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Central European Distribution Corporation (NASDAQ:CEDC)

Q2 2008 Earnings Call Transcript

August 5, 2008 8:30 am ET

Executives

James Archbold – VP of IR and Corporate Secretary

William Carey – President, CEO and Chairman

Chris Biedermann – CFO

Analysts

Doug Lane – Jefferies & Co.

Bartek Paslov [ph] – Oak Hill Advisors

Amy Greene – Avondale Partners

Alberma Nair [ph] – Fortis Investments

David Crogan [ph]

David Kadarauch – Wood & Co.

Operator

Good day, and welcome to the CEDC second quarter 2008 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.

James Archbold

Thank you. I'd like to welcome everyone today to CEDC's second quarter 2008 earnings conference call. Joining me this morning are William Carey, our President, CEO and Chairman of CEDC, 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, August 5th 2008. The online replay will be available shortly after the conclusion of the call. You may also view a copy of yesterday's press release on our Web site.

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 Reform Act of 1995. Without limiting the foregoing discussions, the forecasts, estimates, targets, schedules, plans, beliefs, expectations, and the like are intended to identify forward-looking statements.

These forward-looking statements, which are based on management's current beliefs and assumptions and current information known to management, involve known and unknown risks and uncertainties and other factors that may cause actual results, performance, or achievements to differ materially from any future results, performance, or achievements, express 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 yesterday and the Form 10-Q to be filed with the Securities and Exchange Commission by August 11. CEDC is under no duty and undertakes no obligations 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 Carey

Thank you, Jim. I would like to welcome everyone to our second quarter CEDC's earnings call. As typical what we do in this call is first like to take you through maybe an outline what will be covered in the call and then get into the meet some of the numbers and then looking at some of the opportunities. But, first of all, we will talk a little bit about the economy in terms of Poland and Russia what we see going on also with the currency, get it to the P&L, I like Chris explain – Chris Biedermann, our CFO explain some of the casual financing and some points on the balance sheet, and then get into some of the recent developments especially Russian Alcohol opportunities yet that we see here in Poland and the region, and then get into a little bit more discussion on Parliament and Whitehall and then finish it off with just to highlight the guidance increase that we put out last night in the press release.

But we start off the call and getting into a little bit of the economy, first in Poland and then Russia. Poland is still projected around 5% GDP growth for 2008, pretty much in line with last quarter, inflation is around 4% to 4.5% projected for 2008 also for Poland. But, generally seeing how that really change a lot within the – from the last quarter call.

In terms of Russia, still projecting around 8% to 9% GDP growth and inflation is currently running around 11.5%, projection is somewhere in the neighborhood of 11% to 12.5%, somewhere in the neighborhood for the full year of 2008. As you have been reading, the government has been very active in trying and maintain inflation, and certainly, from indications at least speaking to some of the bank analysts is what we are seeing is a probably that certainly could bode well for continued strong Ruble currency.

What we see in both markets also is continued wage pressure in both markets which has certainly continued to drive the consumer demand for trading up, but we continue to see in Poland and in Russia, of course with the higher GDP growth of Russia, certainly trade-up opportunities are higher that also we are seeing coming through with the pricing of value over volume which we get to a little bit later, which certainly be the aspect of bode well for a strong currency.

The zloty has continued to appreciate around 5% of the second quarter, and another 2% so far year quarter to-date this third quarter. The Rubles are relatively flat this quarter, third quarter, and maybe only about a 1% appreciation in the second quarter, but relatively up flat to the dollar and the euro.

What we are also seeing from the stronger currency in Poland, as we mentioned last time, but it's been accelerating a bit. It is the slowdown in the U.K. as well as in Ireland and what we see is with the growth in Poland and the strong currency we see people coming back, as you know, there was a map exited, so closed to 2 million people who left Poland over the last 24 months which we start to see now a larger amount of people coming back into Poland to find work in a certainly more dynamic economy which is going on here than in the west.

If we look at the – getting into the sales, as reported in the press release been a 57% increase in the total sales number, which of course broken out between acquisitions, currency and organic. If you look at the organic base in Poland, we had a mid-to-single digit of about 5.5% organic increase for Poland in the second quarter, which was pretty much in line with the previous quarter.

