirit pricing. And generally, what they tell us today is they're -- they will be following the -- we won't see the type of increases we saw before, that they will be following more the grain movement. And at least, they have stated -- we haven't seen any decrease, but they have stated that they will follow more or less where grain in Russia is moving today. And it won't be the sort of chart, as you see here, as increases were not -- were done more or less ad hoc from the various spirit producers. But certainly, looking into 2011 and 2012, as we price our products in Russia in 2012, certainly, that's going to be a certainly weight in our operating model 2012 pricing in the spirit prices on an annualized based moving into our 2012 financial model.

Page 11 is interesting chart that we stuck in for the first time for you to see, for people to understand that this is what's happening in the overall market place. The blue column is what you -- is you have the volume declines in the marketplace. The red column is your ruble market. And then you have the line below is your price of ruble per half liter. It's interesting to know that the price per half liter is moving up, certainly, much more than excise. Your value have stayed relatively consistent where volumes have declined. And in our anticipation with the excise increase that we're seeing in Russia this year, that you should see similar trends with a declining volume and value to increase, because you are pricing on top of excise. So our anticipation of pricing is that we will get pricing through in terms of pricing on top of excise, which drives significantly value growth. But what happened certainly is the volume will be impacted as well, not only because of the higher price positioning but that's something that we see from our competitors. And we'll be more or less in line with our competitors this year in terms of pricing, in line with our competitors in terms of -- and not jumping out ahead of the market leader and waiting for them to catch up. We'll be more or less in line with them as we move into like-for-like comparison this year with our pricing starting at the beginning the year, more or less in line.

Next chart is showing market share over the last 2.5 years. As you see from this chart, the last 8 months, we've more or less stabilized in terms of market share. You see, on the right side, numeric and weighted distribution. Yes, we have our problems of route-to-market sales execution. But certainly, from numeric and weighted distribution, we still maintain the #1 position of market leader in Russia, as well as numeric and weighted distribution reach. We lost about 4 points, as highlighted on the third quarter call, in terms of distribution gain. And that's something that -- within our management changes we're making, that we're going to be looking to get back to this numeric and weighted distribution losses that's come from our sales execution, as well as from the relicensing issues that face many of the wholesalers which took gaps in the route to market that we are facing.

And on Page 13, this gives you a flavor of the export market of vodka coming out of Russia. It's pretty much dominated by ourselves and Russian Standard. The rest of the players are quite small. And this year we're targeting over 2.2 million dekaliters, and we should be able to grow probably close to a good 40% to 45% of the total export of roughly coming out of Russia. And certainly, with our new export team working on a more global basis today, we should be able to see continued gains coming out of not only the former Soviet bloc but in light of the new contract that we signed in U.K. with the #1 importer distributor First Drinks. And in Germany, we've started also with Green Mark in Germany. It's another big vodka markets. We're looking also on Green Mark in U.S. and this other market that we're looking to tackle from an export point of view. Exports will continue, probably, to lead our sales growth, certainly of vodka coming out of Russia.

Chris, I'll turn over to you now to go through some of the financials.

Christopher Biedermann

Thanks, Bill. I'll start on Page 15. Page 15 is a comparison of our Q4 GAAP numbers to our comparable numbers. As the next few page, I'll be referring to the comparable numbers. Let me just highlight some of the differences between the 2. The first, as we backed out on our comparable, the FX loss fits [ph] again comes in translation of our dollar and euro liabilities into rubles and zlotys, and it tends to fluctuate every quarter based upon the exchange rates. In Column C, we've also made a significant change in our bad debt provision to a more conservative approach across the group, which resulted in a onetime charge in Q4. And in Column D, we have restructuring/relicensing cost. This is predominantly -- majority is redundancy costs. Also included in there is cost of shutdown of our Tula. Some costs associated with the restructuring are our [indiscernible] Trade House and, finally, some lagging cost related to the relicensing program that have took place over the summer. Column E is -- represents, what I call, fair value adjustments, which is related to impairments and deferred tax. And on next page, I'll give you a little more information on that, and then we'll get into an out [ph] with the comparable numbers.

