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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

Julien Martin - BofA Merrill Lynch, Research Division

Unknown Analyst

Kurt Knuppel - Nightscape Capital

Natasha Zagvozdina - Renaissance Capital, Research Division

Daniel Wakerly - Morgan Stanley, Research Division

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

Andrzej Knigawka - ING Groep N.V., Research Division

Andrzej Kasperek - UniCredit Research

Central European Distribution (CEDC) Q1 2012 Earnings Call May 10, 2012 8:00 AM ET

Operator

Good day, everyone, and welcome to the CEDC First Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the 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 First Quarter of 2012 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, May 10, 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 find the presentation for today's call on our website at www.cedc.com.

Please also note that statements made during this conference call, other than those related to historical information, constitute forward-looking statements within the meaning of the Private Securities Litigation and Reform Act of 1995. Without limiting the foregoing discussions, the forecasts, estimates, targets, schedules, plans, beliefs, expectations and the like are intended to identify forward-looking statements. These forward-looking statements, which are based on management's current beliefs and assumptions and current information known to management, involve known and unknown risks and uncertainties and the 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 our Form 10-K 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. I welcome everyone to our Q1 earnings call. First off, we'll be going over on the presentation as filed on our website. We'll be going over Poland Q1 results, Russia Q1 results, a bit about our other markets, and then we'll get into the financials surrounding Q1. And then we'll get to the outlook for the rest of the year, how we see Poland, Russia and a few of our other markets and open up the call for questions.

So starting off on Page 3 of the presentation, Q1 overview for Poland. We had a good quarter for Poland. We're up about 7% in our domestic volume growth and up 15% in value. As you recall, the first 3 quarters last year, domestic volume was higher than the domestic value. And the last 2 quarters, as explained on our last few calls, that certainly today, value -- our value growth is certainly more than our volume growth. So we're seeing that continuing through our performance as you should see that continuing out through the rest of the year. But the overall vodka market was down 1% to 2%. It was no surprise, really, for the overall vodka market as compared to the last year.

Spirit prices have remained stable. There's this little chart that we'll come to later on spirit prices. Exports continue strong growth, 17% in volume terms, even more in value. And again, we've been working on our mix, client mix, product mix, new product launches that we've made in the flavor category and working on the small sizes, which are more profitable, the 0.2 and the 0.1 size. So overall, that's had a very positive contribution to our earnings in Q1.

If you turn to the next page, we get into the different sectors. As you can see, 7% growth at the top, it's of vodka, which was 18% in value. And that's a big increase in value, 18%. Again, that was mainly driven from the mix, of SKU mix, client mix, pricing and product mix. The growth was mainly led by Biala, which as you know we launched about 18 months ago in November '10 and also Soplica, which we have restyled. Soplica was up close to 80% growth, and our flavors that we launched are over 100% growth rate. So -- and flavors are much more popular than clear, and the flavor category is growing in Poland, which now accounts for over 20% of the total vodka market.

Also, what stands out was the large growth of our brown spirit portfolio. We've done a lot of work with Grant and the Jim Beam brands to really push hard. And with their investments, the brown spirits, which is still growing quite dramatically in Poland -- Poland is now in the top 20 largest brown spirit markets in the world, and it's growing at around 20%, 25% annual. So we're doing a lot of work to really push our strong brown spirit portfolio, Grant, Jim Beam, Metaxa as well as our other brown spirits that we represent here in Poland.

If you turn to the next page, if you look at the spirit pricing in Poland. As you see, we had the big increase in 2010. And then since 2010 and the first quarter, really, the January '11 was the last time we've really seen a large spirit move. We're currently pricing now in May around PLN 2.75 to PLN 2.80, so pretty much in line with what we saw in the second quarter. So really, no surprise here and really no earnings hits for 2012 compared to 2011 in terms of spirit pricing.

Next page is showing our market share in Poland. Again, it's a pretty similar chart to what we showed previously. We still have around 24% share. The big loser, as you see in the market, has been Pernod, and that's mainly as they, I think, are focused more on their import portfolio and a little bit less on their overall vodka portfolio. And of course, coming out of Stock, the market leader, a bit of share taken from us and Sobieski.

The next page breaks out the channels in Poland where we represent ourselves. And as we said in previous calls, our strategy overlapped really 18 months with development strategy and how we needed more -- a profitable strategy across new product development, mix, SKU mix and channel mix. And clearly, the channel mix, we've done a lot of hard work in terms of not only maintaining our leadership in the modern trade, which you see on the left side, reduced reliance on discounters that's been made up by Stock and Sobieski. A lot of Sobieski's market share has come out of this channel, which is the least profitable channel. And traditional trade is still the most profitable channel, and still, that is our biggest management challenge, is to increase faster our share in the traditional trade within our overall portfolio. And that's something that we remain very committed in our work within the trade to really grow the share in the traditional trade which is, again, the most profitable channel.

So I think we have a lot of opportunity here as Stocks' market share is at 43% is -- it's extremely high. I think it's a good opportunity for us and others to really grab some of this share. But again, it's going to come from a -- Stock is a strong competitor. And we made a solid business plan which we have in place, and we want to continue to grow this part of the market.

Looking at the next page, a quick overview of Ukraine, which has become a quite large part of our business today. The team is doing extremely well there, up to 7.8% market share. The business has -- was -- has turned profitable. Also, in the first quarter, while fourth quarter was also quite profitable, but compared to a year ago, the volume now is such that we can leverage off our fixed overheads. Value up 160%, which also is very good with our overall mix within our portfolio.

We're launching Talka, which is doing extremely well in Russia. It's one of the top 5 -- top premium brands in Russia today after we just launched it last year. And we're launching this in this summer in Ukraine, and we're also talking with various international spirit suppliers also about representing them in Ukraine on their portfolio of imports.