We saw continued strong growth of our key Vodka brands in Poland led by our top premium by our highest value for the Bols, and what we saw was that the continuing drop in the economy sector, the economy Vodka sector as people continue to trade out the economy sector into mainstream of premium which we continue to see quarter after quarter the same trend in Poland and actually the same trend happening in Russia as well.

We see continued strong import growth trends here in Poland over 40% growth again in the quarter for our import portfolio, and our import share has now grown from 12% in the fourth quarter last year, our total revenue in Poland to 13% in the first quarter, and it grew to 14% in our total overall sales mix in Poland in the second quarter, and over 20% in the gross margin aspect. Overall, we see continued strong dynamics coming out of Poland.

If we turn our attention to Parliament, again, the numbers I've given you of course is the new acquisitions coming into our business, but if you look at the true organic growth coming out of these businesses, Parliament and Whitehall, we saw Parliament up 24% in volume, 33% in value, this is again pure organic growth, has continued to outperform the subpremium category, and we have been very pleased to see the continued development of the Parliament as the number one subpremium brand in Russia, and probably number six to seven top selling brand in Russia today.

We move to Whitehall in terms of the revenue side, Whitehall has a 26% growth in the volume, 34% in value. Again, the pricing opportunities in Russia are still quite robust as you can see from those numbers, and again is led by the strong performance of the Moet Hennessy portfolio.

I think you had a chance last week or the week before our Moet Hennessy, certainly, they cited Russia and China as their two key growth driver that they see coming out of their business, and certainly that's in line with what we see within the business model in Russia as well, and also of (inaudible) strong growth again coming out to wine segment from the Whitehall portfolio. Whitehall, as you know, we closed on May 23rd, so we have just over a month really of revenue. So it will be good to see a full first – full quarter of revenue and margin and profits coming in the third quarter.

We turn your attention to the margins. As you saw from the press release we have the 20.7% margin a year ago, growing to 24.6% this quarter, again, that was mainly led by the inclusion of Parliament and Whitehall into our consolidated numbers. Parliament, you are working on a margin of around 55 to 57% gross margin, and Whitehall around 36 or 38%. So, again, very accretive to our current margin.

Also, what we are seeing with the strong currency, also we are seeing beer pricing continue to come down as reported last quarter, we have around 10% of reduction as beer pricing in Poland, what we are seeing now that's closer to 12% in the second quarter, and we see continued downward pressure again in the third quarter. It's been a very good harvest so far, but quite wet, so again, we're anticipating quite good year in terms of spirit pricing.

Also with the strong import growth of the strong currency, again, the margins on the import are certainly reflecting in our overall gross margin expansion, and we start to see – and if you look at our third and fourth quarter, where we see margins going from the 24.6, what we will see is moving up to around to 27, 28% gross margin in the third and fourth quarter with the full year coming out in the mid 25% range.

If we turn your attention to SG&A, SG&A decreased as a percent of sales to 14.5%, as is does include again the Parliament and the Whitehall business which does operate on a higher SG&A as a percentage of sales than does our distribution business in Poland. But it's very similar to our production business in Poland in terms of the percentage of SG&A, there is nothing really unusual coming out in the SG&A percentage.

The polish business was up about a half percent compared to a year ago, mainly driven from option expense as the share price increase, the volatility increase, with the accounting rules you obviously the option expense is certainly higher as well as some transport and wage increases. But overall, costs are well under control.

And if we look out in terms of the third and fourth quarter, as we start to see bigger pickup in sales, especially the fourth quarter, this percentage of 14.5, you will start to see the drop by a minimum of 100 basis points as we move forward in the next two quarters.

Fourth is being the operating profit, obviously, with the strong sales and margin accretion, from Russia plus continued good solid growth in Poland, and continued strong currency, we had a 70% growth in our operating profit compared to a year ago.