On Page 16, we have a significant impairment charge and tax of -- and provisions for our taxes. On impairment charge, again, we continue to observe a weak market, as Bill mentioned before. In addition, the overall performance of our RAG business was below expectations. As a result of this, we reevaluated our fair value of Russian business at year-end, and we determined that a further noncash impairment charge of $383 million for the quarter, for Russian goodwill, was required.

On the tax side, we took additional noncash charges for provisions for our tax loss carryforwards, as well as certain provisions for uncertain tax positions, which impacted our tax charge for the year. Going forward, if we were able to improve our tax funding [indiscernible], these provisions can revert if we're able to get confident with utilizing tax losses, because they're still available for us to utilize. But from a GAAP basis, we determined it's prudent to provide for them. And this year, our tax rate will be impacted as -- going forward, on a consolidated basis, our profitable entities will end up paying in taxes, and we’ll have a tax charge. We will not be offsetting that with a tax benefit for the loss-making entities. Again, so we're focused on tax planning. We intend to try and improve the situation going forward.

On Page 17 then is the quarter-to-quarter comparisons of our P&L, again, on a comparable basis. As we look, sales were up in Q4, 23%, but that's primarily due to Whitehall. And on next page, we'll have a walk of the major line items we see year-on-year. Our EBIT, again, was up year-on-year, 62.5%, and that's driven primarily because of Poland where we had the improved margins. As you remember, last year, we had significant costs involved when we moved the launch, which drove us to negative EBITDA -- EBIT last year. That output did not repeat in 2011. In addition, the Russian segment included the consolidation, this year, 2011, of Whitehall, which, last year, was still included as an equity investment.

Page 18 provides a more detailed walk, in a consolidated basis, of our 2010. Looking at sales, gross margin, SG&A and operating profit: Column A, again, is just our prior numbers; Column B, the impact of Whitehall consolidation in this year; Column C is the impact of FX. As we mentioned, the -- both the zlotys and ruble were weaker this year compared to last year; on the net impact of volume, which is positive in Poland, negative on domestic Russia, offset by -- from the export; Column E, the impact of spirit cost to the quarter; and Column F is other. We primarily include in the sales line, higher pricing as well as lower trade marketing. As you can see, if you look at the volume impact of $9 million, it's roughly offset by the pricing -- I mean, other, which bring up to the 2011; also included, SG&A as a savings year-on-year of $10.7 million.

Page 19, just to present to you these numbers on a segment basis. Again, many things we've discussed earlier goes to assure [ph] the volume. Trends in volume increased in Poland, which is offset by the: negative FX of 12%, the negative FX in Russia, the lower domestic sales in Russia, and -- which is somewhat offset by the significant price increase we've taken in Russia over the last 12 months. In terms of operating profit, you can see the big turnaround in Poland going from negative to a positive last year, again not repeating the heavy launch cost we had associated with the Zubrówka Biala last year. Affecting all this as well is the negative impact of FX, as well as negative product mix in Russia, and obviously, the spirit pricing in both Russia and Poland.

Now moving onto Page 20. Highlighting some of the primary drivers to our variances into our latest full year estimate guidance. The biggest item here is the volume impact and the client/product mix in Russia, which is, versus our estimate, approximately $17 million. Again, our expected volumes were -- we expected about 2% to 5% down. We were actually down 10%, with domestic down 19% in Russia. We also have higher export sales, which, as we discussed, on top of the lower margin, this is not fully offsetting the lower domestic volumes. The FX also negatively impacted us with simple translation of $4 million, which -- due to the fact that the actual average exchange rates were weaker than expected. In addition, our import business were impacted just roughly $2 million in Russia and $1 million Poland, as we had weaker average FX compared to what was in our estimates.

Next one would be a higher trade marketing spend per liter in the key accounts in Russia of approximately $10.5 million. The environment is very competitive in the key accounts modern trade channel. As such, we were forced to spend more per liter in this channel than was estimated just to maintain the existing shelf space we had. And finally, the approximately $1.5 million versus -- and in Poland and Hungary. Then Hungary -- and the economic crisis began affecting the results there.