Turn to Page 9, and look at the Russian market Q1. Again, that we had -- we're struggling in the overall vodka category, down 15% in volume, down to 12% in value. And again, this is coming from 2 main factors. One is that we had de-stocking in the wholesale trade mainly from the fact that we agreed with the new management team, which was already active a bit in March in our discussions but making sure that we look at allocating more trade marketing spend across the sell out rather than the sell in, meaning that the wholesaler sell out into the trade and to the retail trade rather than selling in, giving the money to the distributor on selling in the product. And that's something that we have agreed with the management team going forward, so you will see a de-stocking effect this quarter in terms of the first quarter as well as a very small de-stocking effect in the second quarter. But beyond that, the trade marketing spend, which we spent almost $100 million in terms of retro discounts and trade marketing spend across all channels in Russia, this will be much more effectively looked at in terms of the best spend for the results in terms of getting the product into the consumer hand.

The second issue we had in the first quarter was one of our largest customers, we were very hard on negotiations. We had about 40, 45 days that we did not deliver, and we ended up having better conditions than we did the year before, which is very rare in Russia to be able to negotiate better conditions, but we were able to. But it did cost us some leaders in the first quarter to have better conditions than the previous year, which will show up in future quarters' profitability. In terms of the import business, this is mainly because of the Moët Hennessy and Campari business which we represent not 100% but a smaller part of that compared to last year. And that was partially offset by new brands that we have taken on to replace some of this volume loss.

If you look down at the value growth, the main issue there coming out of the import is mainly the Moët Hennessy business as it does represent a smaller part of our business today, and that came with a very high value. That's why the value is down more than the volume. If you look at the export business, it continues do very well. A lot of that's coming out of our Ukrainian -- selling to our Ukrainian subsidiary, the exports, which Ukraine is taking a bigger share of that business is also why the value's down slightly but still very strong growth at 48% in volume and 40% in value.

If you look at the Q1 overview in Russia, on Page 10, again, strong export growth. Our Talka success, we targeted 1.2 million decaliters, which is about 1.3 million cases. I think we're probably on track now, maybe more like 1.6 million on a run rate, 1.7 million cases, 10% increase in excise took place on January 1. Another 18% is scheduled for July 1, and that's been as planned. Spirit prices have remained fairly stable.

The strong government regulation which started about 18 months ago, is continuing to be enforced very strongly against producers as well as distributors. So that's continued strong government enforcement of their increased regulations. Also, we've taken a lot more initiatives, not only on the management changes we are doing in Russia but also on the headcount reduction. We had 180 people at the end of March and another 240 will be, in April, reduced. And of course, you'd be -- start seeing that coming to our results Q2 and beyond. And as announced last earnings call, we changed the General Manager and other key management from April 2012.

Just to highlight the recent management changes in Russia on the next page. The new GM for Russia is Grant Winterton, has extensive FMCG experience in Russia from Wimm-Bill-Dann, Coke, Red Bull. He started April 1. Also, we took a new CFO, really to drastically improve our controls and forecasting coming out of the company. Again, comes from extensive financial experience in tobacco and retail, and he led the recent turnaround of one of the large electronic retailers in Russia. And he also started in around April 15 in terms of starting his role in Russian Alcohol Group.

Also, a new Sales Operations Director, which will be primarily focused on the effectiveness of trade marketing spend. As I said, between the retro discounts we give out to the trade and our trade marketing spend, it's close to $100 million -- was over $100 million. And this job, as well as from the financial function, is to really get the best return out of the spend in terms of the effective spend, and that's something between Grant, Ryan and Alexander that they're going to be extremely focused on making sure we're spending the money in the right places and getting the right mix through the spend.

Also, in terms of a consultant to help us restructure some of our key processes and systems, which would be including sales order planning and forecasting, he'll be joining soon, is Gary Sobel, also a very senior executive within Russia from Wimm-Bill-Dann and P&G and Cadbury in senior management positions also over last 10, 12 years.

So again, our main aim is to really beef up the first-line management team, which we believe we have done. And our main aim now is also to have a much stronger second-tier management team coming into our business as well, which we'll talk about a little bit later.

Turn to Page 12 on the spirit pricing in Russia. Generally, it's more or less stable. We felt a big increase in '10, a bigger increase in '11. As -- and as you know, that's really hurt profitability tremendously in Russia over this 2-year period. But we have seen some stability, and we are in line with planning and budgeting through May of this year so far. And generally, what we see and talk to the procurers of the spirit is that they're pretty much going to be following grain pricing-- grain pricing movement, and we shouldn't see the large movements as we've seen in the past as it should more or less stabilize.

If you turn the next page, in terms of market share, value market share. Again, at Nielsen, as you know, tracks the sell out from the trade to the consumer. And even though our results certainly have not been stellar, we really haven't lost share and value over the last 8-month period. We should be getting new data for February, March here in the next week, but generally -- which we'll report on the next earnings call certainly. But generally, we have stabilized our situation on market share, but for me, that's not acceptable. And for the team, one of our objectives is in stronger business as a team, it certainly is to grow market share in this fast consolidating market.

As you know, there's been a lot of press out over the last 30 days regarding our Russian Standard transaction in terms of our strategic alliance with Russian Standard. This will take you through some of the highlights of that. I'm sure there'll probably be more questions afterwards. But we closed the first part of the transaction recently, and it was funded with $100 million, which will be used to convert eventually into equity upon shareholder approval. $70 million of that will be on shareholder approval, $30 million, no. That's -- that is already converted into equity. So the $70 million, on the June 29 shareholder meeting will be voted on.

Also, we put out today a positive statement from Mark Kaufman, which also owns close to 10% of the shares. They put a letter out to the board and filed a 13-D that he's in support of the transaction and that he looks forward to coming onto the board upon shareholder vote and also working with us and Russian Standard to also how we can improve the operations and business and also look at the synergies that we can have throughout the -- our business combinations in Russia.

