Description
Filed with the SEC from June 14 to June 20:
Central European Distribution (CEDC)
Private investor and wines and spirits business consultant Mark Kaufman increased his stake in the alcoholic-beverage maker and distributor. He now has 7,517,549 shares (9.5%), after buying 100,000 on June 11 at $2.95 apiece.
BUSINESS OVERVIEW
Central European Distribution Corporation (“CEDC”), a Delaware corporation incorporated on September 4, 1997, and its subsidiaries (collectively referred to as “we,” “us,” “our,” or the “Company”) operate primarily in the alcohol beverage industry. We are one of the largest producers of vodka in the world and are Central and Eastern Europe’s largest integrated spirit beverages business, measured by total volume, with approximately 33.2 million nine-liter cases produced and distributed in 2011. Our business primarily involves the production and sale of our own spirit brands (principally vodka), and the importation on an exclusive basis of a wide variety of spirits, wines and beers. Our primary operations are conducted in Poland and Russia and we also have operations in Hungary and Ukraine. Through our Ukrainian operations that we opened in 2010, we import and sell our vodkas and we had an approximate 7% market share by the end of 2011. In Poland and Russia, we have six manufacturing facilities and a total work force of approximately 4,540 employees.
In Poland, we are one of the largest vodka producers with a brand portfolio that includes Absolwent , Żubrówka, Żubrówka Biała , Bols, Palace and Soplica brands, each of which we produce at our Polish distilleries. Żubrówka Biała , which we launched at the end of 2010,was one of the fastest growing brands in the Polish market during 2011 with a market share of 5.7% as of the end of 2011. We produce and sell vodkas primarily in three vodka sectors: premium, mainstream, and economy. One of our vodkas we produce in Poland is Royal , which was the top-selling vodka in Hungary during 2011 according to trade statistics.
In Russia, the world’s largest vodka market, trade statistics for 2011 show that we were the largest vodka producer in the country, that our Green Mark brand was the top-selling mainstream vodka in the country (and the fourth-largest vodka brand by volume in the world) and that our Parliament and Zhuravli brands were among top-selling sub-premium vodkas in the country.
Our brands in Poland and Russia are well-represented in all vodka sectors. Our production capacity in both countries gives us the ability to introduce new brands to both markets. The best recent examples are Żubrówka Biała , which we introduced in Poland in November of 2010, and Talka , which we introduced in Russia in July of 2011. We believe our ability to introduce new brands to market in an ever changing economic and consumer preference environment gives us a distinct advantage over most our competitors.
For the year ended December 31, 2011, our Polish and Russian operations accounted for 26.3% and 70.2% of our revenues respectively and, excluding impairment and certain unallocated corporate charges, 42.3 % and 51.2 % of our operating profit, respectively.
We are a leading importer of spirits and wines in Poland, Russia and Hungary, and we generally seek to develop a complete portfolio of premium imported wines and spirits in each of the markets we serve. In Poland we maintain exclusive import contracts for a number of internationally recognized brands, including Jim Beam Bourbon, Campari, Jägermeister, Remy Martin Cognac, Corona, Budweiser (Budvar), E&J Gallo wines , Carlo Rossi wines , Sutter Home wines , Metaxa Brandy, Sierra Tequila, Teacher’s Whisky, Cinzano, Old Smuggler, Grant’s Whisky and Concha y Toro wines. In Russia our import Portfolio includes E&J Gallo wines, Concha y Toro wines, Paul Masson wines, Jose Cuervo tequila and Great Valley brandy among others.
In addition to our operations in Poland, Russia, and Hungary we have a sales office in Ukraine and distribution agreements for our vodka brands in a number of key export markets including the United Kingdom, Ukraine, the Baltics and the CIS for Green Mark , Zhuravli , Parliament and Żubrówka , the United States, Japan, the United Kingdom, France for Żubrówka and many other Western European countries. In 2011, exports represented 11% of our sales by value.
Our Competitive Strengths as a Group
Leading Brand Portfolio in Poland, Russia and Hungary— In Poland, Russia and Hungary, we have a leading portfolio of domestic vodkas covering all key segments. In addition to our domestic vodka portfolio we have a complementary import portfolio of leading import wines and spirits. This combined portfolio gives us a distinct advantage in the market by allowing us to provide a full spectrum portfolio of top domestic and import brands.
Depth of market position in Poland — We are a leading producer and importer of alcoholic beverages in Poland. Our portfolio includes top-selling brands that we produce as well as brands that we import on an exclusive basis. Our broad range of products, including our own vodka brands as well as imported wine and spirit brands, allows us to address a wide range of consumer tastes and trends as well as wholesaler needs and provides us with a solid portfolio base. Additionally, we have the scope and ability to bring new products to market in a timely and cost efficient manner to meet the changing desires of our consumers.
Solid platform for further expansion in the fragmented Russian spirits market — In 2011, we were the largest vodka producer in Russia, producing approximately 16.6 million nine-liter cases. Our large portfolio of alcoholic beverages consists of our own brands, including Green Mark , which for 2011 was the top-selling mainstream vodka brand in Russia and the second largest vodka brand by volume in the world, Parliament and Zhuravli , one of the top-selling sub-premium vodka brands in Russia and imported products. These vodka and import brands are supported by a combined sales force of approximately 2,293 people. We believe our combined size and the geographic coverage of our sales force enable us to benefit from the ongoing consolidation in the Russian spirits market. Furthermore, we believe we have the necessary infrastructure to introduce new brands to the market place in the segments where consumer demand is strongest.
Our sales force in Russia includes people allocated to Exclusive Sales Teams, or ESTs. ESTs are employed by wholesalers that carry our vodka products but focus exclusively on the merchandising, marketing and sale of our portfolio. Because spirits advertising is heavily regulated in Russia, we believe that this structure provides us with meaningful marketing benefits as it allows us to maintain direct relationships with retailers and to ensure that our products receive prominent shelf space. Wholesalers who employ our ESTs are solely compensated through a rebate on purchases of our vodka brands. This arrangement enables us to maintain an expansive and exclusive sales force covering almost all regions of Russia with limited associated fixed overhead costs.
Attractive import platform for international spirit companies to market and sell products in Poland, Russia and Hungary — Our existing import platform, under which we are the exclusive importer of numerous brands of spirits and wines into each of our core markets, combined with our sales and marketing organizations in Poland, Russia and Hungary provide us with an opportunity to continue to expand our import portfolio. We believe we are well-positioned to serve the needs of other international spirit companies that wish to sell products in these markets.