Finally on Page 21, [indiscernible] shows our cash flow for the year. The [indiscernible] period of cash flow from operating activities was a positive of $29 million, almost $30 million for the year compared to the negative number in 2010. We were benefited this year by entering into a factoring arrangements in Poland, whereby we get the cash earlier from our sales. And the CapEx there of $10 million, basically came in line with what we've been guiding for over the last few quarters.

Thanks. Then I'll turn it back to Bill, and he'll present you an overview of 2012 outlook.

William V. Carey

Thank you, Chris. From Page 23, if you look at Poland outlook, we're expecting the vodka market to be down 1% to 2% over 2011. We think the EURO Cup coming in the -- in June through July should help the bid on the consumer enthusiasm in terms of celebrations. Certainly, beer will be the most impacted, but we think also vodka will be positively impacted also. But we think the market will not be down as much as before, 1% to 2%. For the domestic vodka, we're expecting our business to be -- to have growth of low single-digit volume growth, with improving -- with improved pricing, as we'll take pricing again this year, and improved mix across all of our relevant channels. And this mix is coming -- not only our channels but also our SKU mix.

Our flavored mix, we're doing a lot of work on flavors. Flavor is a growing category, quite dramatically, in Poland. And what you have out of flavor is you have a 32% to 36% alcohol by volume -- percentage of alcohol by volume, so your excise taxes is very high in Poland. You pay much less excise tax but your shelf prices are almost typically higher than your clear vodka. So this is an area for us. And stock, we pretty much dominate in the country of flavors, and that's something that we continue to really push hard to get a better mix to our business here in Poland and also the client mix. And all of these changes should improve our margins.

Exports -- imports, especially brown spirits, we have a new agreement with Grass and Jim Beam, added investment that the suppliers are putting into the marketplace, and we're expecting to continue quite strong growth of 20% to 25% in our brown spirit sector in Poland. And exports, again, continue to -- strong export growth of around 20%.

As I've said about 18 months ago, we were lacking a -- really a pipeline of new product development coming out of Poland and Russia, which we've done a lot of work in both markets over the last 18 months: to develop a more robust pipeline extension of new products or line extensions. And we were pretty solid top line in Poland, looking for -- so pleased with the Zubrówka extensions, again, coming into flavored category; as well some EURO Cup special packaging coming out in the summer for some of our other products; cost of spirit currently remains -- currently appears to have stabilized; and then the changes that we've made in key management positions over the last 18 months; and our route to market from selling the distribution business. We've had to change a bit our route-to-market approach. And that's starting to show positive effects from our market execution coming through in the results that we're showing.

Before I tended to the Russia outlook, with the 28% excise increase plan for 2012, 10% was January. 18% is planned for July 1. We're anticipating a 5% to 10% drop in the overall vodka market by volume. And because you price -- you're pricing on growth sales, that we should see a value growth year-on-year in the domestic market. Even with this decline, you should still see value growth. The brown spirits and wine market are expected to continue strong growth in volume terms. We've added a lot of new contracts in our Whitehall business over the last 3 months, in terms of a new brown spirits agreements with different suppliers. Our spirit pricing expected to follow grain pricing, as I mentioned before. We're forecasting a 10% increase in 2012, plus the annualized effect of substantial 2011 increases in January, August and October. So on a like-for-like comparison, '12, we're still going to be impacted, as I said before, on the overall annualized increase in our spirit costs.

We're expecting in our core brand single-digit declines of volumes in Russia of our core brands and with our new brands, especially Talka and Silver Blend, which has been generating over $1.3 million incremental volume, offsetting some of that losses that we see from our core brands, which should follow more or less in line with the market.

Domestic vodka value expected to show considerable growth as our price increases from 2011 and our price increase in 2012 above excise in January and planned in July will lift value considerably. Exports will continue a strong push with expected volumes up 20% to 30%, to reach approximately 50% of total volume sales from Russia.