And as we move into the last two quarters, we are going to see the operating profit increased by another 200 to 300 basis points, accordingly in the third quarter, around 200 in the fourth quarter, around 300 basis points to where we are today in the second quarter. And this operating profit does not include the JV income because within the Whitehall company, there is a joint venture with Moet Hennessy and that joint venture income is recognized recorded in other income below operating profit.

I will now turn it over to Chris Biedermann. He will take you through some of the financial highlights.

Chris Biedermann

Thanks. Looking at our P&L below operating profit, starting the interest expense, net interest expense 15.2 million increase of a prior year which was 8.3 million, and this is due against the additional debt we have, we took on at the end of Q2 '07 for Polmos Bialystok minority buyout plus the end of March, the 310 million of debt related to our Parliament and Whitehall acquisition which we will get into a bit more about later.

Looking at other financial income of 32 million, this is primarily unrealized noncash FX gain. And as we discussed in prior calls, this FX reflects the movement, an exchange rate between the zloty and the euro on our senior secured notes and the dollar and the zloty on a convertible note, as this debt has went down to our Polish operating company. Q2 represents a larger amount that we paid is historically recorded and is driven by the fact now we not only have the 250 million euros of debt revalue, we also have the 310 million convertible notes that are revalued.

Looking at our tax rate has moved to approximately 21% from the 19% last year, and this is due to the inclusion of Russian businesses where the effective tax rate in the 24% to 25% range as compared to 19% in Poland. And also below our costs before tax is that 902,000 which approximately one month of equity earnings related to our proportional share of the Moet Hennessy JV earnings as part of the Whitehall group.

And as Bill mentioned before, although the majority of the Whitehall group is fully consolidated, part of this group is a joint venture with MH, and this piece is accounted for using equity method.

Looking down on a GAAP basis, our net income was $46.8 million compared to net income last year of $19.9 million. However, taking out the noncash FX, other noncash and nonrecurring items, on a comparable basis, our net income was $24.3 million for the quarter, or $0.56 per fully diluted share, compared to $13.7 million, or $0.34 per fully diluted share, which reflects a 65% increase in a fully diluted share on a comparable basis. And that's again reflects the strong growth both in our underlying business plus the accretive impact of our recent investments into Russia.

Moving to cash flow statement, our net cash provided by operating activities for the six months was 50.1 million in '08 versus 20 million for the prior year, and is it driven by a growth in business as well as moving some working capital. Moving to working capital balances contributed 11.2 million in '08 as compared to utilizing 1.5 million in '07.

Our cash for investing activities was primarily driven by the two acquisitions we completed, Parliament in March, and Whitehall in May. The net cash outflows to these two acquisitions were 165 million for Parliament and 200 million for Whitehall. These acquisitions were financed through the issuance of the 310 million five years senior convertible notes for the 3% coupon, and principal payment on March 2013 as well as the $50 million bank facility.

In addition to the proceeds, there is two debt issuances including in our cash flow from financing activities is net inflow of 233 million. This represents the net proceeds from our equity offering we completed at the end of June. These proceeds plus additional bank facility and cash were used to fully fund our investment in the Russian Alcohol Group which complete on June '09.

This investment includes the purchase of a 42% our initial stake in Russian Alcohol plus the purchase of convertible notes. Our investment in Russia Alcohol Group will be accounted for equity investment started in Q3. And Bill will get into a bit more on the Russian Alcohol Group bit later.

Finally, looking down to net debt to EBITDA on a trailing 12-month basis is 3.53 times, again, we didn't have a full quarter earnings in Whitehall group, only about a month. On a pro forma basis we're well in line in our target range of 3 to 3.5 times. Our EBITDA interest coverage was 3.06, the quarter up were 2.17 in the prior quarter. Again, I think another strong quarter both top to bottom line cash flow results.

Having said that, I'll turn it back over to Bill for his further overview of current activity.

William Carey

Thanks, Chris. We discuss a little bit on the opportunities we see here in Poland and the region here, and then we look a little bit on to Russia. First is, as you know, Pronova successful in its BNS [ph] acquisition which was closed recently, and one of the European antitrust commitment is that they have to sell their Gin in Poland and the Gin having a 50% market share certainly is the leading Gin in Poland and certainly we will be one of the bidders as they put it on the market in the next – for this next half of year. I think they have to sell it by – I think they have six months to get rid of it.