Business Strategies
Capitalize on the Russian market consolidation — The Russian vodka market is currently fragmented, and we believe we will be able to take market share from smaller competitors in the near and long-term. We estimate that the top five vodka producers in Russia accounted for estimated 55% of the total market share in 2011 as compared to 26% estimated in 2006. We believe, based on our experience of consolidation trends in Poland, that the combined market share of the top five vodka producers in Russia could increase from 55% to 70-80% in the next five years as the Russian market continues to consolidate. We intend to capitalize on our leading brand position, our breadth of portfolio, our ability to bring new brands to market and our expansive sales and distribution network to expand our market share in Russia.
Develop our portfolio of exclusive import brands— In addition to the development of our own brands, our strategy is to be the leading importer of wines and spirits in the markets where we operate. We have already developed an extensive wine and spirit import portfolio within Poland. In Russia, we intend to capitalize on the well-developed import platform and our sales and marketing strength by developing new import opportunities and capitalizing on the overall growth in imports. We also plan to utilize the platform we have developed in Ukraine for import wine and spirit opportunities.
Continue to focus on sales of our domestic and export brands and exclusive import brands — Within Poland we intend to continue our marketing efforts behind Ż ubrówka and Żubrówka Biała which we launched in November 2010, with further extensions planned for the Ż ubrówka family during 2012 and beyond. We will also continue to develop extension for our other vodka brands such as Soplica which was repackaged with new flavors during 2011. We are also in the process of completing an extensive program to develop new packaging and marketing programs for Bols and Absolwent vodka in our core markets. We also plan to introduce flavor extensions of our Soplica and Żubrówka brands.
Develop export opportunities for our vodka brands — We also intend to seek new export opportunities for our vodka brands, such as Żubrówka, Green Mark, Kauffman and Parliament , through new export package launches and product extensions. During 2011 we developed a new export structure within the group to leverage the portfolio strength of our brands to develop further export opportunities.
Recent Developments
Evaluation of Strategic Alternatives; Current Financial Condition
Over the past several months, the management of the Company, in consultation with the Board and with assistance of financial and legal advisors, has been reviewing the Company’s strategic alternatives in light of its upcoming financial obligations, in particular the Company’s 3.00% Convertible Senior Notes due 2013 (2013 Notes). The management of the Company has concluded that cash generated from operations, cash on hand and amounts expected to be available under existing credit facilities will not be sufficient to pay principal on the 2013 Notes, which is due and payable on March 15, 2013. This review has taken on added importance given the challenging market conditions and a difficult operating environment.
The Board and the management of the Company believe that all strategic alternatives should be evaluated, and is not ruling out any transaction that is in the best interests of stockholders. The Company and its advisors are working to develop various alternatives to address the 2013 obligation, including a strategic alliance with several potential investors, including Mr. Roustam Tariko and Russian Standard Corporation, other strategic investments, sale of certain assets, an exchange of the Convertible Notes and issuing equity. In the context of its evaluation of strategic alternatives, the Board continues to consider the letter from Mr. Tariko of Russian Standard Corporation (Russian Standard), dated February 1, 2012 proposing a “strategic alliance” whereby, among other things, Russian Standard would seek to convert a portion of its 3.00% Convertible Senior Notes due 2013 in exchange for common stock of the Company, obtain certain minority rights and board seats, possibly extend a backstop credit facility to the Company and possibly sell certain distribution and other rights to the Company. Although discussions are ongoing, no agreement has been reached. Moreover, there can be no assurance that any transaction or series of transactions will be completed with Russian Standard or any other third party. A failure to pay amounts owed under these convertible notes would constitute a default under those notes and the Company’s 9.125% Senior Secured Notes and 8.875% Senior Secured Notes, each due 2016, and other indebtedness. The Company’s cash flow forecasts include the assumption that certain credit and factoring facilities that are coming due in 2012 will be renewed to manage the working capital needs. Moreover, the Company had a net loss and significant impairment charges in 2011. The Company’s auditors’ report for the year ended December 31, 2011, is unqualified and includes an explanatory paragraph that certain matters raise a substantial doubt about the Company’s ability to continue as a going concern.
For additional information, see also “Risk Factors—Risks Relating to Our Indebtedness—We may not be able to make the required payments upon maturity of our Convertible Senior Notes due March 15, 2013, and our auditors have expressed a view that there is substantial doubt about the Company’s ability to continue as a going concern,” “—Our substantial debt could adversely affect our financial condition or results of operations and prevent us from fulfilling our obligations thereunder” and “—We require a significant amount of cash to service our indebtedness”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Company’s Future Liquidity and Capital Resources”, and Note 1 (Organization and Significant Accounting Policies—Liquidity) to our financial statements included in Item 8 of this annual report on Form 10-K.
Whitehall Group acquisition
On February 7, 2011, the Company entered into a definitive Share Sale and Purchase Agreement and Registration Rights Agreement. Pursuant to these agreements, we received the remainder of the economic and voting interests in the Whitehall Group that previously were not owned by us as well as the global intellectual property rights for the Kauffman Vodka brand. In exchange we paid total consideration of $93.2 million including $17.5 million for the intellectual property rights. The terms of the agreements included a share price indemnity given to Mark Kauffman which was settled in March 2011 through a payment by the Company of $0.7 million in cash and the issuance of 938,501 additional shares. As a result of this transaction, we acquired full voting and economic control of the Whitehall Group. The Whitehall Group is one of the leading importers and distributors of premium wines and spirits in Russia. Kauffman Vodka is one of the leading super-premium vodkas in Russia with a strong presence in top end restaurants and hotels and key accounts, as well as, it is exported to high-end customers in over 25 countries.
Industry Overview
Poland
The total net value of the alcoholic beverage market in Poland (including beer, wine and spirits) was estimated to be approximately $7 to $9 billion in 2011. Total sales value of alcoholic beverages at current prices decreased by approximately 1.3 % from December 2010 to December 2011. We believe that this decrease was due, for the most part, to the continued effects of the world-wide economic crisis. Poland fared better than most countries in the region, but was nevertheless affected. Beer and vodka account for approximately 88% of the value of sales of all alcoholic beverages.
Russia
Russia, with its official production of approximately 940 million liters in 2011, is by far the largest vodka market worldwide. The Russian vodka market is fragmented with, in our estimation, the top five producers having a combined volume market share of approximately 55% in 2011. This number is up from 2006 when the top five producers only had an estimated 26% market share. Further sector consolidation has been ongoing in recent years, with the potential to continue in the near term despite the market being down approximately 9% in 2011.We believe we are well-positioned to participate in the consolidation of the Russian vodka market in 2012 as we have the leading brands by volume and value in the mainstream and sub-premium categories together with a dedicated sales force and ESTs. In addition, the Russian government has put in place very restrictive policies on the advertising of spirits. We believe these policies make it difficult for any competitor to buy market share by out-spending its rivals.