These funds that we got out will be used to repurchase 2013 Convertible Notes. And following approval of shareholders, also the $102 million notes currently held by Russian Standard will be rolled over into new notes due in mid-2016 with an average interest rate of around 6%, with a lower interest rate in the beginning years and a slightly higher rate in the back years. And the remaining $100 million of the Convertible Notes will be a new note issued to Russian Standard, also due in mid-2016, to provide remaining funds to retire the full amount of the Convertible Notes in January, February 2013, which he's given a guarantee for that back stop, not a hard guarantee but a corporate guarantee.

And also, certain interest payments in the beginning years, which will be paid in shares, which also help a bit on cash flow and will bring his this total estimated upon shareholder approval and interest paid to around 29.5% by the end of 2013. Also, he was given certain governance rights. We still have 3 board seats out of 10, of course, again, with shareholder approval, and the final board seat will be given after the $70 million notes are converted into equity. Protective anti-dilutive rights on new debt equity issuance and veto rights approval of brand and asset sales. I think that's all spelled out in the -- in our proxy, our draft proxy that we put out recently and the 8-K filings.

And also, that's on the financial part of our transaction, but also that we also have been discussing a business part of our alliance, strategic alliance, and that's something that we continue to develop together. We are not anywhere close to having any type of a deal on this. We're still negotiating this combination, and we'll continue to work together in developing a plan for combination of our domestic business in Russia and look for also future synergies through purchasing and other areas of cooperation. For example, he just opened his own spirit plant in Russia, which he's supplying himself spirit, he does have capacity there. That's also an area of opportunity of synergy. He's also just finished a new warehousing office complex outside of Moscow. That's also an area of opportunity and also production opportunity that we have across our production assets across the group. So there -- and not to mention the export opportunities that we can also look at. So a number of items to discuss with Russian Standard, and all of these are being discussed and will be further discussed over the next month as we work towards looking at what type of positive synergies we can have out of our relationship.

I'll now turn it over to Chris Biedermann, who'll take you through the financials in Q1.

William V. Carey

Well, thanks, Bill. We'll start on Page 17, which is our standard reconciliation of our GAAP numbers to numbers we call comparable numbers, which provides a more comparative analysis versus prior results. And I'll highlight the 2 or 3 main differences there.

The first one in column one, you'll see we eliminated the $97 million gain we had on FX. This is due to the strengthening of results currently from year and until today, which is also the gain again on operating income to back that out. On the restructuring, we see $3.7 million. As Bill mentioned, we've taken significant headcount restructuring efforts during March and more coming in April. We've taken the effect of this staffing to provide a more comparable operating expense number.

And finally, column D, there's a significant adjustment to our tax rate to bring it to our more normalized underlying rate. We have significant NOLs in Poland, so we basically treat Poland as a 0% tax rate country. So as the significant gains or losses, for example, from FX, those numbers will have a 0 tax rate associated with them. So in order to guide comparability, we've normalized the tax rate there.

Moving on to Page 18 then, we compare the 2-year quarter 1, last year versus quarter 1 this year on a comparable basis. As we discussed before, the net revenue was down primarily due to FX as well as the lower Russian sale I'll get into a bit more on the following slides. [indiscernible], profit margins are up from 38% to 40%, which is driven by the price improvements in Russia as well as the changes in Poland, not really a product mix and a channel mix as Bill discussed earlier.

Our operating expenses on dollar terms are generally flat if you were to adjust the prior numbers for the Whitehall. If you remember, Whitehall was not consolidated in the first quarter last year as we only completed the acquisition mid-quarter. If you add back the $3.9 million to the prior OpEx, you have an apples-to-apples comparison, and you'll see generally flat OpEx. Nonetheless, EBITDA is slightly down, and that's again primarily driven by the higher spirit cost in Russia as well as the lower net sales revenue in Russia, which leads as well to a slight reduction in EBIT.

Interest expense, generally stable last year. And other nonoperating, a bit higher, and in other nonoperating, it's probably cost factoring as well as the cost of the excise guarantee that we have in Russia now.

Moving on to Page 19 is a whole walk taking us again from the 2011 sales gross margin, operating profits for 2012 on a comparable basis. Column B, as I mentioned, as with the partial Whitehall was not consolidated for the full quarter. C is the FX. Although the FX trend year end year-on-year versus the same quarter last year, you actually have a weakening which reduced sales and operating profit to a weaker FX. D is the net volume impact, which is the higher net volumes in Poland offset by lower in Russia. And Column E is the Russian spirit cost. Again, as we mentioned, although it's been stable recently despite a loss prior quarter, we still have a significant higher spirit cost quarter-on-quarter. And finally, column F is the impact of the pricing, better mix and a bit on inflation of SG&A cost. So I think this provides a pretty clear walk for us without some prior numbers this year.

On Page 20, we can see the same number is split by segments: Poland, Russia, Hungary, and corporate overhead. In the sales numbers, I think we've been through there, higher Poland, lower Russia; again, the impact of FX, negative; a bit lower sales volume in Russia, higher in Poland. If you look at the Poland EBIT, you can see that Poland EBIT basically doubled from prior year. Again, that's driven by the fact that we've been able to have higher margins and higher sales value due to the set of the flavors and the strategy of lower SKUs, lower package sizes and channel strategy, all that with basically a stable OpEx. So that has driven to a doubling of our Polish EBIT. The Russian EBIT is down versus prior year. Again, we have a $3.2 million impact of spirit in there. And as well, we had lower sales impact from the quarter due to the fact that we discussed earlier and as Bill mentioned. In terms of corporate overhead, we're certainly higher, and it's really due to some additional legal costs in 2012 versus in '11.

On Page 21, a quick snapshot of our cash. We were cash flow positive from operating activities in the first quarter 2012. It was down versus last year. And if you remember, last year was the first quarter we began factoring. So what that meant is last year, we had all our cash flows from the peak season of Q4 2010 coming in as cash in 2011. As well, we had the Q1 2011 coming in as we began factoring, whereas this year, we just really have the cash coming in from factoring in Poland.