We believe there is also some regional assets of Pronova that they could be looking to dispose as you know they made a commitment – well, they made a statement anyway not a commitment that they would like to dispose around a billion euro in terms of brands. So, certainly we believe there is other region will have assets that will become available which certainly we will take an active look at within the region of Poland or Czech Republic.

Also, those of you follow that the spirit market, our biggest competitor in Poland is 16:28 Group has recently got into bankruptcy proceedings. So, we also believe that – we believe that taking market share gains in Poland were eventual potential brand disposal that the company may do, it could be very interesting to see what happens and certainly we look to take full advantage of the situation in terms of trying to grab additional market share.

If we turn your attention over to Parliament, give the update as we close the acquisition back in March, the integration continues on schedule. We have put in a new financial director as of May – beginning of May also, two controllers in terms of U.S. GAAP experience, consolidation experience, budget controlling, also a new marketing director from Russia's Standards, who also worked extensively with Remy, Grant's, and Jagermeister who knows the import market very well in Russia, as we look to expand the part of that portfolio as well as a new director of human resource.

So, we are moving ahead with some of the integration of our standards and certainly that we have also realized quite a bit of purchase synergies already within the company in terms of capital label, in terms of utilizing our Polish purchasing power and then purchasing power to combine, and getting much better prices on capital labels.

Also that we have streamlined a German operations that they had in Germany, went from loss making to currently will be generating around 500 million – or 500,000 of operating profit coming out of German market. Before it was well over a million in losses. Also we were certainly utilizing best practices because our production facilities in Poland are very similar to what Parliament has, so certainly using best practices between the two companies and to really to streamline the better operational company.

Also, we have lined up some major import brands to start in the fourth quarter 2008, and we generally been very pleased as I said before with the Parliament brand continue to outperform the market. So, things remained probably better than expected in the Parliament business.

Moving on to the Whitehall, Whitehall we closed on May 23rd as I said earlier it was a 49.9% stake in terms of voting stake, and a 75% economic stake. We had – we have already started an initial discussions to bring other import brands into the Whitehall import company as well as we are currently looking at potential sale synergies between the Whitehall company and the Parliament company as we believe that the Parliament distribution reach is a greater than Whitehall, there could be potential certainly a sale synergies that we could realize there.

Well, overall, the portfolio of premium spirits of wine continue to attract extremely well. And again, we just had the company for a month until the end of June and we look forward to working with the Mark Kaouffman who is leading the company in terms of improving its performance.

We move on to Russian Alcohol. This is an investment that we closed on July 9th with a 42% investment with Lion Capital taking the other 58% stake, which is Lion Capital, for those of you don't know is one of the leading private equity firms in Europe in terms of consumer. They own already one of the leading juice companies in Russia.

The consumer sector is led by Javier Ferran who is a former CEO of Bacardi, who worked at the Bacardi company for over 20 years, and was the CEO when he eventually acquired Grey Goose brand from Sidney Frank and we have been working very hard with Javier and his team to again to try to realize best practices coming out of the Russian Alcohol and Parliament business, as many things are overlapping in terms of operating structures.

The Russian Alcohol business is the largest vodka company in Russia. It's grown from an organic growth from 6% share of the market to over 10% share today, operating one of the largest vodka market – operating in the largest vodka market in the world. Its sales from January through June was up over 45% in volume, again it's tremendous performance from being the leader in the market to grow over 45% in volume and over 55% in value. It operates with only seven brands really, three to four vodka brands, just a few long drink brand – main brand, for the salesmen have lot of potential to sell to sell more products through its portfolio.

And one of its advantages has in the market play is certainly its sales structure. The company has 1400 salesmen throughout the country. It has exclusive sales team with almost all of the wholesalers have been worked with throughout the industry and because it's a very fragmented market Russia, the necessity to have volume and having sales force penetration is a tremendous benefit versus Parliament we have only around 400 salesmen.

So, strongly their penetration is far deeper than we are currently achieving with Parliament. I think that's one of the reasons why it gets tremendous success within the volume and value growth numbers.