We believe that a key factor that will impact the Russian vodka market will be the continued role of the Russian government in the form of further controls to reduce the black market as well as planned excise tax increases. On one hand the government has continued to develop policies to reduce the number of players who operate in the grey market. This was further evidenced in 2011 through the overall industry re-licensing process which left a number of producers and distributors unable to operate as their licenses were not renewed. We believe a continuation of this policy will be to the benefit of the larger legitimate vodka producers in the market including our Russian operations. At the same time, the government has taken steps to increase excise taxes which in turn will increase the shelf price of vodka in the market. For 2012, two excise tax increases are planned with the first 10% increase having occurred in January 2012 and a second 18% increase scheduled for July of 2012. This is compared to annual average historical increases of 9%-10% during the last five years. We expect that this trend of higher excise will continue for the next 2-3 years.
The Russian spirit market has also been impacted by higher spirit pricing, since the beginning of 2010, spirits prices in the market have increased by 92% which has impacted our production cost by $3.7 million in 2010 and $18.1 million in 2011. As the supply of spirit in Russia is generally controlled by a small number of producers and we purchase spirits primarily from a single source that effectively controls market pricing, we do not expect to see reductions in spirit pricing in the upcoming periods, and we may see further increases in spirit pricing. Additionally, as the majority of the spirit price increase in 2011 took place during the 2 nd half of the year, we expect the full year purchasing cost of spirit to be significantly impacted during 2012. We cannot assure you that we will be able to offset the effects of higher spirit prices or excise taxes through price or volume increases or whether the recent declines in the vodka market will impact our ability to do so.
We believe however, that producers who operate in higher priced segments of the markets will have less negative impact as a result of lower consumer demand from higher shelf prices as the excise tax is fixed per liter of spirit and thus the percent increase will impact higher priced brands less. Additionally, as the largest producer of vodka in Russia, we believe we have the purchasing power to obtain the most competitive spirit prices in the market. Therefore although prices may increase we believe that given our purchasing power we will have advantageous spirit pricing vis-Ă -vis some of our competitors. Our strategy over the last few years in Russia has been focused on the mainstream and sub-premium price points and we believe we have a well-placed vodka portfolio, together with higher priced import brands, to best weather these upcoming challenges.
Spirits
Vodka consumption dominates the Russian spirits market with over 90% market share. The Russian vodka market is generally divided into five segments based on quality and price: premium, sub-premium, mainstream, economy and cheap. In terms of value, the premium segment accounts for approximately 1.5% of total sales volume of vodka, while the sub-premium segment accounts for approximately 9.6% of total sales volume. The mainstream segment now represents 43.8% of total sales volume. Sales in the economy and cheap segment currently represent 45.2% of total sales volume. We believe the economy sector grew vis-Ă -vis the other sectors in 2011 as a result of the implementation of minimum pricing, as described above.
Vodka represented over 90% of the total Russian spirits market in 2011. The vodka market decreased approximately 3% in 2011 versus 2010, and we believe that the market will continue to see volume declines in the next few years. However as before, we believe the premiumization process should most benefit the mainstream and sub-premium brands, particularly in light of the planned excise tax increases and thus we would expect overall value in the market to grow. We believe we are well-positioned for this with the bestselling brands in both the sub-premium and mainstream sectors. In addition, with our current capacity and relatively little capitalization expense, we plan to introduce new brands to the market to capture sales in any sector that we believe will have the most dynamic growth potential.
The Russian vodka market is quite fragmented, with the top five producers only having an estimated 55% market share in 2011 as compared to an estimated 90% market share in Poland and an estimated 84% market share in the Ukraine. We believe that the Russian market will experience trends similar to those experienced in the Polish market and will continue to see further consolidation of the market as the retail infrastructure further consolidates and develops and the effects of the economic crisis stabilize and diminish. We believe that this consolidation post crisis will increase significantly over the next 3-5 years.
Wine
According to market data, Russia has relatively low wine consumption per capita (about 5.6 liters per year) . It is expected to grow at an estimated 3-4% annual growth rate during the period from 2012-2016.
Currently the fastest growing category in the Russian wine market is sparkling wine. In 2011, sparkling wine sales grew 7% by volume and 10% by value terms, according to Euromonitor. Despite the fact that domestic wines prevail on the market, the share of imported higher quality wines has been constantly growing. We believe we can benefit in the future from the growing Russian wine market through the import and distribution of high-value wines and the addition of new wines to our import and distribution portfolio in Russia. Through Whitehall, we import wines from Constellation and Concha y Toro among others.
CEO BACKGROUND
William V. Carey has served as Chairman, President and Chief Executive Officer of the Company since its inception in 1997. Mr. Carey began working for Carey Agri, a subsidiary of the Company, in 1990, and instituted and supervised the direct delivery system for CEDC’s nationwide expansion. Mr. Carey has 16 years experience heading distribution companies in Poland. Mr. Carey is a graduate of the University of Florida with a B.A. in economics. Mr. Carey led the rapid growth of the Company as the principal and driving force behind the acquisition strategy of the group, over a period of dramatic changes in Eastern Europe, the region in which we operate. We believe that Mr. Carey’s leadership skills, reputation and experience in our industry enable him to be both an effective Chairman of the board and CEO of our Company. Additionally, through his contacts in the industry and his experience managing and leading the Company, Mr. Carey has made, and we believe he will continue to make, invaluable contributions to the Company’s overall success.
David Bailey has been a director of the Company since December 2003. Mr. Bailey joined International Paper in 1968 and has held various levels of responsibility within that company including President IP Poland, and Managing Director Eastern Europe, including Russia. He was Chairman of the Board for OAO Svetogorsk (Russia), and Chairman of the Board for IP Kwidzyn (Poland). He retired from International Paper in 2008, and is currently serving as a consultant for their Russian joint venture and has opened a private strategic planning consulting business for Poland and Russia. In addition, he served on the board of directors for the American Chamber of Commerce in Poland for 9 years, is on the board of Litewska Children’s Hospital Foundation, United Way Poland, and was a member of the Polish Business Roundtable for 13 years. Mr. Bailey served in the United States Army and graduated with a Chemical Engineering Degree from Oregon State University. We believe that Mr. Bailey’s extensive experience with the operations and management of publicly traded companies, his skill in navigating the regulatory and competitive environments in Poland and Russia and his demonstrated willingness to further his education in the area of corporate governance, have made and will continue to make him a valuable asset as our Lead Director.