If you look at our cash flow from investing activities, this year, we had minimal CapEx, $1.2 million versus last year of $41 million. Now the $41 million prior year included the final payment for the buyer of the Whitehall Group. And in financing activities, we repaid, which is primarily a reduction due to our repayment of our Polish facility in January. And this has left us with cash at the end of the period of $107 million. Now we're getting cash flow and working capital as one of our key focus areas. And if you look at our AR days, we've seen improvements in AR days from 62 to 60.8. And as well, we brought down our inventory days as compared to the prior quarter -- same quarter last year from 127 to 123.

So now I'll turn it back over to Bill, who will give an outlook for the remainder of the year.

William V. Carey

Thanks, Chris. First off, on Page 23, go over Poland. Again, not much changed from our last earnings call. The overall market, again, expected to be down 1% to 2%. We're expecting single-digit volume increase, much better value increase, again, better mix across all the relevant channels, SKU mix, improved pricing. Imported spirits, again mainly brown spirits, expect to have strong growth, good export growth. And all this as well as solid pipeline of new flavor extensions in place. We launched 2 new variants in April, one for Zubrowka , one for Soplica, with more planned the second half of 2012. Beer has remained stable for the time being. And really, a lot of the changes we made in key management positions and business route to market, product mix, new product development over the last 18 months, that's certainly start to show positive effects on our top to bottom line performance over the last 2 quarters, which translates into our operating profit, this year, forecast well over 50% forecasted increase. And as Chris mentioned, we're already close to 100% in the first quarter. So overall, we're quite pleased on our development on how we see the outlook for Poland.

If we turn our attention to Page 25, our Russian outlook. The new management team that we have in place are focused on the following objectives. First is developing a strong second-tier management team with authority and accountability. We're streamlining our processes across all regions. As I've said, main focus is going to be effectiveness of trade marketing spend, how we can get the best for these large amount of spend we put in the market. Gain market share in a fast consolidating market. Streamline the Russian group as more effective processes are put in place, so there'll probably be further headcount reduction in the future. And certainly, forecasting improvements for supply chain as well as so we can lower inventories further as well as volume and value projections in terms of having more accurate in terms of the forecasting on the volume and value projections that are given out.

Page 26 is more or less highlighting the same. A lot of these areas of focus will be done in the second and third quarter. So the team has been very, very busy and looking at not only the team but also, like I said, the commercial and financial operating model in terms of controls over the processes and effectiveness of the spend.

Overall, we don't really change our estimations for the market, we still anticipate a 5% to 10% decline in the volume in the market in light of the 28% excise increase for 2012, 10% within January, 18% is in July. Again, that -- what we see in the market is that the brown spirits and wine will probably continue to expect its strong growth in volume terms, and spirit pricing is expected to follow grain pricing. We're currently forecasting a 10% increase in our budget. And so far, we're in line with that in our forecast, and we don't see anything today that changes that outlook.

If we look at our performance in Russia, that we're still expecting a single-digit decline with volumes in Russia. You already see marked improvements in the second quarter coming in terms of versus quarter 1 in our volume sell in and sell out and certainly, in our overall profitability. Exports will continue a strong push, because that's area of opportunity we believe still coming out of Russia. We represent today over 35% of the total exports out of Russia. Being the largest exporter out of Russia, and we believe there's still large opportunity for further expansion on our export volumes.

And also on the price increases that we have scheduled for July 1, not only are we taking excise increases but also further increases to that on top of excise. And what we do understand from the trade and key competitors is that the focus will be on value add on Russia, because with the 28% excise increase and higher spirit pricing, as highlighted, volumes will be difficult to have positive volume growth out of Russia unless you grain -- gain really quick massive market share, which probably would come at the expense of margin. So most of us and other companies, is what we hear publicly and talking, is that certainly, value is going to be a key component of driving profitability out of this market as well as streamlining business, effective spend, mix and gaining market share.

If we look at other markets. Ukraine, we're still, as I said, performing extremely well. Ukraine is the third largest vodka market in the world after U.S. and Russia, ahead of Poland. So we will look to continue to add more products for our portfolio and look to also add an increased import portfolio of other spirits in -- from international spirit companies to complement our strong vodka portfolio. And we continue to grow our long grain business, our RTD business, and that's going through a massive consolidation also in the last 12 months. So again, we're in pretty good position to continue to grow our profitability in that business as well.

So really just to summarize, before I open to questions, we've had a lot of issues and concerns certainly in the past year, 15 months, and we are trying and meeting these challenges head on. We're addressing a lot of these key challenges, which has been, as you certainly know, financing our 2013 converts, as well as profitability from our Russian business. Not only do we believe we found a strong partner and Russian Standard can help us on the financing but also a strong partner that can also -- we can align in business together in Russia with a strong Russian partner and look at synergies that we can put together in terms of businesses and other opportunities. At the same time, that we've -- we believe we've hired a really first-rate management team in Russia which, again, will be --the main objective will be to improve our profitability and performance and forecasting out of our Russian businesses in Russia.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Karen Eltrich with Goldman Sachs.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

Great. In terms of what you're talking about with the sell in, sell out in Russia, in terms -- is this kind of trade spend in terms of instead of spending with the wholesalers, you'll rather be directing dollars to retailers? Is that how we should look at it?

William V. Carey

Yes, correct. Yes. The sell in, we'll be selling into the distributors where you're giving money more to the distributors. And sell out is more the sell out into the traditional trade, and you'll be spending more money in the traditional trade and driving -- trying to drive more off take from that side rather than from the -- putting money in the distributors' hands.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

I mean, this is kind of a very large change from what you originally envision your sales force to be in Russia, if I'm not mistaken. And I mean, is that a lot of the reduction? And are you rethinking how you move product in this country?

