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Wall Street Breakfast

Wimm Bill Dann Foods OJSC (NYSE:WBD)

Q2 2007 Earnings call

September 4, 2007, 9:00 AM ET

Executives

Marina G. Kagan - Head of Public Affairs

Tony Denis Maher - CEO and Chairman

Dmitry A. Anisimov - CFO

Analysts

Margaret Kalvar - Harding Loevner Management

Natasha Zagvozdina - Renaissance Capital

Marat Ibragimov - Citigroup Smith Barney

Brady Martin - Alfabank

Svetlana Sukhanova - Brunswick UBS Warburg

Presentation

Operator

Good afternoon ladies and gentleman and welcome to today's Wimm-Bill-Dann conference call. For your information, this conference is being recorded. At this time, I would like to turn the call over to your host today, Ms. Marina Kagan. Please go ahead madam.

Marina G. Kagan - Head of Public Affairs

Hello, ladies and gentleman and thank you for joining us to discuss the financial results for the first half and second quarter of 2007. After our presentation, as always we will be happy to take your questions. I would ask that you please refer to the cautionary statements included in the press release covering any comments made during this conference call.

And now I would like to hand the call over to our Chief Executive Officer, Tony Maher.

Tony Denis Maher - Chief Executive Officer and Chairman

Thank you, Marina. Good afternoon to everybody in Russia and Europe and good morning to our listeners in the United States. We hope you had a nice long holiday weekend and feeling very rested. I would like to take you through an overview of our financial and operational results for the first half, and outline the progress we are making on our key strategic objectives. I will then review our business segments and leave you with the outlook for the full year 2007. After this, I will pass the call over to Dmitry to discuss the financial results in greater detail.

We are very pleased with the results we achieved during the second quarter and the first six months, as we continue to make excellent progress on our strategic objectives. For the first half of 2007, sales increased 40.5% to US$1,147.8 million, strong organic growth across all our business units, drove the six months results generating almost 31% of total revenue growth, while acquisitions contributed 9.6% out of 40.5% in total. We also saw a significant improvement in EBITDA, which increased 40.3% to $147.2 million for the first half of the year, in fact this is more than we made in the full year of 2005.

Operating profit increased a significant 44.3% year-on-year in the first half, which is a result of a healthier balance between volume and pricing, and an improvement in our sales mix.

Net income for the first six months increased 40.8% to $65.8 million or $1.50 per share. We are particularly pleased with the hard earned improvement in our gross margins during the quarter and the first half. It was achieved despite sharp rises in raw material costs particularly raw milk, which is consistent with what is happening globally.

I'd now like to discuss the progress we are making on the strategic initiatives I've outlined for you before. During the first half, we increased our investment behind our marketing programs to boost sales, and enhance brand equity. We are now taking a more focused, comprehensive, and strategic approach to marketing with greater targeted media investments, better advertising, and a continued focus on consumer-led innovation.

In line with our plans, in absolute terms, we more than doubled our marketing spend in the second quarter increasing it to $40 million or 6.6% of revenue, compared to $17.8 million in the second quarter of 2006 or 4.2% of revenue. Although marketing investments will continue to remain significant throughout the year, as a percentage of sales they will be lower than in the second quarter. We are already seeing the results of our more focused marketing campaigns which have accelerated our pace of growth to unprecedented 40%. Innovations, which come in the shape of new products and new formats have become another key driver of such a fast top line growth.

Our recent launches of products included an multipack fruit purees and enriched bio-drinking yogurt, under our Agusha baby food brand and Chudo desserts. We also re-launched our flagship Lovely Gardens juice and nectar brand with fresh and bright new look packaging. We launched new Chudo desserts flavors in Ukraine, NEO M [ph] in Novosibirsk, our key regional growth markets. And just to give you an idea of how improved packaging is linked to sales, since we re-launched Chudo drinking yogurt, which incidentally is the overwhelming market leader in drinking yogurt in this market, in new more attractive modern sleek bottle, its sales grew in revenue terms over 80% year-on-year... year-to-date.

We also continue to reinforce our management team. Among others, I am pleased to welcome our new Head of Dairy Marketing, Constantine Semilop [ph] who joined the company in the beginning of June. Constantine brings us a wealth of experience in top marketing roles at leading international FMCG companies in these markets.