N. Scott Fine has been a director of the Company since January 2003, and was previously a director during 2001. Mr. Fine is an investment banker at Scarsdale Equities, a New York based investment-banking firm. Mr. Fine has been involved in corporate finance for over 25 years. Previously, Mr. Fine was an investment banker at Fine Equities, focusing on small- to medium-cap companies and managing high net worth individuals and small institutions. Mr. Fine co-managed the Company’s initial public offering. He has also worked on a series of transactions domestically and internationally in the healthcare and consumer products area. Mr. Fine currently sits on the Deans Advisory Board for The University of Connecticut’s Neag School of Education at Storrs, Connecticut. We believe that Mr. Fine’s relationships within the financial community in New York and around the world, as well as his significant experience with equity and debt offerings, have made and will continue to make him a valuable contributor to the board.
Marek E. Forysiak has been a director of the Company since April 2009. Mr. Forysiak is the Chief Executive Officer (“CEO”) of AKB Russky Slaviansky Bank, a full service commercial bank based in Moscow, Russia. Prior to that, Mr. Forysiak was the CEO and then Vice Chairman of Renaissance Capital Consumer Finance Group, part of the Renaissance Capital Group also based in Moscow, Russia. Mr. Forysiak’s international based career spans over 20 years, holding senior executive roles previously at both JP Morgan Chase and American International Group. Mr. Forysiak is also a retired Combat Veteran of the U.S. Army Reserves, with numerous awards including the Bronze Star. He is a graduate of Montclair State University and Columbia University Executive Management Program. We believe that Mr. Forysiak’s experience with high-level finance and banking in Russia and Eastern Europe with executive responsibilities at both Russky Slaviansky Bank and Renaissance Capital Consumer Finance Group, has enabled and will continue to enable him to provide insight into ways in which the Company can continue to fund its growth.
Robert P. Koch has been a director of the Company since February 2004. Mr. Koch is President and Chief Executive Officer of the Wine Institute. He has close to 20 years experience in the alcohol beverage industry specializing in domestic and international public policy, international marketing and regulatory affairs. In his current capacity, he maintains close working relationships with key members of the alcohol beverage community. His presence in the United States, a growing export market for the Company, and his many contacts in our industry, have benefited and will continue to benefit the Company as we seek to grow and create new business relationships.
Markus Sieger has been a director of the Company since August 2005 and holds a degree in Economics from the University of Applied Sciences for Business and Administration Zurich. He started his career in 1981 with Zurich Insurance Group where he specialized in information systems and organizational projects. In 1994, he joined fincoord and is today managing partner of ffc fincoord fincoord finance coordinators ag and the Chairman and CEO of iscoord ag. He has been a director of both public and private companies, in the United States, the European Union and Switzerland. We believe that Mr. Sieger’s regional experience, as evidenced by his serving as a senior advisor and a director for a number of other companies based in Central and Eastern Europe, as well as his significant transactional and entrepreneurial experience have allowed him and will continue to allow him to make valuable contributions as a member of our board.
William S. Shanahan was the President of Colgate-Palmolive Company, a global consumer products company, from 1992 to September 2005. Previously, he served as Colgate-Palmolive’s Chief Operating Officer, a position he held from 1989 until his appointment as President in 1992. While at Colgate-Palmolive, Mr. Shanahan worked in senior management positions for a number of Colgate-Palmolive’s foreign subsidiaries, and from 1978 to 1980 was the Chief Executive Officer of Helena Rubinstein, Inc., a global cosmetics company (then a Colgate subsidiary). From 1980 to 1981 Mr. Shanahan ran Colgate Palmolive’s Latin American division and from 1982 to 1984 he was the Group Vice President of Europe and Africa. Mr. Shanahan also has served on the board of directors of several publicly-traded companies, including Diageo plc. from 1999 to 2009 and Life Technologies, Inc. from 2008 to 2010. Mr. Shanahan also serves as the Chairman of the compensation committee of the board of directors of Visa Inc., and is a Management Advisor to ValueAct Capital LLC, a privately owned hedge fund based in San Francisco. Mr. Shanahan holds a Bachelor of Arts degree from Dartmouth College and has done graduate studies in Japan and the Philippines. We believe that Mr. Shanahan provides great value to our board, through his vast experience as a director of other companies, familiarity with a board’s role in setting compensation and knowledge and insight within our industry.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
The Company is one of the world’s largest vodka producers and Central and Eastern Europe’s largest integrated spirit beverages business with its primary operations in Poland, Russia and Hungary. During 2011, the Company continued its strategy of integrating the business in Russia following the buyout of the remaining stake in Whitehall in the first quarter of 2011 where the Company took full economic and controlling ownership of the business. In addition, the Company continued to focus on developing sales volumes in its key markets of Poland and Russia. Overall, both the Polish and Russian vodka markets continued to see an overall market decline, however in Poland the Company was able to see year on year domestic volume growth for year ending December 31, 2011 of 33% primarily due to the continued success of its recently launched Żubrówka Biała brand. Additionally the Company also began to show progress in the higher margin flavored segment with a successful launch of Jeżówka and the re-launch of Soplica which grew by 27% during the fourth quarter of 2011. Total Russian volumes were down which was driven by lower domestic volumes partially offset by higher export volumes. On the domestic front, sales volumes for the year 2011 in Russia were down by 18% as compared to 2010. This was due to factors including an overall weak spirit market and the continued impact of the wholesaler relicensing process during the first three quarters. Finally spirit, which is the main ingredient in vodka production, continued to see higher price levels as compared to 2010, which together with higher levels of market investment resulted in a contraction of gross margins as compared to the prior year and impacted total gross margins by $36.7 million in 2011 as compared to the prior year.
Recent Developments
Evaluation of Strategic Alternatives; Current Financial Condition
Over the past several months, the management of the Company, in consultation with the Board and with assistance of financial and legal advisors, has been reviewing the Company’s strategic alternatives in light of its existing financial obligations. This review has taken on added importance given challenging economic and market conditions and a difficult operating environment.
The Board and the management of the Company believe that all strategic alternatives should be evaluated, and is not ruling out any transaction that is in the best interests of stockholders. In the context of its evaluation of strategic alternatives, the Board continues to consider the letter from Mr. Tariko of Russian Standard Corporation (Russian Standard), dated February 1, 2012 proposing a “strategic alliance” whereby, among other things, Russian Standard would seek to convert a portion of its 3.00% Convertible Senior Notes due 2013 in exchange for common stock of the Company, obtain certain minority rights and board seats, possibly extend a backstop credit facility to the Company and possibly sell certain distribution and other rights to the Company. Although discussions are ongoing, no agreement has been reached. Moreover, there can be no assurance that any transaction or series of transactions will be completed with Russian Standard or any other third party.