Also announcing today, we've made a change in our General Manager in Russia starting from April 1. We've signed an individual named Grant Winterton. He has a very strong Russian FMCG background, 10 years working in Russia, including senior management positions at Coca-Cola Wimm-Bill-Dann with Tony -- Mike Myers as one of his right-hand guys, and most recently General Manager of the last 3 years of Red Bull Russia. So we're very pleased to welcome Grant to the team. There's a lot of challenges in front of Grant, as we have been discussing. But Grant, and ourselves and our board, believe that with our portfolio, we are still well positioned to take advantage of the consolidation opportunities in Russia and really do a better job on execution and forecasting within our business model in Russia.

We plan to continue to streamline our overheads and add more senior-level management into our team in Russia, especially in finance. We'll have more better forecasting on the sales and the cost of getting those sales, continue investing and improve our management systems, IT. So we have a lot of work in front of us, and we welcome Grant to work with us on executing -- I'm sorry, better execution in our overall Russian business.

If you look at some of our other markets quickly, our Ukrainian business, which we started 18 months ago, already has a 7.4% share, which you'll find on the next page, starting from scratch and still growing. So the team is doing a great job there. And we'll be looking to add more products for our portfolio in Ukraine to continue to grow our business and profitability.

And the RTD business, which we're looking to sell a few years ago, has showed a remarkable turnaround, and we'll be achieving around a $7 million to $8 million EBITDA this year out of this business. So we're very pleased with the team to drive a negative business to a positive business. And with the massive consolidation, there's been a lot of players driven out of this business last year with the relicensing and there are fewer players. And we feel quite -- we feel very positive that we're in a good position with a few players in the market to really continue to grow this business, even though it's a very difficult business with government regulation and overall consumption. But I think that we are in a very good position to continue to take advantage of all of our competitors leaving this business.

So in summary, we certainly recognize as management -- again, extremely difficult quarter in Russia, certainly below our forecast. But I think we're making the right changes in line management and structure and strategy to improve our business, even in light of the difficult conditions that face us with the excise increase that we face to 10% and 18% that we face in Russia this year.

So thank you, and I open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Karen Eltrich with Goldman Sachs.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

One thing that had been a primary concern in Russia is with the relicensing, is the restocking of inventories that the distributor lever. Can you maybe give some commentary in terms of how that panned out and if it was along your expectations? Do you think you're at normalized levels, or is there a potential build to come?

William V. Carey

No. At the year-end, we were at normalized level with distributors. But keys accounts, we have far less inventory at key accounts than we had the previous year, as a number of key accounts were looking to reduce their overall inventory.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

Do you think that's a new normal? Or do you think we can see some rebuilds?

William V. Carey

It probably depends on the key account's performance. I've been reading some of them are doing well, some haven't done so well. So I think it depends on the individual basis, on what they're looking on their cash management.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

Great. And you mentioned, in terms of addressing the converts, that you would consider some assets for sale. What assets would you do as non-key that could potentially be sold?

William V. Carey

Yes. I mean, we certainly understand that 2013 notes are due in a year, and the board and the management have been working on a plan over the last few months to address this issue, including looking at all different options available to the company to handle this future indebtedness. I can't really get into which ones in particular, but we are looking at all possible options that can address this future indebtedness, including our discussions with the different parties that highlighted, that we have been discussing with.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

And then -- also, I mean, I believe one of the options they gave was providing a bank loan. Is that something you would also consider?

William V. Carey

Yes. Part of the discussions with Russian Standard with -- has been that -- discuss this highlighted publicly, have been that there would be some type of a guarantee provided from them for the remainder of the notes outstanding.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

And with regards to -- can you maybe refresh us in terms of how Russia is currently structured with regard to management with your new hire? Because I believe roughly about a year ago, you had mentioned that you also made some new local hires. You actually never revealed those names. So maybe you can give us a sense of what the hierarchy is there and how that kind of flows into sales? And you've kind of given us the impression that maybe you don't necessarily have full control over your sale structure or maybe it's not the most optimal structure, so maybe you can give us a sense again of what the current hierarchy is and how you need to reform your sales force.