We continue to work to optimize our entire organizations to exploit synergies within the Group and to integrate back office functions across business areas to reduce cost. We have also made progress in capturing synergies in our production especially between baby food and diary.

During the quarter, we continue to make good progress on the consolidation of legal entities, and the further simplification of our corporate structure. As of the end of June, we have legally consolidated 17 enterprises, which is ahead of our internal deadlines. During the first half, we worked to further enhance our route-to-market. We have been adding additional production lines to select plants, where it makes sense so we can produce those products close to the markets where they will be sold, reducing our transportation cost.

As we have described in the past, we are making major investments in our sales team and changing, how we interact with our key regional clients. We have been expanding our sales force across the company with a focus on creating the best team in the industry.

We are investing substantially in training and have put in place performance incentives linked to profitable growth. As a result of all these important initiatives, our marketing, sales and distribution costs increased during the first half, as we enhanced our route-to-market, established new sales channels and entered new geographies. We believe these steps were essential for a sustainable profit growth going forward.

I would now like to discuss the operational results of each of our individual businesses. In the first half, our Dairy segment revenue increased 43.4% to US$858.4 million, 70% of which was organic. Diary gross margin increased slightly in the first half of 2007 despite record growth in the price of raw milk. Raw milk prices increased by 15.3% in dollar terms over the first six months, however, by 19.3% in the second quarter alone. We continue to take steps to improve the reliability in price of our raw milk supplies. This includes our long-term contracts with a number of large farm enterprises and the development of our own farm. We have recently acquired an additional farm in the Krazadar [ph] region, giving us 3000 head of cattle in Southern Russia and are completing the construction of a mega farm in Northwest Russia for closing [ph].

In the first half, our Beverage revenue increased by 29.6%, US$212.1 billion, driven mainly by better pricing and a solid volume growth. Gross margin in the first half increased to 40.8% compared to 33.8% over five-year period. This is significant achievement especially given higher concentrate costs. For the first half, you know the last three years, J7 sales grew significantly at 27% in line with Beverages top line growth. Higher sales of J7 were held by its re-launch in new packaging and should be held further by major new advertising campaign scheduled later in the year. We also re-launched our new other flagship brand Lovely Garden in new packaging.

Our turnaround strategy in Beverages is progressing and we expect to see market share gains by the end of this year. Sales growth in the Baby Food segment have picked up pace every quarter and over the first half of 2007 increased by 40.7% to $77.3 million. The gross margin in our Baby Food segment increased to 45.3% in the first half year, 0.6% in the same period last year. Our growth benefit from increased selling prices as well as our continued focus on improving our sales mix with higher margin products.

As of May, our Kursk Baby Food factory launched full production, increasing our volume and range of products enabling us to push into new markets. We're also now producing poultry and meat purees at our Tsaritsino plant in Moscow.

In conclusion, I'm very pleased with our results for the first half of 2007 and I'm confident in our plans for the full year and our ability to continue to deliver sustainable growth across all business segments. Our guidance for the full year 2007 is that we expect revenue to grow between 30% to 35%, and EBITDA in absolute terms come within the current consensus which, we see as a fair reflection of our 2007 numbers. We also expect our effective tax rate to stay below 30% and CapEx as a percentage of revenue to be in the range of 7% to 8% for the year.

With that, I'd like to hand the call over to our Chief Financial Officer, Dmitry Anisimov.

Dmitry A. Anisimov - Chief Financial Officer

Thank you, Tony. During the second quarter of 2007, Group sales rose 40.8% year-on-year to $605 million, driven by strong organic growth across all three of our business segments: Dairy, Beverages and Baby Food. For the first six months of this year, Group sales increased 40.5%, up to $1,147 million.

Sales in the Dairy segment increased 43.1% to $444.2 million in the second quarter compared to $310.5 million in the second quarter of prior year. In the first six months of 2007, sales in the Diary segment increased 43.4% to $858.4 million from $598.4 million in the same period of last year. Acquisitions made in late 2006 contributed $78.6 million to the overall sales growth in the segment.