The Company also is considering the feasibility of restructuring its outstanding debt. The management of the Company has concluded that cash generated from operations, cash on hand and amounts expected to be available under existing credit facilities will not be sufficient to pay principal on the Company’s 3.00% Convertible Senior Notes due 2013 (2013 Notes), which is due and payable on March 15, 2013. The Company’s cash flow forecasts include the assumption that certain credit and factoring facilities that are coming due in 2012 will be renewed to manage the working capital needs. Moreover, the Company had a net loss and significant impairment charges in 2011. As a result of these conditions, the Company’s auditors’ report for the year ended December 31, 2011, included herein, expresses substantial doubt about the Company’s ability to continue as a going concern.
Further, the Company may not be able to raise finance in the capital markets to repay principal on its 2013 Notes. A failure to pay amounts owed under these convertible notes would constitute a default under those notes and the Company’s 9.125% Senior Secured Notes and 8.875% Senior Secured Notes, each due 2016, and other indebtedness.
See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – The Company’s Future Liquidity and Capital Resources.”
Significant factors affecting our consolidated results of operations
Effect of Acquisitions of Whitehall
As disclosed in prior filings, on May 23, 2008, the Company and certain of its affiliates entered into, and closed upon, a Share Sale and Purchase Agreement and certain other agreements whereby the Company acquired shares representing 50% minus one vote of the voting power, and 80% of the economic interests in Whitehall.
On February 7, 2011, the Company entered into a definitive Share Sale and Purchase Agreement and registration rights agreement, in accordance with the terms that were agreed by the parties on November 29, 2010, and disclosed in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 3, 2010. Pursuant to these agreements, among other things and upon the terms and subject to the conditions contained therein, we received the remaining 20% of the economic interest and 50% plus one vote of the voting interest in the Whitehall Group (“Whitehall”) previously not owned by us, as well as the global intellectual property rights for the Kauffman Vodka brand. In exchange we paid total consideration of $93.2 million including $17.5 million for the intellectual property rights for the Kauffman Vodka brand. For further details on the whole structure of this acquisition please refer to Note 2 of the accompanying Consolidated Condensed Financial Statements attached herein.
As a result of this transaction, the Company acquired 100% of the voting and economic interest in the Whitehall Group and changed the accounting treatment for interest in Whitehall from the equity method of accounting to consolidation starting from February 7, 2011.
Effect of Exchange Rate and Interest Rate Fluctuations
Substantially all of Company’s operating cash flows and assets are denominated in Polish zloty, Russian ruble and Hungarian forint. This means that the Company is exposed to translation movements both on its balance sheet and statement of operations. The impact on working capital items is demonstrated on the cash flow statement as the movement in exchange on cash and cash equivalents. The impact on the statement of operations is due to the movement of the average exchange rate used to restate the statements of operations from Polish zloty, Russian ruble and Hungarian forint to U.S. dollars. The amounts shown as exchange rate gains or losses on the face of the statements of operations relate only to realized gains or losses on transactions that are not denominated in Polish zloty, Russian ruble or Hungarian forint.
Because the Company’s reporting currency is the U.S. dollar, the translation effects of fluctuations in the exchange rate of our functional currencies have impacted the Company’s financial condition and results of operations and have affected the comparability of our results between financial periods.
Effect of Impairment Testing
The Company continued to observe an overall market environment of declining vodka consumption and significant price sensitivities in its core markets of Poland and Russia. Additionally the Company experienced other key changes in market conditions, including changing of sales channel and product mix and market disruptions from relicensing in Russia. As such the Company determined that an impairment indicator exists, performed a goodwill impairment test during the third quarter of 2011 and fourth quarter of 2011, and took an impairment charge of $930.1 million related to its core businesses in Poland and Russia during 2011. We also experienced related underperformance of certain brands in Poland, primarily Bols Vodka , due to among other factors the movement of consumer purchasing from the sub-premium sector, where Bols Vodka is the leading brand, to the mainstream sector. Therefore, the Company also took an impairment charge for trademarks during the third quarter of 2011 of $127.7 million.
We also have experienced impairment charges in prior periods, which affect our period to period comparability. Due to the continued lower performance of certain brands as compared to our expectations in 2010, primarily Absolwent and Bols , we determined that the fair value of the trademarks related to these brands had deteriorated and recorded an impairment charge of $131.8 million during the fourth quarter of 2010 that included an impairment to the carrying values of our trademarks related predominantly to the Absolwent and Bols brands in Poland and an impairment charge of $20.3 million for the twelve months ended December 31, 2009 related to the Bols brand in Poland. See Notes “10. Goodwill” and “11. Intangible Assets other than Goodwill” to our consolidated financial statements contained elsewhere herein for further details of these impairment charges.
We cannot assure you that we will not recognize further asset impairments or experience declines in our financial performance in connection with the ongoing challenges that we are facing in our core markets.
Gross Profit
Total gross profit increased by approximately 3.5%, or $11.5 million, to $339.4 million for the year ended December 31, 2011, from $327.9 million for the year ended December 31, 2010. Gross profit margins as a percentage of net sales declined by 7.4% from 46.1% to 38.7% for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The overall impact of higher cost of goods which includes the higher spirit pricing resulted in a $26.0 million impact on gross margins for the year ended December 31, 2011 compared to the same period in 2010. Additionally the decline was driven by the shift of sales from premium segment vodkas to the mainstream vodkas segment which has lower margin in Poland and Russia, as well as substantially higher spirit pricing in both markets. The weight of the gross margin contribution relative to total sales of the Russian vodka business which tends to operate at higher gross profit levels than the Polish business was lower in 2011, thus impacting the overall blended gross profit as a percent of sales. Within the Polish market the main factor driving the lower gross profit margins as compared to Russia is that the Polish market continues to experience a strong competitive environment from other producers and retailers, especially discounters, making it difficult to increase prices in line with the spirit cost increases.
Non Operating Income and Expenses
Total interest expense increased by approximately 6.4%, or $6.7 million, from $104.9 million for the year ended December 31, 2010 to $111.6 million for the year ended December 31, 2011. This increase is mainly a result of a stronger euro during most of the year as compared to the U.S. dollar, as a significant portion of the long-term borrowings are denominated in euros.
The Company recognized $140.0 million of foreign exchange rate losses in the year ended December 31, 2011, primarily related to the impact of movements in exchange rates on our U.S. dollar and euro denominated liabilities, as compared to $6.8 million of gain in the year ended December 31, 2010. These losses resulted mainly from the depreciation of the Polish zloty and Russian ruble against the U.S. dollar and euro.