William V. Carey

Yes. It's a fairly typical -- the Russian Alcohol Group, very similar to the Whitehall Group in terms of structure. You have a GM. You have COO, you have a CFO. You have a Sales Director, which -- if you look it at from the Sales Director point of view, he's got a Wholesale Director which takes care of wholesalers. He's got a Key Account Manager. And then you've got a structure throughout -- around 10 regions we work in. And we have a full sales force operating in the 10 regions, dealing with local chains, traditional trade and key accounts, reporting into the individuals that are in charge of local chains, key accounts and wholesalers. It's certainly normal hierarchy that you would find in most companies that we -- we have not been happy with the performance. And we -- like I said, we've been making -- we made some changes. And we'll -- and we're making the GM change to have someone that have stronger FMCG experience in the marketplace, to drive a more aggressive route-to-market work.

Operator

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

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

A couple of questions for me. First of all, on the Russian margin. Clearly, the qualitative pressures going into 2012, higher spirit pricing, continued negative pricing leverage, I mean, a higher trade marketing, on my estimates, you got an EBIT margin in Russia of about 11.5%. I mean, do you see that trending downwards into 2012?

William V. Carey

No. We anticipate certainly increases to that margin, mainly coming off the fact that the price increases we took in '11 and the prices increases we're taking in January and in July, we're taking around 3% or 4% above excise, which is pretty much -- and the competitors have taken a 8% or 9% above excise in January. And my guess, probably in July, we would probably do something similar as our competitors, but probably around a 3% to 4% increase on top of excise. And when you price off of gross sales when excise is moving up, you price off the gross sales, it really adds a lot of value to your overall net sales because you're pricing off of that excise. So in terms of just -- a big part of the increase in coming in '12, it's coming from that value growth. And then the new brands that we've launched will be eating up some of the loss of our core brands and then of course the export growth. And we are also continuing, in Russia, to do a cost reduction as well. We'll continue to look at -- we have over around 100 people also planned in our Russian Alcohol Group, also planned for reductions. I think most of that coming in March as well as -- as Grant comes on board, they will also will be doing a sales restructuring of our sales force and having a -- like I said, a more pointed and more accountability on the route to market and results coming out of that -- out of those changes. The main focus is on accountability from the sales force.

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

I mean, the reason I was asking about the Russian margin is that in your full year results statement, you talked about some -- growing the Polish top line and bottom line, but you don't have a similar sense into Russia. So I'm just wondering, should we expect the EBIT to Russia to deteriorate in 2012?

William V. Carey

No. I think together with our exports, certainly, we're anticipating a growth in volume in Russia. And like I said, value will be -- value, we're anticipating a far greater value number.

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

Okay. And second question, I didn't catch what the net debt was at year-end?

Christopher Biedermann

Net debt is about -- which you can see in the press release, there was a $304 million of convertible notes, $932 million of senior notes, and $85 million of bank facilities, less $94 million of cash. It's included in the press release balance sheet.

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

Okay. So it's in the press release, okay. And I just had a question on Russian regulation. I mean, are there any plans of minimum price increase for vodka 2012?

William V. Carey

No. That -- our belief is that they did not take a -- well, they did not take a pricing -- a minimum price increase in January -- I mean, a minimum shelf price, that our belief that was mainly driven from the elections -- upcoming elections. And there has been discussions that they will look to take one in July on a -- in terms of a minimum shelf price increase, along with the excise increase.

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

I'm sorry, that minimum shelf increase will largely affect the excise tax increase, I think.

William V. Carey

Yes. We're not sure what number they put out on the growth of the minimum. In the past, it's been in line with excise. We'll have to wait and see what they decide to put out on July 1. We should know in May or June what they decide.

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

Okay. And just a final question on the 2013 refinancing. I appreciate you can't comment exactly on what your chances are, but do you have any sense as to when we might see the refinancing of these 2013 obligations?

William V. Carey

Yes. Again, that -- certainly, it's probably certainly more in the next 6 months than the latter 6 months.

Operator

And we'll take our next question from Julien Martin with Bank of America.