William V. Carey

No. The route to market remains the same for us concentrating again on our -- we have our own trade houses which sells in our key market in Moscow and St. Pete and Siberia, where we do our own selling primarily. Then we use -- we sell direct to key accounts as well, to a vast majority of key accounts who have direct -- who have central warehousing. And then we still work with about 130 distributors or wholesalers, let's say, across the country and servicing our needs to the traditional trade. And our sales force is still covering 70,000 outlets. We still have the largest coverage in the marketplace, and their job is to do more in the traditional trade to drive more off take. But now, effectively, that they'll have a bigger budget as there'll be less money going to the wholesale trade and more money going into the improvement of the off take in the traditional trade, again, run though our sales force that covers the 70,000 accounts. So it's not really any change. It's just a look at a more effective way to spend and having a management team that will, our belief, that certainly will control and having processes in place to get the accountability for that sales force performance across those 70,000 accounts.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

All right. Very good. And in terms of for the relicensing, have distributors rebuilt their inventories now that that process is done? Are have they kind of lowered it -- have they kind of taken an excuse to lower inventory levels?

William V. Carey

I think generally, there's a feeling of lower inventory levels in general, mainly not only because -- I wouldn't say it's from relicensing. I think the relicensing has -- most people who have got relicensed have got relicensed. There are some still struggling but very few, maybe 10 to 15 out there, that are still struggling to get relicensed. But generally, you can't keep a company open so long if you're not going to get a license for a long period of time. So most that are there today will remain. There's still strong government regulations still overseeing on a monthly, quarterly basis producers and the wholesalers. So just you have -- just because you have a license, it doesn't mean you're not going to have a problem if you're doing something wrong. So generally, belief is that wholesalers are looking at with the banks. Certainly, banks have a lot of liquidity in Russia, but it's not so easy to borrow out in the wholesale trade. So I think, generally, from a financing of stock, I think most are looking very hard at how they finance their inventories today from their own working capital or from a bank side. So generally, I think you're probably going to see slightly lower inventory levels than what we saw in years past.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

Okay. And with the increase in excise taxes, as you mentioned, obviously, it's going to be a negative on demand. But also, I mean, doesn't that also feed into your original thesis in terms of lowering the kind of third-tier black market players? Do think that will play out?

William V. Carey

I think the government regulations -- they're very strong in their government regulations and enforcing that across the trade in terms of wholesalers, producers, et cetera. So even though you're going to have a large excise increase, most people are assuming the black market's going to increase because the risk versus reward is certainly -- reward versus risk is -- there's more reward as prices move higher. And the black market should grow, but we're not totally convinced. Because of strong government regulation, there's not a lot of areas you can move in that direction. But we'll have to wait and see over the next -- post July. We probably need to give it a good 12 months to see what happens in the market in terms of the overall black market development with the increase in excise.

Karen Eltrich - Goldman Sachs Group Inc., Research Division

Great. And final question actually. I mean with all the upheaval and the protests that are happening with politics in Russia, is this having an impact in demand as well?

William V. Carey

No.

Operator

And our next question will come from Julien Martin with Bank of America.

Julien Martin - BofA Merrill Lynch, Research Division

My 2 questions. The first one is on the bank debts, let's put it that way, with the deal with Russian Standard, what the status around refinancing this short-term debt, the different lines that you have, the receivable factoring and the different bank lines with the different banks in Russia. So that's my first question. And whether we should see a variable of bank debt announced you're being around the $80 million level going forward or whether that would reduce to your point of view. And then second question is on the market share. When I look at the graph on Slide 13 of the presentation, and I can see that the top 11 players accounted for 45% of the Russian market and now accounted for 55% of the market, really the consolidation has taken place except that you lost market share, as we all know. But my question is, do you reckon all the small players have gained share profitably or whether you think that some of these will have to go out and continue like that, because they've gone -- have grown officially out of unprofitable stock? So my 2 questions.

William V. Carey

Yes, I'll -- yes. I'll answer the first and the last point I'll get Chris to answer the debt issue. On the consolidation, no. Our view is the market's going to go in the direction like most other markets in the world, where you're going to have 80% share, your top 5 or 6 players and that we think the market -- that certainly, we're not happy that we haven't gained also in this consolidation that you've seen from 43 to 55. Certainly, our -- if you recall, a few years ago, our -- certainly, vision was we're also going to gain a couple of points out of this as well. And -- but we are not accepting where we are. We are going to grow market share, and yes, the smaller players will continue to have problems as it is in most emerging markets.

Julien Martin - BofA Merrill Lynch, Research Division

If I look at these 11 players, should I consider that the consolidation of -- into 5 players from 11, let's say, will happen through acquisitions from large players of small players? Or will happen through the exit of small players of the market?

William V. Carey

I think you'll see more from exit.

Julien Martin - BofA Merrill Lynch, Research Division

More from exit. Okay.

Christopher Biedermann

It's Chris. So with regard to your question on short-term facility, to avoid giving a detailed discussion now, the 10-Q will be coming out shortly today. And as usual, you'll see the full footnote disclosure of all our facilities, maturity dates and so forth. Our general intention is that most of the facilities roll over or potentially be replaced by another equivalent facility. We are continuing to explore all options within the market to see if we can always provide some additional liquidity or buffer in our liquidity. The general intention of those lines will stay in place or will be replaced. The only -- the deleveraging would come from the $100 million that's coming through reco. And Russian Standard investment, it's for basically, effectively an equity infusion, which will then ultimately lower the debt. But we don't see any real big change in our short-term working capital facilities.

Operator

And our next question will come from Bartek Patois [ph] with Legal & General.

Unknown Analyst

Just one question. If you can comment or provide any more clarity on the level of cooperation with Russian Standard, what you plan to do, what your expectations are in terms of operations. Because obviously, you disclosed the loss on the financing side but just interested in how -- sort of any indication of synergies and overall benefit, please.