Total other non operating expenses increased by $4.3 million, from $13.6 million for the year ended December 31, 2010 to $17.9 million for the year ended December 31, 2011. Expenses in 2010 consisted of the one-time charge of $14.1 million related to the early call premium when the Senior Secured Notes due 2012 were repaid early in January 2010. Moreover they included the write-off of the unamortized offering costs related to the Senior Secured Notes due 2012 of $4.1 million. This was offset by a final dividend of $7.6 million received prior to disposal of the distribution business. In 2011 total balance primarily consists of $7.4 million representing write-off of assets related to the Tula facility to net realizable value. Additionally it includes $5.7 million of other losses which primarily related to the costs of factoring in Poland and bank guarantees in Poland and Russia for customs and excise taxes. The Company began to factor receivables in 2011 which represent $2.9 million of expense for the year ended December 31, 2011. In Russia due to changes in legislation in 2011, the Russian business is required to have a bank guarantee to cover the excise tax related to six months of production at the time of spirit purchase, which resulted in $2.7 million of cost in 2011.
Income Tax
Our tax charge for 2011 was $32.2 million which represents an effective tax rate for the year ended December 31, 2011 was 2.6%. The underlying tax rates in our key jurisdictions are 19% in Poland, 20% in Russia and 35% in the US. However due to underlying performance and certain of the Company’s subsidiaries the Company determined that an additional non cash valuation allowance for deferred tax assets of $71.6 million was required and took the charge during the year. Additionally, the Company did not recognize a tax asset for losses at these subsidiaries therefore the tax expense for the profitable entities was not offset by a tax benefit at loss making entities. Changes in the Company’s uncertain income tax position, excluding the related accrual for interest and penalties, for 2011 relate to reductions, additions for prior and current year tax positions of $3 million, $5.6 million and $0.8 million, respectively. During 2010, uncertain income tax position changed for additions related to previous year tax of $3 million. There were no reduction for prior year tax positions, settlements or lapses in statute of limitations. As of December 31, 2011 and 2010, the uncertain income tax position balance was $6.4 million and $3 million, respectively. This resulted in a net tax charge even though on a consolidated basis the Company incurred a pre-tax loss.
Equity in Net Earnings
Equity in net losses for the year ended December 31, 2011 include the Company’s proportional share of net income from its investment in the Moet Hennessey Russia Joint Venture for the period from January 1, 2011 to March 30, 2011 and Whitehall for the period from January 1, 2011 to February 7, 2011.
Although the bulk of our business in Poland is the sales of our domestic vodkas, our export sales and sales of import brands increased by 20% and 9% respectively in volume terms for the year. Exports represent approximately 4% of our sales volume and exclusive import brands represent approximately 19% of our total sales value for the Polish operations.
These decreases in local currency sales value were partially offset by stronger Polish zloty against the U.S. dollar in the first half of the year which resulted in an overall year on year increase of approximately $4.8 million of sales in U.S. dollar terms.
Sales for Russia increased by $66.5 million from $394.1 million for the twelve months ended December 31, 2009 to $460.6 million for the twelve months ended December 31, 2010. This increase was driven by a combination of the strengthening of the Russian ruble against the U.S. dollar for the first three quarters of 2010 which accounted for approximately $5.2 million of the increase and the consolidation of Russian Alcohol which was completed in April 2009, which accounted for approximately $80.0 million of the increase. The increase was partially offset due to decreases in our sales in Russia which we believe resulted from the heat wave in the summer as well as delays in obtaining excise stamps in November as described earlier. Our underlying liter volume sales in Russia were generally flat for 2010 as compared to 2009 in the overall vodka market that we estimated declined by 4%–5% we were one of the few vodka companies in Russia to grow market share during the year. Although we were able to gain market share, our sales value declined by approximately 3% due to the impact of product sales mix as well as higher trade marketing spend. With regards to mix, as we had higher sales growth of our lower priced brands such as Yamskaya, Urozhay and Gerbovaya as compared to our more premium and mainstream products. These lower priced economy products contribute less to both net sales revenue and gross margins than the higher priced mainstream and premium products. Higher trade marketing, which was recorded as a reduction of net sales revenue, was incurred to incentive customers in December 2010 following our production delays due to a lack of excise stamps as described above. For our Russian business, export sales increased by 68% in volume terms in 2010 as compared to the prior year to 1.4 million cases, driven primarily to sales to the Ukraine which grew by 265% to 0.75 million cases in 2010. Exports represent 7.7% of our sales volume of Russia.
The Hungarian sales decline was driven mainly by the soft consumer environment and an excise tax increase on January 1, 2010, which accounted for approximately $4.8 million of the total decrease of $6.1 million, as well as weakening of the Hungarian forint versus U.S. dollar in 2010 which resulted in $1.3 million of sales decrease in U.S. dollar terms.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
The Company is one of the world’s largest vodka producers and Central and Eastern Europe’s largest integrated spirit beverages business with its primary operations in Poland, Russia and Hungary. During 2011, the Company continued its strategy of integrating the business in Russia following the buyout of the remaining stake in Whitehall in the first quarter of 2011 when the Company took full economic and controlling ownership of the business. During the first quarter of 2012, the Company continued to focus on developing sales volumes in its key markets of Poland and Russia as well as reorganizing the Russia operations. Both the Polish and Russian vodka markets continued to see an overall market decline. In Poland, however, the Company was able to see year on year domestic volume and value growth for the quarter ending March 31, 2012 primarily due to the continued success of Żubrówka Biała and the higher margin flavored segment including Soplica . Total Russian volumes were down which were driven mainly by lower domestic vodka volumes, as a result of wholesalers de-stocking to lower levels of inventory and reduced sales to key accounts, during our renegotiations in the first quarter of 2012, partially offset by higher export volumes. On the domestic vodka front, sales volumes for the first quarter 2012 in Russia were down by 15% as compared to 2011, however, sell out from wholesalers to the retail trade was only down 8% - 9% reflecting the impact of continued de-stocking. Finally spirit, which is the main ingredient in vodka production showed signs of stabilizing in both Russia and Poland, however Russia is still impacted as compared to the same quarter in the prior year due to the rapid increases in spirit prices during 2011.
Gross Profit
Total gross profit decreased by approximately 1.0%, or $0.6 million, to $58.7 million for the three months ended March 31, 2012, from $59.3 million for the three months ended March 31, 2011. The decline in margin was driven primarily by the lower sales value in Russia. Although absolute gross margin declined, gross profit margins as a percentage of net sales increased by 1.7 percentage points from 37.9% to 39.6% for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The improvement in gross margin percentage was driven by a number of factors including improved product and channel mix in Poland and price increases taken in Russia. Part of the improvement in pricing coming from the Russian market was offset by the year on year growth of spirit pricing which resulted in approximately $3.2 million of additional cost in the first quarter of 2012. The spirit prices in Russia have however recently begun to stabilize since January 2012, and in Poland spirit prices have been stable since February 2011 and into the beginning of 2012.