Julien Martin - BofA Merrill Lynch, Research Division

Two questions for me. The first one is just touching on the guarantee that you mentioned on the Russian Standard proposal to take hold the remainder of the converts. Would that be to repay the $207 million at par, or whether you would consider also exchanging some of these converts into equity? That's my first question. And second question is on Whitehall. It looks like the profitability of Whitehall averagely weight a lot in Q4, and I think full year operating profit is about half of what you guided either this year. So question is, what's happening, here? And what's the outlook as well for this business going forward?

William V. Carey

Yes. On the guarantee with Russian Standard, currently, that there's been discussions -- certainly that in light -- in view of the transaction discussed, there would be a guarantee given which would probably come into effect when the notes are due.

Julien Martin - BofA Merrill Lynch, Research Division

And that would be to repay the converts, the remaining of the converts at par value?

William V. Carey

Yes. I would -- I assume that's it at the date due and it'd be at par, yes. If you look at the Whitehall business, we're looking at a -- at an EBITDA number of around $15 million to $18 million for this year.

Julien Martin - BofA Merrill Lynch, Research Division

And I think you guided to, what, something around $30 million, $35 million in 2011?

William V. Carey

I think that was more for '10. It would have been around $18 million to $20 million.

Julien Martin - BofA Merrill Lynch, Research Division

Okay. But you're still confident in the outlook of that business despite Moët Hennessy, obviously, dropping out of your portfolio right now?

William V. Carey

Moët's not dropping out. We still do about 30% to 40% of their business in Russia. So we certainly are not dropping out. We just don't have the other 60%. But then we do get compensated with a $5 million payment for 2012 and another $5 million for 2013 for some of that sales that we did lose. And certainly, our aim is -- and what we're doing is that we're replacing that sales with other sales. As I've said, we've added a number of new contracts into Whitehall over the last couple months, and we'll continue to do -- add some new contracts into -- to replace some of that revenue loss. But at least for 2012 and '13, we'll get $10 million of cash to -- that offset some of that margin loss. [indiscernible] for them.

Operator

We'll take our next question from Bartif Paskwa [ph] with Legal & General.

Unknown Analyst

A few questions. First of all, can you talk about the -- your factoring lines, your RCF? I mean, any liquidity you've got at the moment that's still available and when that comes up for renewal?

Christopher Biedermann

Yes, this is Chris. Today, there'll be a 10-K filed which have all that in detail. But yes, as quick summary, we still have active line in Poland up to PLN 250 million.

Unknown Analyst

What was the number again, please?

Christopher Biedermann

PLN 220 million.

Unknown Analyst

PLN 60 million, is it?

Christopher Biedermann

PLN 220 million. But as I said, this will all be -- a matter of hours, this will all be detailed out in the 10-K. As well as in Russia, we have a few facilities. In Whitehall, we've got $35 million of facilities available within 3 banks. And in RAG, we have roughly around 30-somewhat million available as well in facilities. And in Hungary, we talked to another $2 million facilities.

Unknown Analyst

Okay. And that's what it says on the -- okay. I'll wait for it then.

Christopher Biedermann

This is all laid out in the K liquidity section. It'll be filed within the next few hours. It would have how much -- what line, how much, how much is drawn and so forth.

Unknown Analyst

Okay. That was good. Your restructuring spend in 2012, what do you expect sort of cash to spend, especially in Russia and then altogether for the whole business, please?

Christopher Biedermann

On a consolidated basis, we have tried -- we feel comfortable with our current liquidity situation. Again, I think there'll be more details within our 10-K regarding liquidity. But at present, we feel that the liquidity that's available to us, including cash and facilities available today, will be adequate to meet the needs of the upcoming year.

Unknown Analyst

I'm sorry, I didn't get that. What's the restructuring spend you plan to incur this year?

Christopher Biedermann

Restructuring spend? Yes, we haven't forecasted any restructuring spend.

Unknown Analyst

Okay. And the $30 million hit last year, what is all cash or is it -- some of that's noncash?

Christopher Biedermann

Some -- you're talking about the restructuring costs?