William V. Carey

Yes. I mean, I -- there was always, for us, a -- really one transaction, which was financing and business. But because of complications on the finance and the business being quite complicated, both transactions, we decided to split it to get the one done which was the finance. But we continue to discuss the business part which, again, would be a combination of our local businesses in Russia where he has a fairly large business that's probably generating like -- we haven't see final numbers but probably somewhere between $35 million or $45 million of gross margin coming out of his business model in Russia. So we would look to combine with that gross margin and take very little overhead on board, and we have enough overheads to cover. The valuation for that is still yet to be determined, but certainly, you don't really pay a lot for a distribution agreement. So second would be synergies on spirits. Spirit -- as I said, that he'll put his own spirit production in Russia. He's one of the few that has a private production of spirit. So we'll be looking at, hopefully, sourcing some spirit from him in the near future to have a better control over our spirit pricing. You said third is the opportunities for export, where you have a large export organization. He's the second largest exporter out of Russian, so we have a lot of opportunity to maybe look at where we could export opportunities and especially even where we have our business, maybe Ukraine, Poland, Hungary, where we have our own business. Third -- and fourth would be warehousing and production opportunities. As I've said, he just -- he's just finishing up now a new facility outside Moscow, a professional warehousing and office facility that there's a potential that we could look to do some combination of warehousing there. Merchandising services, we're discussing also in Russia, how we could combine maybe merchandising services. We both spent a lot of money for outsourcing merchandising and then production opportunities. He has production. We have preproduction facilities, where can we benefit also on production opportunities in terms of synergies. So that's sort of the key areas that we're discussing. I don't really have firm numbers for you. They will come at a later stage. It's still too early. It's more just the overview. And as we get into more detail, we'll get into more numbers, and I'm sure we'll keep you informed.

Unknown Analyst

Okay. On the spirit side, did you say the Spirit business will be contributed also to the new -- I mean, to CEDC? Or would that be just an agreement to buy?

William V. Carey

No. That would just be an agreement.

Unknown Analyst

Okay. And will we -- should we expect anything to come through by end of Q2? I mean, any more concrete discussions and arrangements?

William V. Carey

No, no. It wouldn't be that fast. No.

Operator

And our next question will come from Kurt Knuppel with Nightscape.

Kurt Knuppel - Nightscape Capital

Can you -- you had laid out some EBIT projections for the Polish business. Can you provide any guidance on the Russian business? And I also had a question. If you could just take me through some of the -- take me through how to think about spirit pricing. Is it all in COGS? And if so, what -- how many -- what metrics should we used to estimate how much pure alcohol per volume is in the final product that they're actually shipping?

Christopher Biedermann

First of all, I think on your -- with regard to guidance, as you know, this year, we've had a policy. Due to a lot of the uncertainties in the market, we have not -- we do not give -- we're not giving any formal guidance in terms of '12 either on EBIT or EPS. So I'm not in a position to give guidance there. With regard to your second question, basically, to look at a 1 liter or a 0.5 liter bottle of vodka, roughly 40% of that is pure spirit. So if you look at our spirit pricing that we have in our charts, that's for 1 liter of 100% pure spirit. So to convert that to a 0.5 liter bottle, you multiply times 0.5 and times 0.4.

Kurt Knuppel - Nightscape Capital

Okay. And is that all in COGS?

Christopher Biedermann

Yes. All in COGS, yes. Spirit is all in COGS.

Kurt Knuppel - Nightscape Capital

Okay. And I'm just curious in regards to guidance. What gives you the comfort to provide guidance for Poland but not for Russia?

William V. Carey

Well, Poland -- as we said a few times that Poland is probably about 6 to 7 years ahead of Russia in terms of maturity of the overall retail market and the different sectors of beer, spirits and wines. And Poland, as we've already gone through, as I said that we've been working -- we worked on Poland and got Poland situated, which we've been working about 24 months on this as highlighted in the press release. And we're starting to see the results the last few quarters. Those certainly didn't come immediate -- better results coming out of Poland, and we just feel more comfortable at where we sit in the -- and what we see in the marketplace of the Polish forecasting. Russia, we do expect certainly better results out of Russia and will achieve better results out of Russia. But in terms of exact numbers, with the 18% excise coming at the July 1, that -- and a new management team starting here in the last 30 days with a lot of the challenges in front of them to execute, as highlighted from our presentation, we just feel that it doesn't really add a lot of value giving out guides at this point. It doesn't mean we won't later in the year but at this point...

Operator

And our next question will come from Natasha Zagvozdina with Ren Cap.

Natasha Zagvozdina - Renaissance Capital, Research Division

Gentlemen, I wanted to ask you if you could give us an indication by how much you will reduce your headcount in Russia and maybe in percentage either year-on-year or versus where you stood at in the beginning of the year. And you've also said that that push will continue. How much of the labor cost do you expect you can take out in 2012? That's one question. And another is could you remind us how many sales people you employ in Russia now to service 70,000 outlets?

William V. Carey

Yes. We have -- on your first question, as mentioned, we did have 180 people at the end of March, which was across Russian Alcohol Group and Whitehall. And another 240 people will be in April, which shall make 420. And as mentioned, as we improve processes moving forward, there could be another small wave in the second half of the year. But to quantify that, it's too early to say. In terms of sales force...

Natasha Zagvozdina - Renaissance Capital, Research Division

And you -- that is compared to -- so you have reduced your headcount in Russia by 180 by the end of March. But what was it in the beginning of the year?

William V. Carey

At the end of March. So you didn't really get much benefit in the quarter. Our overall headcount is -- it was about a 10% reduction in total.

Natasha Zagvozdina - Renaissance Capital, Research Division

10%.

William V. Carey

And if you look at the sales force that's covering the 70,000 accounts, the average sales force -- the average salesman will cover 120 accounts.

Natasha Zagvozdina - Renaissance Capital, Research Division

Do you think that your average salesperson can increase the number of outlets that they -- he or she services? Or do you see the potential increase in the number of products that is offered to the outlet? For example, if you are previous Russian Standard, you combine the sales effort. And for example, your sales force will be selling both your portfolio and the part of the entire -- or maybe part of their portfolio. Is that a possibility that you would discuss?

William V. Carey

Yes. I mean, first off is that the sales force is the -- the sales force that we did the sales restructuring in the first quarter -- and part of the process that we went through last summer with the sales audit that we did at external consulting audit of our sales force and the market in best practices and we put that in place in the first quarter, has been the fact that the sales force was going out to accounts in regions that weren't getting the throughput in the accounts. So we realigned the -- we went from 80,000 accounts to 70,000, but the coverage is a better coverage in terms of throughput. And so you should be -- we should be getting a better throughput through the accounts we're covering, because we're covering a better mix of accounts than before. And second is that we flattened the structure. And certainly, with the new team, it's going to be more accountable in terms of their execution in the trade. And in terms of SKU handling, there's not a problem, we feel, to handle 100 SKUs. For a salesman to handle 100 SKUs is not a challenge. And the good thing about the Russian Standard portfolio, of having Russian Standard, Rémy, which for Rémy -- is now the fourth largest market in the world for Rémy is what I recall and Jagermeister and a few other that he bought recently, the Gancia business and a few other small things that -- generally speaking though, that for a sales force going to the traditional trade, it's not a huge challenge to handle 100 SKUs which would fit into an overall sales force. If you look at our sales force in Poland, we probably have too many products they -- that they service probably close to 700, 800. Even though you have a top 10 product that account for the bulk of your business, still, you do have these auxiliary second- and third-tier products that also need to be sold. But we have a lot to work, Natasha, on a -- on the best structure moving forward. One is the agreement with Russian Standard, but second is the integration plan, which is a lot of work in front of us to make sure the integration plan works from a sales point of view, because the last thing you don't want is the integration and lose 20% of revenue. So for us, it's very key that the -- any integration plan is increasing revenue not decreasing revenue. And that's going to be our...

Natasha Zagvozdina - Renaissance Capital, Research Division

And my final questions -- yes. And line with what you were saying, what is the current standard of SKU average for your person in Russia?

William V. Carey

We probably do around 40 to 50 currently. And if you look at main SKUs, probably around 12 to 15 SKUs make up the bulk of the sales, which is a very low number.

Natasha Zagvozdina - Renaissance Capital, Research Division

And if I may, along the same lines, you said the redistribution of focus as well as some couple of marketing projects from distribution to traditional retail channel, is there a particular target in mind as you share of your sales that you want to see in 3, 5 years going through traditional retail?

William V. Carey

Yes. I -- looking back 3 years ago, that certainly -- certainly that we've lost 4 points in coverage. In the traditional trade of our core product, Green Mark, we've dropped 4 points of distribution coverage. And for us, that's first and foremost to get back our distribution through these outlets that we lost. And second is increasing the throughput through a more effective trade marketing spend, of allocation of spend, where I think before, the team was struggling certainly on revenue and volumes, which you've certainly been looking at. And I think that more has been a bit of a -- well, how much we can give the distributor to make sure he's hitting monthly or quarterly numbers rather than effectively spending the money in the trade where you can get a better sell out. Do you have an absolute number of what it represents? It's hard to say, Natasha, because the market's going to go through a pretty major shift in terms of the excise increase, in terms of the traditional trade, in terms of price points. But certainly, for us, the #1 objective for grant also is not only the effectiveness of trade marketing spend, but it's also about grabbing market share as highlighted from a previous call. For us, it's unacceptable to have the same market share for 8 months, where we should be having a 70,000 accounts and having the structure we have. We have got to increase our market share as part of our overall strategy in this consolidating market, which will also come from better share in the traditional trade which, again, is the most profitable channels like Poland. So that's something that you -- to focus on profitability, you need to get the right mix of products as well as channel mix. And for us, the traditional trade is still the most profitable channel as is Poland. So that's something, again, that is going to be a key focus of Grant to execute.

Operator

And our next question will come from Daniel Wakerly with Morgan Stanley.

Daniel Wakerly - Morgan Stanley, Research Division

My first question is on the Russian margin. I mean, how should we think about how that margin may evolve over the next couple of quarters? Have I understood correctly? It's essentially a case of short-term pain for long-term gain, and that you're willing to lose the volume with the distributors, but you think the funds you'll release will then ultimately drive much better volumes in traditional trade. And that will drive better overall profitability. Is that right? And what's the sort of timing to getting that payback?

William V. Carey

Yes. You're -- that you'll be seeing -- as I said that you'll be seeing better results already from Q1, much better certainly than compared to Q2 compared to Q1. And if you look at the sell out data that we have in Q1, they actually sell out with 8% to 9% down on volume, where the total volume was minus 15% but the actual sell out data from distributor was only down 8% to 9%, which is probably more or less in line with the market. That's why the market share has been more or less probably consistent. So yes, you're right. It is taking that short-term gain -- pain, on that sort of keyword, Chris, yes, pain not gain on that short-term volume to achieve better results moving forward. And that's the strategy that we have agreed with Grant and his team to adhere to.

Daniel Wakerly - Morgan Stanley, Research Division

And in your budget, I mean when does that margin get to something -- when does that get to something you're sort of happy with? And what's the key driver? Is it the volume in the traditional trade? Or is it more to do with getting sufficient pricing ahead of the excise that are coming in?

William V. Carey

Key accounts -- also, key accounts, pricing is a big part of it, key account growth, traditional trade growth, mix, SKU mix. We're going to -- he's also going to be doing a lot of focusing on Parliament, one of our jewels in our business. And with the integration of Russian Alcohol Group, the focus on Parliament has somewhat been lost. There was a standalone Parliament business. So he's really also going to be pushing for product mix as well in terms of profitability. So like I said, that you're already going to see better results coming in Q2 and moving forward, Q3, Q4. So -- but yes, you have to take short-term pain today.

Daniel Wakerly - Morgan Stanley, Research Division

Okay, understood. And just one other question. It's obviously a bit of an unusual year with the additional excise coming in in -- on the 1st of July. Should we -- is it logical to expect some loading in June and some de-loading in July? Will that affect the shape of the next couple of quarters?

William V. Carey

Yes. That's a very good question. Now we are addressing that with the team today. And I think that today, the strategy has been more to not load and to take the inventory build and to take the price increase July 1, where you can take the extra 10% in price on your margin in third quarter. Again, not just giving out into the trade on some load but actually taking it for yourself on -- and I'm sure some people will try to load, even probably try to even to push for payment of cash. And we will -- but for us, it's not going to be a big loading -- there's no loading program to take advantage of this, which was then quite easy for us. It's better to take the inventory into third quarter and make the margin on the inventory that we have.

Daniel Wakerly - Morgan Stanley, Research Division

Understand. But in a competitive world, is there a risk to other -- your competitors will play the loading game and...

William V. Carey

No.

Daniel Wakerly - Morgan Stanley, Research Division

You don't think they will?

William V. Carey

As far as -- not as far as we know. But from [indiscernible], no.

Operator

And our next question will come from Edward Mundy with Nomura.

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

Just wanted to dig in a little bit more into the potential continued negotiations on the potential combination with Russian Standard. And you -- Bill, you mentioned one of the potential benefits could be the private production of spirits and the additional margin you could get from that. Are you able to give any more color onto that as to what proportion of your spirits volumes could be sourced from Russian Standard and what the potential margin upside from that could be?

William V. Carey

Yes. I think it's too early to say, I guess, that he just opened his facility. We closed this transaction. And we're -- that we'll do to sit down the table week after next to start discussing in more detail on the business combination. And one of the items is certainly the spirit, but we have not got any pricing from them yet, so I can't really give you any further -- well, not much to say at this point.

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

I mean, versus the graph on Page 12 of your slide deck where you were showing spirit prices of PLN 39.9 per ruble, I mean you really can get significant saving versus that? Or is it more like of 10% savings?

William V. Carey

Like I said, it's really just down to a negotiation. I mean, to be honest, if you look at the call for production in Poland on that same chart that if you take a 10:1 ruble to the zloty, that we're buying that same spirit for RUB 27 -- RUB 27.5 versus RUR 39 in Russia. And if you can imagine, the cost of production is not any more in Russia than Poland.

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

Right. Got it. Okay. In terms of sort of potential combinations with Russian Standard, are we right in thinking it could be a further possible equity deal?

William V. Carey

Yes. I mean, as -- I think we've mentioned on the last call that I think his interest is for some more equity and probably cash. Again, we haven't got into discussion of what split of that, because we haven't got into the final numbers of really what we would be getting. So again, it's -- but yes, there would probably be some more equity but probably not a lot more as you have a Polish restriction at 33% where it triggers a tender offer, up to 66%, which would trigger a control change, a Polish pocket change regulation once you cross 33%.

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

Okay. And just finally on that Polish guidance to bring up operating profit by 50%, is that in local currency? Or is that in dollars?

Christopher Biedermann

Okay.

William V. Carey

That's in...

Christopher Biedermann

Local currency. If you remember, actually, FX was slightly negative year-on-year, so local currency was similar, slightly better.

Operator

And our final question will come from Andrzej Knigawka with ING.

Andrzej Knigawka - ING Groep N.V., Research Division

Just coming back for a while to the first quarter, in Russia, your delta for value was lower than your delta for volume, but it was particularly lower for imports and exports for that particular quarter. Can you maybe just -- I think you mentioned Ukraine during the call. Can -- but can you just explain what was the reason?

William V. Carey

Yes, for the -- yes. In your export number, that's also the sales -- the export to Ukraine. So as Ukraine grows quite dramatically, as highlighted, it's takes a bigger share of the overall export number, and it comes at a lower value than other export markets. So you have a lower value number than you would without Ukraine. So that's the main reason why that value number would be lower than the volume. And on the...

Andrzej Knigawka - ING Groep N.V., Research Division

Right. And for imports?

William V. Carey

And on the import number, that's mainly coming out of the Moët Hennessy, which we were still selling 100% of Moët Hennessy through the first quarter of last year which we did the buyout, and I think it was April or May last year. So this year, we're only doing probably around 40%, maybe 35%, 40% of what we did last year at Moët Hennessy, and that's a very expensive product per liter or a price per liter. So your value number is lower mainly because of the Moët Hennessy and the Mondoro, also Campari. Also that Campari bought a company last year in Russia, and again, we probably sold around 30%, 35% of what we sold last year at Mondoro, which also comes at a pretty high price per liter. So that was the 2 main factors driving down that -- and that will be more like-for-like. As you get into the third and fourth quarter, you won't see that type of disparity moving into the third and fourth quarter to the same level.

Andrzej Knigawka - ING Groep N.V., Research Division

Right. And the other question is completely different. Belvédère, they announced the intention to sell brands, potentially including Sobieski. Do you know who might potentially buy it? And would that have any competitive impact on the Polish vodka market dynamics? Seems ubiquitous if Belvédère was to divest Sobieski brand.

William V. Carey

Yes. I mean, Andrzej, it's really hard to say who would buy it. I don't -- we're obviously not in the process. I -- it's a very tight-knit process. I have asked around. There's very limited information of who's looking at this in terms of a serious nature. And of course, everybody took the perspective, but who's actually looking at this in a serious nature, I don't -- I can't really comment. If you need more information get to the French banker who's representing them on the sale process.

Andrzej Kasperek - UniCredit Research

Right. But Sobieski brand in Poland, it's not as dynamic as the Krupnik, right? It's stable. So it's -- so I would think it's constantly...

William V. Carey

No. It's down maybe 40%, Andrzej. It's hurt a lot. Yes, it's really down a lot over the last couple of years. It's -- hasn't done well at all. Your main [indiscernible] Krupnik, Krupnik and Krupnik.

Operator

And that does conclude our question-and-answer session for today. I would like to turn the call back over to Mr. Archbold for any additional or closing remarks.

James Archbold

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

Operator

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

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