Operating Expenses
Operating expenses consist of selling, general and administrative, or “SG&A” expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses excluding fair value adjustments increased by $3.9 million, from $57.9 million for the three months ended March 31, 2011 to $61.8 million for the three months ended March 31, 2012. For comparability of costs between periods, operating expenses, after excluding the fair value adjustments, are shown separately in the table below. As a percent of net sales they increased from 36.9% for the three months ended March 31, 2011 to 41.7% for the three months ended March 31, 2012.
Management views and performs analysis of financial and non financial performance indicators of the business by segments that are split by countries. The extensive analysis of indicators such as sales value in local currencies, gross margin and operating expenses by segment is included in the MD&A section of this Form 10-Q.
Net cash flow from operating activities
Net cash flow from operating activities represents net cash from operations and interest. Overall cash flow from operating activities decreased from cash generation of $84.4 million for the three months ended March 31, 2011 to cash generation of $23.8 million for the three months ended March 31, 2012. The primary factors contributing to this lower cash generation in 2012 are due to the fact that in the first quarter of 2011, the Company entered into factoring arrangements in Poland for the first time which resulted in higher cash collection during this quarter. In 2011 the Polish operations received the cash inflow from the peak Q4 2010 sales as well as the cash from the factored receivables of the quarter, resulting in a one-off benefit in cash flow for the period. During the same period in 2012, the Polish operations only received the normal factored cash flow from the first quarter of 2012.
Overall working capital movements of accounts receivable, inventory and accounts payable provided approximately $54.2 million of cash during the three months ended March 31, 2012. Days sales outstanding (“DSO”) as of March 31, 2012 amounted to 60.8 days as compared to 62 days as of March 31, 2011. The number of days in inventory as of March 31, 2012 amounted to 123 days as compared to 127 days as of March 31, 2011. In addition, the ratio of our current assets to current liabilities, net of inventories, was 0.71 as of March 31, 2012.
Net cash flow used in investing activities
Net cash flows used in investing activities represent net cash used to acquire subsidiaries and fixed assets. Net cash outflow for the three months ended March 31, 2012 was $1.2 million.
Net cash flow from financing activities
Net cash flow from financing activities represents cash used for servicing indebtedness, borrowings under credit facilities. Net cash used in financing activities was $18.2 million for the three months ended March 31, 2012 as compared to an outflow of $4.1 million for the three months ended March 31, 2011. The primary use in the three months ended March 31, 2012 was repayment of loans by the Company offset by certain loans drawn in Russia. For details see Note 5 to the Condensed Consolidated Financial Statements.
The Company’s Future Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As discussed further in Note 5, our Convertible Senior Notes (the “Convertible Notes”) are due on March 15, 2013. Our current cash on hand, estimated cash from operations and available credit facilities will not be sufficient to make the repayment and the Company may default on the Convertible Notes, unless the transaction with Russian Standard Corporation is completed as scheduled. The Company’s cash flow forecasts include the assumption that certain credit and factoring facilities that are coming due in 2012 will be renewed to manage working capital needs. Moreover, the Company had a net loss and significant impairment charges in 2011 and current liabilities exceed current assets at March 31, 2012. These conditions raise substantial doubt about the Company’s ability to continue as a going concern unless the transaction with Russian Standard described below is completed as scheduled.
As discussed further in Note 16, on April 23, 2012, the Company announced that definitive agreements had been signed with Russian Standard Corporation (via Roust Trading Limited) for a strategic transaction. Pursuant to these agreements, on May 4, 2012 Roust Trading Limited and its affiliates invested $100 million in the Company by purchasing a combination of newly issued shares of the Company’s common stock and notes exchangeable into the Company’s common shares following shareholder approval. In addition, Roust Trading has agreed to purchase from the Company up to $210 million principal amount of newly issued, unsecured senior notes due July 31, 2016 at a blended interest rate of 6.00%. While we believe that this transaction would allow the Company to settle the Convertible Notes before March 15, 2013, the transaction is subject to certain risks, including shareholder approval which may not be obtained. The Company’s annual general meeting (AGM) is scheduled for June 29, 2012 at which time the final vote of the shareholders will be known. We believe that if the transaction is completed as scheduled, Convertible Notes will be repaid by their maturity date which would substantially reduce doubts about the Company’s ability to continue as a going concern. Under the terms of the Indenture for our Senior Secured Notes due 2016, we expect that any indebtedness we incur in exchange for, or to redeem or refinance, all or a portion of the Convertible Notes will be required to be incurred as permitted refinancing indebtedness (a term defined in the Indenture); as a result, the terms of the indenture may limit our ability to enter into agreements that contain limitations on dividends (and certain payments having similar effects) payable to the Company (or its subsidiaries) by its subsidiaries.
Any failure to pay the Convertible Notes would also be an event of default under our Senior Secured Notes due 2016 and the terms of our other indebtedness. Such events would jeopardize our ability to continue as a going concern. Notwithstanding the foregoing, we believe that cash on hand, cash from operations and available credit facilities will be sufficient to fund our anticipated cash requirements for working capital purposes and normal capital expenditures, and that we will remain in compliance with the financial covenants contained in our debt agreements, for at least the next twelve months. The Company’s cash flow forecasts used in making this determination include the assumption that certain credit and factoring facilities that are coming due in 2012 will be renewed to manage the Company’s working capital needs.
For additional information, see also “Risk Factors—Risks Relating to Our Indebtedness”—included in Item 8 of our annual report on Form 10-K filed with the SEC on February 29, 2012.
Financing Arrangements
Bank Facilities
As of March 31, 2012, the Company has outstanding liability of €25.0 million ($33.4 million) from the term loans from Zenit Bank, Alfa Bank and Raiffeisen Bank drawn by Whitehall:
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The loan agreement with Zenit Bank dated March 29, 2011, matures on June 6, 2012. The credit limit under this loan agreement is €10.0 million ($13.3 million) and the loan is released in tranches maturing in 365 days, no later than June 6, 2012. The loan was released in four tranches between April 21, 2011, and September 13, 2011, repayable between April 20, 2012 and May 18, 2012. As of March 31, 2012, the Company has outstanding liability of €5.0 million ($6.7 million) from this term loan;
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The loan agreement with Alfa Bank dated July 22, 2008, matures on October 18, 2014. The credit limit under this agreement is €20.0 million ($26.7 million) and the loan is released in tranches maturing within three, six or nine months, depending if they are pledged on inventory. The loan was released in eight tranches between September 14, 2011, and March 30, 2012, repayable between April 28, 2012 and October 30, 2012. As of March 31, 2012 €15.1 million ($20.1 million) of this limit was granted to the Company;
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The loan agreement with Raiffeisen Bank dated July 6, 2010, matures on July 6, 2012. The credit limit under this agreement is €10.0 million ($13.3 million) and the loan is released in tranches maturing within one to 12 months, not later than July 6, 2012 . The loan was released in five tranches between September 12, 2011, and October 26, 2011, repayable between May 18, 2012, and July 6, 2012. As of March 31, 2012, the Company has outstanding liability of €4.9 million ($6.5 million) from this term loan.