Also, as you know, advertising is illegal in Russia and in Poland. So, again the benefit of having the sales force platform and having the ability to leverage our relationship in the trade with the best performing brand that they have in the market play by having a number one brand in the market in Green Mark, gives them the tremendous advantage.

Also, one of the key advantages in Russia is to limit logistics costs. The company has now almost finished an investment up in Siberia, up in Nova Sevier, which is a new production site, the Greenfield production site which should be coming on line in the next month or two. And this will give the ability again to help reduce logistics costs in terms of transporting products across the Europe which is very expensive. So, again, these are also opportunities that we can leverage with Parliament and look at opportunities that we can sell synergies with the Parliament business.

We are currently – will resume discussion after the holiday period with the Lion Capital and Javier and his team to start to see what synergies that we can bring out of the two businesses. The company is extremely well-financed. Its net debt to equity is less than 2.5 times. So it's certainly a low leverage within the company.

So, we are – we see tremendous opportunity as we move forward and looking at other opportunities in the marketplace to acquire brands not necessary production side, but to acquire brands in Russia or Ukraine, because you know, Ukraine is stopping its advertising ban or its advertising permission is stopping at the end of this year as moving very similar to the Russian and the Polish market.

So the opportunity to acquire brands in Ukraine to move them into this sales and production platform that we have put together in Russia with the Parliament and Russian Alcohol really is a tremendous opportunity. Not only in vodka, but also brandy, Russia's one of the largest brandy markets in the world. Certainly, we don't have any brandy today in neither company to serving us an opportunity as well.

But, Ukrainian market sells very well in Russia. Green Mark is one of the top performing brands in Ukraine. It's very good crossover synergies between the two countries in terms of vodka. And we believe that there are some good opportunities to look at across synergies of sales, and production synergies between Russia, Ukraine.

And again, this would also require to discussions with Russian Alcohol with the Lion Capital, to see if we can utilize the sales force because the 58% that we don't own in Russian Alcohol, the first time we have the calls of business is from the audited results of 2009 based of the EBITDA audit of 2009.

We are looking at February, March, for the first time we'd be able to call the business based on the preceding year valuation. So, obviously, any business we bring to Lion, we certainly would like to discuss a new multiple, because we already have a pre-agreed multiple on their '09 business performance. So any business that we do bring them we certainly would like to negotiate a different multiple that is currently on the table for the current business. So that's something that we believe that Lion is very open to.

So we see really a lot of opportunity in terms of looking at potential synergies initially. At the same time, we already start planning for synergies between Parliament and Russian Alcohol post the spring of 2010 which we would expect to call the business a 58%. So, we're really valued, we are the big number of synergies with counter petition.

So, really to summarize it was another strong quarter that we put forward, not only Poland, but also the addition of the Russian businesses, and that was really the main driver behind the racing of guidance which we saw we raised from a mid point of 1.62 billion in revenue, to a mid point of 1.73 billion in revenue, and EPS, diluted EPS accretion from around 272 EPS number to a mid point to a 285 around $0.13 increase in terms of diluted EPS accretion for 2008.

For 2009, we like to see how the Russian Alcohol business continues to perform as well as given the first full quarter of Whitehall and see how the business performs in general, we will be coming out with the revised guidance in the fall this year once we get a little more clarity on the sort of business that we have invested in Russia.

I now open the floor to questions, and thank you very much.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Doug Lane, Jefferies & Co.

Doug Lane – Jefferies & Co.

Yes, hi, Bill, hi, Chris.

William Carey

Hi, Doug.

Chris Biedermann

Hi, Doug.

Doug Lane – Jefferies & Co.

Quick question on the Pronova's Gin business in Poland. About how big a business is that, Bill?

William Carey

We're looking at around 100,000 to 130,000 cases. It's not tremendous, but it's a nice add-on for us.

Doug Lane – Jefferies & Co.

Right. Got it. And what's the word about Belvedere situation, what are the odds on Belvedere working through bankruptcy and coming out of the other side intact versus partial or complete sale of the company?

William Carey

It's really hard to say, Doug. I think it's better you ask Belvedere, but with their debt level today, with a very little operating profit and debt levels of almost $900 million, it's – and I think a lot of credibility loss in the markets with financial bond holders and banks and so forth, I think it will be difficult for them to come out of it.

Doug Lane – Jefferies & Co.

That's helpful. And lastly, can you talk about the trading environment in Russia, the stock market has taken a pretty big hit in the last couple of months here, and I wonder if that's impacted either the business environment or the consumer spending environment with regards to your business?

William Carey

Yes. I think some of the risk premium, Russia has been and half by the recent publicity that you have seen in the press I think again, that's more from commodity, energy, and media, we don't see the same risk premium – or the risk in the consumer sector. We continue to see the consumer in the growth sector, retail, continue to perform quite strongly, we continue to see trade up, continue to see decline economy sector trading up as you can see from the numbers put out by Russian Alcohol. I just don't see it. I talked to other companies there, I just don't see that type of slowdown in the consumer sector.

Doug Lane – Jefferies & Co.

Thank you.

Operator

And next we will hear from Bartek Paslov [ph], Oak Hill Advisors.

Bartek Paslov – Oak Hill Advisors

Hello, good afternoon. Just a follow-up question to the previous one. Are you seeing any weakness on your competitor side at the moment (inaudible)? Are you really taking advantage of that at the moment or are you just thinking about the possibility in the future?

William Carey

Yes. I think that we just announced this two or three weeks ago, so I think we need to wait and see how all those plays out. They have six months under the bankruptcy proceedings to see how things work out for themselves. I don't think we are going to see anything short-term, this is more medium-term perspective, so maybe there could be some brand assets for sale, or short-term, again, I think it will be better off to ask Belvedere on how they look to get out of the situation or the bondholders who may be no more, but…

Bartek Paslov – Oak Hill Advisors

Absolutely. And would you not say this as a competition issue given that to get the controls the 70%, 71% of the market in Poland?

William Carey

No, no, this wouldn't be an asset purchase of the company. We would – I’m sure they can look at different brands for disposal. Obviously, with our market share we – there is a limit of 40% for acquisition. You could pick up a few brands obviously you would not be able to buy the company now.

Bartek Paslov – Oak Hill Advisors

Thank you.

Operator

Our next question comes from Amy Greene of Avondale Partners.

Amy Greene – Avondale Partners

Bill, you mentioned for now, having assets in Czechoslovakia, or in Czech Republic, could you give us a little background on what the size or opportunity in that market it looks like?

William Carey

Again, it's better to ask Pronova, this is just my feeling is that what we will hear in the marketplace with the amount of asset of full they want to have is that we have heard some rumors of the better vodka brand in Czech Republic, that maybe could come on to the block, are going to put out anything publicly from Pronova, is just what we hear in the market.

Amy Greene – Avondale Partners

Talking about the margins in raw materials, have you – the storage facilities that you guys had been building over the past couple of quarters, are those finished, are you able to utilize those in kind of lock-in some of the beneficial grain pricing in Poland?

William Carey

Yes. We have been locking in beneficial grain pricing, we continue to lock in a lower pricing as we speak and I think we will be well covered till the end of the year.

Amy Greene – Avondale Partners

And that you are able to store head grain that you kind of carry for how long?

William Carey

About six months.

Amy Greene – Avondale Partners

Thanks, guys.

William Carey

The storage sphere, not grain.

Amy Greene – Avondale Partners

Yes.

Operator

Alberma Nair [ph] from Fortis Investments has our next question.

Alberma Nair – Fortis Investments

Hi, guys. Good afternoon. I have a couple of questions. First question, I wondered if you can comment on the CapEx because I don't understand your investing activities (inaudible), the number it looks like (inaudible) for the six months of the year in investment in fixed assets, whereas in the first quarter, you have 9.3. So, can you–?

William Carey

It was typically gross up between investment and proceeds in the first quarter due to – actually due to the way we recorded a balance sheet (inaudible) which is corrected in Q2. So the Q2 number represents the full year number.

Alberma Nair – Fortis Investments

The full year number?

William Carey

The six months number. As in Q1, Q2, the two were grossed up, the investments and proceeds have finally grossed up as I said. It was recorded on the balance sheet and we picked it up. It was corrected in this quarter. So, if you look at now, the six months is the way it should be. The total corrective just a gross up of two lines.

Alberma Nair – Fortis Investments

But does include like (inaudible) loan number, what you spend in the…

William Carey

When compared to last year, last year, there was a significant investment for rectification facilities. Last year number which was completed and basically done in the Q4 (inaudible) this year.

Alberma Nair – Fortis Investments

So can you give us some kind of idea of what the full year number will look like, more like 2006 or in the beginning of this year, more like 2006?

Chris Biedermann

We're still guiding around 10 to million on full year CapEx. But plus – yes, plus we are beginning some investment in Parliament in terms of the plans which is a total investment about 15 million which will be spread over to next year too. The part that may begin to come in this year.

Alberma Nair – Fortis Investments

Good. My second question was getting precise comment on Russian Alcohol, did I answer it right that you said the first call baked for you for – what you don't already known in that company, it's February, March ’09?

William Carey

Yes, it will be baked. After the audited numbers, we have a call window, after the audited numbers in '09, you're looking probably February, March, we have a 60-day if I believe a call window which we have the right to call the 58% based on a pre-agreed multiple for the '09 audited EBITDA numbers?

Alberma Nair – Fortis Investments

Okay, great. And my last question I would like to have a feel on your policy on acquisition because it isn't doing that well. From many transactions here and (inaudible) good, the integration is really good and (inaudible), but I am quite surprised by the pace of acquisition and in my opinion that at some point you need some more time to digest some deals or actually can you give a feel of how do you keep up with such a strong pace of growth and how you could keep track of your current business while at the same time any new transactions?

William Carey

Yes. I think we have grown the company from organic growth acquisition growth for the past 10 to 12 years, and we have been very prudent of how we grow the company in terms of being able to manage the risk profile as well. I think how we set up the businesses obviously, part of that is the only company we have management control over in Russia, which we have been working very hard. On that integration work which I mentioned a bit on. We have a very good team we believe in Parliament to realize this project. In terms of Whitehall or Russian Alcohol we don't have management control. We do feel on the board we are involved in certain decisions. But we need to be honest, it's not requiring a tremendous amount of our time to run these businesses as we are not in control of day-to-day operations. The Polish business has been set up for many years with a very good quality team here. So again it's yes, we need to manage that business here, but to be honest, it's the structure of the 42% Russian Alcohol is also done, also to enable us to look at the sense without having our time we didn't take a majority control of Russian Alcohol. A few months ago, this would have really put 24 months of work of our team in a full blown work in terms of managing this 5,000 person operation. So I think the – of course, we are paying for the multiple '09, but it gives us more flexibility also to plan for synergies, and I think execute much better from any execution risk.

Alberma Nair – Fortis Investments

And as you look for more opportunities like the one you discussed with (inaudible) portfolio that kind of acquired, do you feel like the debt in equity market still has opened for you, or they were – this year, (inaudible) the right issue, how do you feel the (inaudible) market responds to the growth strategy of CEDC?

William Carey

No, I think, in general, that our (inaudible) are – have been using around 100, so, generally, what we see is with the equity offer, we did with Russian Alcohol that we kept a quite balanced approach in terms of keeping a balance sheet, in terms that 3, 3.5 net debt to EBITDA as we move forward for the year, the number should move below 3, plus generating good amount of cash. So, again, we believe by keeping a balanced approach of the balance sheet that debt markets are open, plus the cash generation that we are using to take advantages of some of these very, we feel the accretive opportunities and the strategic opportunities that we see within the region today. So it is a concern for us, but we don't see an issue today with our balance sheet of smaller opportunities to and take advantage of.

Operator

(inaudible) has our next question.

David Crogan

Good afternoon – good morning rather. It's actually David Crogan [ph] speaking. I just had one question. We have results from on the beer side from Carlsberg, the BBH business. And I just thought it was interesting the price and mix but they gave 10% on price and 6% on mix. When we think about your business in Russia, on the production side in Russian Alcohol, is it possible to give a bit more clarity about sort of expectations for price other than sort of driven by inflation, especially on mix side, and the influence of excise taxes on that?

William Carey

Yes. Right now, that the value, David, within the business as I mentioned in Whitehall, Parliament and Russian Alcohol, is all between 8% and 10% in terms of pricing. What we are seeing in the first half of this year, so, quite consistent probably the what Carlsberg is saying. In terms of the mix within the Russian Alcohol business is that it's a – that growth is mainly led from the Green Mark brand, and the (inaudible) that the subpremium brand they have which is the third in the market behind Parliament and one other brand, (inaudible) second, but growing at their growth rate of over 100%. So, the growth is coming from where the profit is within that business model. The long drinks they have and the economies business they have is having the slowest growth which is the lowest margin business. So we do see very good mix coming out of that business of moving forward. And excise, as stated before, it's (inaudible) Russia at about 7% annual, it's a three-year plan that government sets out. I think this is the third year if I remember correctly. The third year of the 7% fixed increase, we don't know next year yet, they will come out with anything publicly yet of the excise situation – what they want to look at next year for excise.

David Crogan

In terms of compensating for inflation, prices or mix, you feel it should continue to be in excess of underlying cost inflation?

William Carey

Yes, absolutely.

David Crogan

Thank you.

Operator

Next we will hear from David Kadarauch of Wood & Co.

David Kadarauch – Wood & Co.

Hi, good morning. Bill, and Chris, I'm just looking for a 57% split out on the sales growth between currency organic and acquisition. Can you give us that?

William Carey

I think, David, that will be coming with the Q when we will be filing on. Yes. That we will have second reporting in the Q, we will break out sales revenue and operating profit for Poland, Russia, Hungary, and central overhead. There is going to be a new layout because we have gone to the segment reporting. So, we will be able to give a better look at the different…

David Kadarauch – Wood & Co.

And the Q comes what later today or something, is that right?

Chris Biedermann

No, it will be on Monday, we file Monday.

David Kadarauch – Wood & Co.

Monday. Great. Thank you very much.

Operator

And we will take our final question from Doug Lane, Jefferies.

Doug Lane – Jefferies & Co.

Hi, Bill, real quick follow-up. Can you give us an update on the (inaudible) in the U.S. how is it doing versus expectations and any kind of time table when you expect it to be break even?

William Carey

Yes. Our (inaudible) was breakeven from certainly the beginning, Doug, we were going to four invest – behind the brand. As you know, with the U.S. slowdown, if you saw the results from Remi, from Pronova, to others, it was the U.S. Moet Hennessy, it wasn't very encouraging. The outlook of the U.S. market in terms of the spirit market (inaudible) 43:21 is no different, certainly, the $26, $27 price point is certainly not the most favorable price point today within the U.S. market but to market, but will still remain our 20,000 to 25,000 cases in the U.S. market, but to be honest, Doug, it is slow.

Doug Lane – Jefferies & Co.

Are you expanding it geographically? I think you and Chicago and New York…

William Carey

Yes, we are. That we are getting new markets in the U.S. all the time. We have also got a project with Gallo, we are exploring a project with Gallo at the moment of looking at Gallo, since we do great work with them here in the eastern Europe, they are looking to expand behind their new Gin and put out, new Amsterdam Gin they put out in the U.S. they are looking to put a bulk out in the U.S. as well, more in the mainstream subpremium category, the $15 to $20 price point and they would like to use us as their – as one of our brands as the main driver of that in the U.S. And as you know, Gallo probably has top four distribution in the U.S. with (inaudible) Coca Cola and Gallo being right up there as well. So, this is the project that that will start potentially next year, but certainly that's also an opportunity we see in the U.S. utilizing our relationship with Gallo as well.

Doug Lane – Jefferies & Co.

No question. Thank you.

Operator

Mr. Archbold, there appears to be no further questions at this time. I would like to turn the conference back over to you for any additional or closing comments.

James Archbold

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

Operator

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

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