Top line growth was driven mainly by volume and pricing effects. The average dollar selling price rose 13.7% to $1.02 per kilo in the first six months of '07 from $0.90 per kilo in the same period of 2006. This increase was driven primarily by average ruble price growth.

The gross margin in the Diary Segment increased to 29.9% in the first six months of 2007 from 29.4% in the first six months of 2006, despite increasing raw milk costs. The raw milk purchase price accelerated 15.3% year-on-year in dollar terms in the first six months of 2007 due to wider market conditions affecting all producers.

Sales in the Beverage segment increased 32.1% to $119.2 million in the second quarter of 2007 compared to $90.2 million in the second quarter of last year. In the first six months of this year, sales in the Beverages segment increased 29.6% to $212.1 million compared to $163.7 million in the same period a year ago. Growth was driven mainly by a healthy balance of price and volumes, marking a continuous recovery in the segment.

The average selling price increased 18.6% to $0.82 per liter in the first six months of this year from $0.69 per liter in the first six months of 2006. Despite continuous cost pressure from the raw materials, the gross margin in the Beverages segment increased to 40.8% in the six months of 2007, from 33.8% in the first six months of 2006, driven by improved efficiency and better pricing and discount management in all regions.

Sales in the Baby Food segment increased 44.3% to $41.6 million in the second quarter of 2007 compared to $28.8 million in the second quarter of 2006. In the first six months of this year, sales in the Baby Food segment increased 40.7% to $77.3 million from $55 million in the same period last year. This was driven primarily by volume growth.

The average selling price rose 7.1% to US$1.84 per kilogram in the first six months of 2007 from US$1.72 per kilogram in the first six months of 2006. The gross margin in the Baby Food segment increased to 45.3% in the first six months of 2007 from 41.6% in the prior year period. Gross profit in the second quarter of 2007 increased 45.4% compared to the second quarter of 2006. Gross margins in the second quarter increased to 33.7% from 32.7% in the second quarter of last year.

In the first six months of 2007, gross profit for the Group increased 48.8% compared to the same period last year, while gross margins increased to 39.9% from 31.1%, despite increasing raw materials prices.

As an expected consequence of enhancing our route-to-market, entering and increasing our presence in new regional markets and establishing new sales channels, selling and distribution expenses increased to 16.2% of sales in the first six months of 2007 compared to 13.7% in the first six months a year ago. As planned, increased advertising and marketing expenditure led to the rise in selling and distribution expenses in the second quarter of 2007.

Marketing and advertising expenditure in the second quarter amounted to $40 million or 6.6% of sales compared to $17.8 million or 4.2% of sales in the second quarter of 2006. Although marketing cost will continue to remain significant throughout the year, as a percentage of sales they will be lower than in the second quarter.

Transportation and warehousing expenses totaled $30.4 million for the second quarter, increasing from $19.9 million in the prior year period. Personnel expenses increased to $20 million in the second quarter from $13.8 million in the second quarter a year ago. General and administrative expenses fell to 7.4% of sales in the second quarter and to 7.5% of sales in the first six months of '07 compared to 7.7% of sales in the second quarter and first six months of 2006.

Operating margin increased to 9.4% in the first six months of 2007 compared to 9.2% in the first six months of 2006. EBITDA margin in the first half held steady at 12.8%. Financial expenses increased 124% year-on-year to $12.5 million, primarily due to decreased foreign currency gains and higher interest expenses. Our effective tax rate decreased to 29.7% from 30.3% in the first six months of this year.

Net income increased 40.8% to $65.8 million in the first six months of 2007 from $46.7 million in the first six months of 2006. In the first half of the year, our capital expenditure excluding acquisitions was $69.1 million compared to $46.1 million during the same period last year. Positive operating cash flow amounted to $110.3 million showing a 31.3% increase year-on-year.

Net cash investments were $93.7 million and mainly comprised of the purchase of property and equipment, the acquisition of subsidiaries and the investments in short-term bank deposit. The total debt to EBITDA covenant for the quarters of June, 2007 stood at 1.85. Marina, we would like now to open the call for the questions.

Marina G. Kagan - Head of Public Affairs

Ladies and gentleman we're now open for questions. Operator, can we have the first question please?

Question And Answer

Operator

Thank you. [Operators Instructions]. We will now take our first question from Virakrishnov Sheleen [ph] from UBS. Please go ahead.

Unidentified Analyst

Good afternoon everyone. Just a question on your funding profile. Could you please tell us whether you intend to fully repay two bonds that are due in May next year or do you intend to refinance some of them or all of them? And how do you see your funding needs developing further in this respect? Thank you.

Dmitry A. Anisimov - Chief Financial Officer

Thank you very much. Our euro bonds are maturing next year, and at the moment we have intention to refinance those two instruments. Currently, we are considering various options how to approach this operation. We have still all options open for us. Given the volatility of the international debt capital markets, we do not want to make a decision right now. But our goal is to refinance those and shortly we will be making the decision what are the instruments which we are planning to use for this operation.

But is it possible to tell us what instruments you are considering?

Tony Denis Maher - Chief Executive Officer and Chairman

I guess... this is... are you, which part of UBS are you representing? I don't know if you are looking for business or whatever, but?

Unidentified Analyst

No. I expect you... its fixed income research, so it don't have to do with business propositions.

Tony Denis Maher - Chief Executive Officer and Chairman

Okay. But, you are welcome to do that if you want, but it is not the time perhaps. We are looking obviously at another euro bond. We are also looking at ruble bonds, because there's a lot more liquidity in the Russian markets. And so on the future things that we are not going to make a decision on until closer to the event. So we are looking at certainly those two as options and some others as well, syndicated loan just clearly another one, but all of those are being considered.

Dmitry A. Anisimov - Chief Financial Officer

It might well also be a mixture of instruments, but we are not rushing to make the decision at this stage. We expect the improvements on the international markets and we still have some time before final decision to be taken.

Unidentified Analyst

So, the bottom line is that you're going to roll them, you are not going to repay them?

Tony Denis Maher - Chief Executive Officer and Chairman

We are going through all of them, yes.

Unidentified Analyst

Okay. Thank you.

Operator

We now take our next question from Margaret Kalvar from Harding Loevner Management. Please go ahead.

Margaret Kalvar - Harding Loevner Management

Yes, hi. I have two questions. The first one is how much of your growth do you see in the future coming from expansion into the regions versus upgrading of the product mix in the urban areas, and how much more growth do you think you can get particularly in the regional areas? Can you continue posting 30% plus growth rate? That's the first question. And the second is relates to the increasing prominence of modern retail formats in Russia. Are you seeing any decline in your bargaining power with the modern retailers as they also gain strength?

Tony Denis Maher - Chief Executive Officer and Chairman

Firstly, I guess we should say that if you look at our total landscape we have where Russia, Ukraine, Central Asia, approximately 260 million people. Out of which, today 95% of our revenue is coming from Russia, which means that roughly speaking, okay we've got a lot of opportunity for growing outside of Russia per se, and then we've also got a lot of opportunity to grow within Russia as well. I would expect more to come outside of the central region on either Moscow part, although I have to tell you that I would say for the last 8, 9 months, our growth in the Moscow region in Dairy in particular has been almost as strong as the growth we are seeing outside of the Moscow region, which is quite phenomenal given the market share we have in the Moscow region which is closer to 60%. So, we see quite honestly, with growing incomes and also growing awareness around in the categories we are in terms of EBITDA, their products are good for you. We see a lot of potential in our existing but also in markets where we have a lot upside just by rolling the products out. And in particular, in... we see Ukraine and Central Asia, in particular, Kazakhstan as being major vehicles for growth over the next couple of years.

In relation to retail, actually, quite honestly, most of that consolidation right now is happening in Moscow where we are and that's by and large the home of most of the change with the exception perhaps is St. Petersburg, where we are the major player in Dairy. So we are well used to working with retailers for a win-win solution. We are a big company and I guess in that respect, we've got a pretty strong voice of the table when you look at our entire portfolio. And also it's not as I said before it's not all downside. Yes, that we may give a little bit in discounts, but also they give us a lot also in terms of being able to reach a lot of consumers in one's distribution points which also saves us the money. So at worst, we see the next number of years, when I say the next number of years, certainly next 3 to 5 years as at worst a plus minus deal in terms of whether they get more and more stronger, at the same time they deliver for us a lot of upside as well.

Margaret Kalvar - Harding Loevner Management

Okay. Thank you.

Operator

We now take our next question from Arun Pillai [ph], from Alliance Bernstein. Please go ahead.

Good morning gentlemen. I think Dmitry can give us a little bit more detail about the low market impact and whether the prices started to drop towards the end of the period and what impacts are you expecting in the next quarter?

Dmitry A. Anisimov - Chief Financial Officer

The prices haven't started to drop in the last period. We would forecast right now that Q3 will be the growth in the mid pricing Q3 will be higher than it was in Q2 as we sit here today at the start of September which is clearly also a key month. To mitigate that we have been doing a number of things. We've taken an unplanned price increase in mid August. We have also taken another price increase in very early September in the next week. The industry as we are the leader, the industry is following us at least it follows us in August and we don't expect any difference in that in relating to September. So, that's we see the pressure continuing quite honestly, certainly in Q3 we see the pressure continuing. But we are also doing things and we have been from the start of the year doing things to offset that.

I think the first half of the year would show that we have done a pretty good job with offsetting as most of our peer group internationally have not done so well. And in the Q3 and Q4 certainly the back half of the year taken together, we see ourselves being able to offset in the most part the effects and in that perspective if you look at it we've taken up our revenue guidance that we've given for the year because clearly we are doing better than we had anticipated. But equally the EBITDA we are saying is inline with consensus. So, some of this is driven... is being offset by growth, some of its being offset by pricing and some is being offset by overhead reduction. But we don't see Q3 being any less difficult in relation to pricings than Q2. I'd also say that in the long term I don't think its necessarily ramping because it simply puts us going into 2008 and beyond with a much higher revenue per liter than we would otherwise have had. And so there is a short term pressure perhaps in being able to manage the journey but over time, we end up with a higher price per liter sold and if there is any short-term downturn in volume which right now we are not seeing actually, we see that recovering also if that was to happen.

One more question. In terms of your marketing and advertising expense, where do you see that normalizing as a percentage of sales?

Dmitry A. Anisimov - Chief Financial Officer

Well about a 100 basis points perhaps lower than were it is. Q2 was deliberate from the beginning. And so far that we had there was a lot programs in terms of rolling out products across retail networks. There results a lot of sampling within the Q2 which in the past we not actually done very much of, so, its lots in just TV advertising. So, I think Q2 was always going to be the high month. Q3 by virtue of the fact that it's mainly the summer time and Russians spend a lot of time outside the homes in July, August because of very good weather and long summer days and so on. We don't and most people don't advertise very heavily with the exception maybe the soft drink people and Q4 will be higher, should be higher than Q3 but will still be less than Q2. So, somewhere less than 6%, but somewhere between 5% and 6% if you take total marketing into account.

Okay. Thank you.

Dmitry A. Anisimov - Chief Financial Officer

You're welcome.

Operator

We now take our next question from Natasha Zagvozdina from Renaissance Capital. Please go ahead.

Natasha Zagvozdina - Renaissance Capital

Good afternoon ladies and gentlemen. I have one question regarding the prices for your Baby Food products. It seems to me that you are not aggressively increasing prices in sort of half of the year versus first half of last year. Was there any particular reason, you were launching new products, you were introducing maybe new product lines, and can you give us the guidance for price, planned price increases in the Baby Food segment for the remaining part of this year?

Dmitry A. Anisimov - Chief Financial Officer

Hi Natasha. There will be some pricing in Baby Food in September. Baby Food doesn't... has not had... a lot of being is happening with Baby Food. One is our range with much wider than we started out the year with that was as planned. And so there is a different, very much different mix. Purees, which are happening [ph] are now quite a considerable piece of our business. And raw milk also doesn't impact our Baby Food, even our Dairy Baby Food any where near as much. And so really it wasn't about pricing, it was very much about product distribution, range, enhancements and so on. But there will be some pricing being taken in September. I think also you should, I think you know that on the areas of Baby Food nutrition, the major on which is Dairy Baby Food, we are by far way the price leader. So, there wasn't any justification for pricing and we haven't taken but we are taking in September and which again would basically obstruct what cost increases we've seen in the last couple of months.

Natasha Zagvozdina - Renaissance Capital

Can you specify the... I have a sense will be different price increase for different products within your product range. But just any idea by how much you may looking to increase prices in global terms versus average prices for same products you had in the first half of this year?

Tony Denis Maher - Chief Executive Officer and Chairman

We are talking about baby food now still?

Natasha Zagvozdina - Renaissance Capital

Yes.

Tony Denis Maher - Chief Executive Officer and Chairman

Somewhere in the order of 5, 6%.

Natasha Zagvozdina - Renaissance Capital

5 to 6% in global.

Tony Denis Maher - Chief Executive Officer and Chairman

Yes.

Natasha Zagvozdina - Renaissance Capital

Thank you.

Operator

We'll now take our next question from Marat Ibragimov from Citigroup, please go ahead.

Marat Ibragimov - Citigroup Smith Barney

Hello gentleman, I would like to ask on the volume in Beverages. According to my calculation, your volumes increased by 9.3% in the first half of this year, am I right?

Tony Denis Maher - Chief Executive Officer and Chairman

We don't normally give out volume information, but I think... can we give the number...

Dmitry A. Anisimov - Chief Financial Officer

If you compare the first half to first half, the volume increase is...

Tony Denis Maher - Chief Executive Officer and Chairman

11% in the first half within the second... and the second quarter was stronger than that.

Marat Ibragimov - Citigroup Smith Barney

So, roughly 11. And on the --

Tony Denis Maher - Chief Executive Officer and Chairman

14 in the second quarter.

Marat Ibragimov - Citigroup Smith Barney

Second quarter, okay. And in Dairy, I estimated that volumes grew by 27%, of which 15% is organic and the rest is acquisition, am I right?

Tony Denis Maher - Chief Executive Officer and Chairman

Yes that's correct.

Marat Ibragimov - Citigroup Smith Barney

Okay, thank you.

Operator

We now take our next questions from Brady Martin from Alfabank. Please go ahead.

Brady Martin - Alfabank

Hi. I just had a question about margins particularly in Dairy, it looks like there's a slight decline in gross margin in the Dairy segment, from my calculations for the second quarter. But what I am really interested in is in deed the previous EBITDA guidance we've been given like a target of hitting 14% this year, 15% next year, I mean I know you have just given the new guidance of the remaining same EBITDA with higher sales is pretty less. But just I'm thinking going forward, where do you think you can be, or what are your targets target in terms of EBITDA productivity this year and next year?

Tony Denis Maher - Chief Executive Officer and Chairman

Brady, I think the long term guidance on EBITDA margin is probably still what it was, that we can and we will get to around 15%. Now, I think in the short term, I think there is going to be a tightening of EBITDA in percentage terms, but not in terms... in absolute terms which I think is an accomplishment given what is happening with the unprecedented commodity price changes. I think we are more focused on driving the absolute lines and the percentage line. We could actually get the percentage line right and maybe the absolute line lower by virtue of doing certain things, which we don't think would be healthy. So, I think you heard me say in the past that while percentages are important and we look at them in absolute terms, in terms of growth and so on for me is the overriding factor. And I think as we are going through a transition period in a step change, I guess you could call it in raw material costs, managing through that, keeping our growth and driving the bottom line is really where our focus is on. I don't want to give you a predicted percentage versus the year. I think we would be doing well, if we could end up the year at the same level as we had last year, I think, as we sit here in the end of August, the beginning of September, that's where we pretty much see it.

But its four months to go, and you are dealing with a very, very major selling period for us in dairy in particular, and also a major period in terms of buying milk prices. So, it's there or there about let me put it like that. But I think the 58% going forward whether it's 2008, or a little bit later, I think this is still very much achievable and all the indications are as we grow our Baby Food business, where our margins are actually holding up and our juice and beverage business which is getting stronger, that gives us comfort that the long term guidance we gave in the past in percentage terms is probably be accurate.

Brady Martin - Alfabank

Okay thanks. Just maybe drill down a little on the Dairy segment, when you are planning these additional price increases this year, I mean are your... is your targets too can maintain margins where they are now or do you think you will be able to overcome the increase in raw milk and perhaps even increase margins for this year?

Tony Denis Maher - Chief Executive Officer and Chairman

Well bear in mind, when you are taking pricing you always take it... we are not going to go out and take a 20% price increase in one go because its ruining us to our brand health and so on. So, you take it in sense so, while you are getting the strong inflation in raw material cost, you are always going to be that little bit behind. However, I think as you go... as we go into next year, I think our stock in fact is stronger than what it would otherwise have been and I think margins will recover, I think probably the likelihood is that Q3 margins are probably going to be tighter than Q4 in fact, because we are taking quite a bit of pricing as we go through Q3. We have no plans to take any pricing in November, December mainly for retailer reason. So, most of the pricing will actually be in fully impacting positively the fourth quarter.

Brady Martin - Alfabank

Okay, thank you.

Operator

[Operator Instructions]. We now take our next question from Svetlana Sukhanova from UBS please go ahead.

Svetlana Sukhanova - Brunswick UBS Warburg

Hi everyone, its Svetlana Sukhanova from UBS. One of the question was answered by the [indiscernible] about acquisition. I saw some headlines at Bloomberg today that you seek acquisition in Kazakhstan and Belarus. Can you please elaborate a little bit more on this? Is it Baby Food area or whatever and what is the size approximate?

Tony Denis Maher - Chief Executive Officer and Chairman

I think what we said to Bloomberg was what we say all along, we are seeing... we are looking in acquisitions in especially in dairy right across all our geography and also looking at the size of our current geography, but in particular in our current geography Kazakhstan and Belarus are two areas, two countries where we've got quite a sizable business but no dairy and in that respect, it would make sense for us to if we could acquire something in those markets to give us a production foot print in those, and if we can get what we want at the right price then it will be something that we would do. So, but we are also looking at acquisitions in Russia and we are constantly doing that because there is as I've said in the past there is a lot of cities in Russia, half a million plus which today actually we are not [indiscernible] because we are too far away and so they are also our priority.

Svetlana Sukhanova - Brunswick UBS Warburg

Okay. Thank you very much, fair enough.

Tony Denis Maher - Chief Executive Officer and Chairman

You are welcome.

Operator

[Operator Instructions]. We now take a follow up question from Arun Pillai [ph] from AllianceBernstein. Please go ahead.

Unidentified Analyst

Hello, can you give us some update on the consolidation of some of your recent acquisitions in general consolidating these businesses, reducing staff and cutting cost?

Tony Denis Maher - Chief Executive Officer and Chairman

Well it's ongoing, I think we of the two that we are talking about in particular Omsk and Ochakovo there has been some reduction in staff in Ochakovo, but its, we have a way to go there in both of those and in other enterprises also. But we completed, I would say phase I, but the fact is, whether its phase I or phase II this is an ongoing process, which are still not where we need to be. I was asked a couple of days ago, if I was to given a percentage of how long along the journey are we? I'd say, at best we are probably about half way through in terms of getting our productivity right. So, that's not just and your enterprise question this is existing enterprise question also. Some of this requires some additional investments; some of this requires retraining and so on. Some of this requires perhaps hiring different people and so on. But we are... I would say in our journey towards getting what I would describe as acceptable productivity levels, we are probably about half way along that journey from when we started a year ago. And that was always, there was low hanging... I won't call it low hanging fruit, but you know there was easier, there was easy stuff... easier stuff to do and now we are in phase II, which is a little bit... you need to do a lot more things to be able to maybe bring that into effect. But that is actually work in progress as we speak.

Unidentified Analyst

Okay, thank you.

Operator

[Operator Instructions]. As we have no further question, I would like to turn the call back over to Ms. Kagan for any additional or closing remarks.

Marina G. Kagan - Head of Public Affairs

Ladies and gentlemen, thank you once again for joining us today. If you have any further questions, please do not hesitate to contact us. The replay of this call will be available for the next week. All the information can be found on the invitations that have initially been sent to you or on our website. But for now, good bye from all of us here in Moscow.

Operator

That concludes today's conference call, ladies and gentleman. Thank you for your participation, you may now disconnect.

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Source: Wimm Bill Dann Foods OJSC Q2 2007 Earnings Call Transcript
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