The aforementioned loans drawn by Whitehall have no financial covenants that need to be met and are guaranteed by Whitehall companies. The loans from Zenit Bank and Alfa Bank are also secured on the Company’s inventory.
As of March 31, 2012, the Company also has outstanding total liability of 879.6 million Russian rubles ($30.0 million) from term loans from Unicredit and JSC Grand Invest Bank, both drawn by Russian Alcohol, as well as, an overdraft facility from Sberbank drawn by Bravo Premium:
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The loan agreement with Unicredit dated May 24, 2011, matures on November 23, 2012. This loan has no financial covenants and is secured by goods up to 720 million Russian rubles ($24.6 million) and guarantees given by companies of Russian Alcohol. As of March 31, 2012, the Company has outstanding liability of 600.0 million Russian rubles ($20.5 million) from this term loan;
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The loan agreement with JSC Grand Invest Bank dated November 25, 2011, matures on November 23, 2012. This loan has no financial covenants that need to be met. As of March 31, 2012, the Company has outstanding liability of 279.6 million Russian rubles ($9.5 million) from this term loan;
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The overdraft agreement with Sberbank dated February 6, 2012, matures on February 5, 2013. The credit limit under this agreement is 60 million Russian rubles ($2.0 million). This loan has no financial covenants and is secured by fixed assets. As of March 31, 2012, the Company has outstanding liability of 52.5 million Russian rubles ($1.8 million) from this overdraft facility.
As of March 31, 2012, the Company had available to use under existing overdraft facility in Hungary 100.0 million Hungarian forints ($0.5 million).
Senior Secured Notes due 2016
On December 2, 2009, the Company issued and sold $380 million 9.125% Senior Secured Notes due 2016 and €380 million ($507 million) 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an offering to institutional investors that was not required to be registered with the SEC. The Company used a portion of the net proceeds from the 2016 Notes to redeem the Company’s outstanding 2012 Notes, having an aggregate principal amount of €245.4 million ($327.4 million) on January 4, 2010. The remainder of the net proceeds from the 2016 Notes was used to (i) purchase Lion Capital’s remaining equity interest in Russian Alcohol by exercising the Lion Option and the Co-Investor Option, pursuant to the terms and conditions of the Lion Option Agreement and the Co-Investor Option Agreement, respectively (ii) repay all amounts outstanding under the Russian Alcohol credit facilities; and (iii) repay certain other indebtedness.
On December 9, 2010 the Company issued and sold additional €50 million ($66.7 million) 8.875% Senior Secured Notes due 2016 (the “2016 Notes”) in an offering to institutional investors that was not required to be registered with the SEC. The Company used the net proceeds from the additional 2016 Notes to repay its term loans and overdraft facilities with Bank Handlowy w Warszawie S.A and Bank Zachodni WBK S.A.
The 2016 Notes are guaranteed on a senior basis by certain of the Company’s subsidiaries. We are required to ensure that subsidiaries representing at least 85% of our consolidated EBITDA, as defined in the indenture, guarantee the notes. The notes are secured, directly or indirectly, by a variety of our and our subsidiary’s assets, including shares of the issuer of the notes and subsidiaries in Poland, Cyprus, Russia and Luxembourg, certain intercompany loans made by the issuer of the notes and our Russian finance company in connection with the issuance of the notes, trademarks related to the Soplica brand registered in Poland, European Union trademarks for the Parliament brand registered in Germany, and bank accounts over $5.0 million. We have also provided mortgages over our Polmos and Bols production plants and the Russian Alcohol Siberian and Topaz Distilleries. The indenture governing the 2016 Notes contains certain restrictive covenants, including covenants limiting the Company’s ability to: incur or guarantee additional debt; make certain restricted payments; transfer or sell assets; enter into transactions with affiliates; create certain liens; create restrictions on the ability of restricted subsidiaries to pay dividends or other payments; issue guarantees of indebtedness by restricted subsidiaries; enter into sale and leaseback transactions; merge, consolidate, amalgamate or combine with other entities; designate restricted subsidiaries as unrestricted subsidiaries; and engage in any business other than a permitted business. The indenture governing the 2016 Notes also contains a cross-acceleration covenant, which would apply in the event that we do not repay when due our Convertible Notes or any other indebtedness which equals or exceeds $30 million. In addition, in the event of a change of control (as that term is used in our indenture), we would be required to offer to repay the outstanding indebtedness under the 2016 Notes at a price equal to 101% of the aggregate principal amount thereof.
Convertible Senior Notes
On March 7, 2008, the Company completed the issuance of $310 million aggregate principal amount of 3% Convertible Senior Notes due 2013 (the “Convertible Notes”). Interest is due semi-annually on the 15th of March and September, beginning on September 15, 2008. The Convertible Notes are convertible in certain circumstances into cash and, if applicable, shares of our common stock, based on an initial conversion rate of 14.7113 shares per $1,000 principal amount, subject to certain adjustments. Upon conversion of the notes, the Company will deliver cash up to the aggregate principal amount of the notes to be converted and, at the election of the Company, cash and/or shares of common stock in respect to the remainder, if any, of the conversion obligation. The proceeds from the Convertible Notes were used to fund the cash portions of the acquisitions of Copecresto Enterprises Limited and Whitehall. The indenture governing the Convertible Notes also contains a cross-acceleration covenant, which would apply in the event that we do not repay when due any indebtedness which equals or exceeds $30 million. In addition, in the event of a fundamental change (as that term is used in our indenture), we would be required to offer to repay the outstanding indebtedness under the Convertible Notes in cash at a price equal to 100% of the aggregate principal amount thereof.
Effects of Inflation and Foreign Currency Movements
Inflation in Poland is projected at 3.7% for 2012, compared to actual inflation of 4.6% in 2011. In Russia, Hungary and Ukraine, inflation for 2012 is projected at 6.0%, 4.9% and 6.5% respectively, compared to actual inflation of 6.1%, 4.1% and 8.0% in 2011.
CONF CALL
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.
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