Unknown Analyst

Yes.

Christopher Biedermann

Majority of that was cash, some of it nonoperating. You'll see there is a nonoperating charge in Q3, and that was all noncash. That was the write-down of the Tula plant, which is a noncash charge. That was out in the third quarter. The rest of the part is on cash.

Unknown Analyst

Okay. Could you talk about value market share for Poland and Russia versus volumes?

William V. Carey

Yes. I mean, that's presented in the presentation that we just went over.

Unknown Analyst

But I think the -- the market shares you presented that relates to volumes?

William V. Carey

Yes, it's not really any different in value.

Unknown Analyst

Okay. Also, the pricing differential for exports versus domestic market in Russia, what's -- what was that roughly?

William V. Carey

It's roughly around -- with the price increases currently, you're roughly looking at -- it's probably at -- your export profitability is probably 70% of your domestic.

Unknown Analyst

So 70% more versus domestic?

William V. Carey

No, 70%.

Unknown Analyst

70% of domestic.

William V. Carey

For every $1 you're in domestic, you're in $0.70 export.

Unknown Analyst

Okay. So really -- so expanding export market without actually losing your money versus expanding domestic market then?

William V. Carey

Yes. As we've highlighted for the last year, the export margin is lower than our domestic margin, which has a negative mix. But certainly for our forecast this year, that -- I don't think that -- certainly, our exports should grow tremendously more than we forecasted in our overall estimates.

Operator

[Operator Instructions] We'll go next to Victoria Petrova with Credit Suisse.

Victoria Petrova - Crédit Suisse AG, Research Division

All my questions were answered.

Operator

We'll go next to Brady Martin with Citi.

Brady Martin - Citigroup Inc, Research Division

My questions were also answered.

Operator

We'll go next to Mark Olson with RBS.

Mark Olson - RBS Research

Just curious on the response to Mark Kaufman's letter. If you can comment at all on that as to the timing and what's happening on that?

William V. Carey

Sure, yes. We received the letter from Mark Kaufman as well as the letter addressed to myself. The board is considering, certainly, its response, and when -- and we'll give a response to Mark before his March 12 deadline that he set.

Mark Olson - RBS Research

And other alternatives that you're looking out outside of Russian Standard and outside of asset disposals, can you give us any sort of sense to get a bit comfortable with the sort of liquidity outlook as to what other options you really have at your disposal?

William V. Carey

Yes, I can't really get into the -- specifically, the different options that we are currently looking at. But like I said, the board has been working on this for the last couple of months and the management, and that we clearly understand that we need to address this issue. And it's not something that we take lightly. And like I said, that you should see in the near term, hopefully, some type of solutions.

Mark Olson - RBS Research

Near term being roughly what timeframe?

William V. Carey

I can't really comment on that.

Operator

We'll move on to Ankur Agarwal with HSBC.

Ankur Agarwal

My first question is just on Slide 31 on the EBITDA calculation for fourth quarter. Could you please run through the comparable adjustments of $401.5 million. I believe $383 million has to do with the impairment charges. What does the rest of the portion relate to?

Christopher Biedermann

Yes. In terms of the -- there's a clear walk in the presentation if you have it, on Page 32, which highlights each of the items.

Ankur Agarwal

Right. So I can see impairment charge of $383 million. But in your -- on Slide 31, the comparable adjustment is $401.5 million, so just trying to understand what the rest -- of $18 million?

Christopher Biedermann

Well, there's the other one, the change in bad debt policy, which I talked about earlier, as well as the restructuring/relicensing investment.

Ankur Agarwal

All right. The next question is just your CapEx for this year. I mean last year, it was $6 million. Do you think it's going to be around the same?

Christopher Biedermann

[indiscernible] But we expect this year to be in the same range, roughly around $10 million, $10 million to $11 million of range.

Ankur Agarwal

Right. And just last -- very quick question. You've been talking to Russian Standard and have talked about including some of their brands, just a collaboration with you guys. What sort of positive impact do you think this sort of tie-up will have on your Russian business? Just some qualitative comments on that.

William V. Carey

I'm sorry I missed your point of the question.

Ankur Agarwal

Russian Standard has talked about collaboration, in terms of including some of the brands and collaborating with CEDC in Russia, a joint business. What sort of positive impact it might have on your business in Russia?

William V. Carey

Yes. I mean, the conversation is looking at some type of combination between his business in Russia and our business in Russia, where you would have some type of combination of the 2 businesses, which are quite complementary in terms of product portfolio. So in my opinion, it'd be very positive on a stronger portfolio in a -- in overall difficult market. At the same time, he operates in a more premium portfolio. So also, when you have excise increases, that it doesn't really hit the higher-priced products as bad as the sort of -- as more mainstream or lower than mainstream, in terms of the affordability for the type of consumer buying those products. So we generally view that as quite positive that the potential combination of those 2 portfolios.

Ankur Agarwal

Right. So I mean, my take on the proposal is that most of the points relate to betterment of CEDC in terms of its credit and in terms of its operating profile. So I mean, I'm just trying to understand what's taking point in your discussions with Russian Standard and why the taking time for you to respond to that proposal?

William V. Carey

Yes. I mean, it's a big investment from his side and commitment from his side and for the board, at the same time, that they -- it's a big decision for the board to have an individual go up to a substantial minority ownership. So there's a lot of discussions back and forth. And like most discussions, you're still -- that discussions are still surrounding evaluation.

Operator

We'll go next to Steve Trusa with Deutsche Bank.

Steve Trusa

There were some discussion about the converts. Recording was breaking. It's coming in and out. I couldn't hear the response. Would you mind repeating that?

William V. Carey

Yes. I'm not hearing you.

Steve Trusa

Yes. There was a discussion previously on the converts. Someone asked a question, I could not hear the response. Would you mind repeating what that was?

William V. Carey

On the converts?

Steve Trusa

Yes, correct.

William V. Carey

Yes. As I've mentioned, the management and the board, we've been working on a plan over the last few to address this issue and looking at the -- not only the discussion with Russian Standard but looking at other optionality that the company has available to us as well. So we're open to looking at the different options that are available to the company. And we understand this is a key point in our company today. So we don't take this lightly, and we're working very hard to address this issue.

Operator

We'll take our next question from Nicola Davies with BlueBay Asset Management.

Nicola Davies

So I wondered if you could just break down how much of the restructuring and relicensing costs were related to relicensing?

Christopher Biedermann

Let's see if I have it in front of me right now. I believe the majority of it, roughly 50% or more than 50% was related to, actually, costs associated with employees leaving the company, dismissals, the redundancies, [indiscernible] in a quarter related to 2 on St. Petersburg [ph] and the rest for other miscellaneous licensing cost, broadly speaking. I don't have the exact figures in front of me.

Nicola Davies

I was under the assumption that the relicensing process have been done and complete. So what happened in the fourth quarter that they...

Christopher Biedermann

There was still some straggling costs hanging over into the quarter.

Nicola Davies

Okay. And in terms of your key accounts, can you tell us how many key accounts you lost in Russia in Q4?

William V. Carey

We didn't lose any key accounts. We lost inventory in key accounts. But no, we don't -- we didn't lose any key accounts.

Nicola Davies

So of the total domestic margin volumes -- or domestic volume decline, how much was associated with just volume losses to your competitors?

William V. Carey

Yes. I don't know to the -- we don't -- unless you don't get the same type of data you have out of Poland in terms of very detailed Nielsen data coming out of -- and also from individual accounts. But certainly, on the key account side, not only did we lose inventory but our pricing was higher. And the biggest drop that we had was that our pricing was sitting at higher levels than our competitors, as addressed in our third quarter call, and we had very slow rotation in key accounts versus, certainly, expectations in a very robust quarter that fourth quarter typically is. And that's -- and that cost us quite a bit of volume losses. So that's really the 2 key factors that were driving those volume declines in key accounts.

Operator

And that's all the time we have for questions. So let's turn the call back to Mr. Archbold for closing remarks.

James Archbold

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Central European Distribution's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts