Central European Distribution Corp. (CEDC, Financial) filed Quarterly Report for the period ended 2010-09-30.
Central European Distribution Corp. has a market cap of $1.82 billion; its shares were traded at around $25.74 with a P/E ratio of 10.6 and P/S ratio of 0.8. Central European Distribution Corp. had an annual average earning growth of 33.8% over the past 10 years. GuruFocus rated Central European Distribution Corp. the business predictability rank of 2.5-star.CEDC is in the portfolios of David Dreman of Dreman Value Management, Columbia Wanger of Columbia Wanger Asset Management, Steven Cohen of SAC Capital Advisors, Jim Simons of Renaissance Technologies LLC.
As described in Note 2 of the Consolidated Financial Statements, in June 2009, the FASB issued new guidance on variable interest entities. ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, amends current guidance requiring an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity. ASU 2009-17 is effective for the Company from January 1, 2010. As a result of adoption ASC Topic 810, the Company changed from consolidation to the equity method of accounting for its 49% voting interest in Whitehall Group effective as of May 23, 2008. This change was applied retrospectively to all the periods presented in the financial statements. Adoption of the requirements of ASC Topic 810 resulted as of December 31, 2009 in net decrease in assets of $108 million, liabilities of $85 million and non-controlling interest of $23 million. The following management discussion and analysis is prepared on the basis of the adjusted balances for 2009 and therefore does not include the results of operations for the Whitehall Group.
Net sales represent total sales net of all customer rebates, excise tax on production and exclusive imports and value added tax. Total net sales decreased by approximately 15.8%, or $29.7 million, from $187.5 million for the three months ended September 30, 2009 to $157.8 million for the three months ended September 30, 2010. Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:
Sales for Russia decreased by $13.1 million from $111.8 million for the three months ending September 30, 2009 to $98.7 million for the three months ending September 30, 2010. On a local currency basis, organic sales declined by approximately 14% which was due to a volume drop of approximately 8%, which is in line with what we believe were the overall trends in the vodka market for the quarter, as well a 3% reduction due to mix and a 3% reduction due to higher trade marketing spending. The volume decline was primarily due to the overall weaker vodka market during the quarter as vodka sales were impacted by the record heat wave and forest fires effecting Russia during July and August 2010. Although volumes recovered in September, the recovery was not enough to offset the double digit declines in July in August. The higher trade marketing represents extra spend that the Company made beginning in June 2010 to drive volume in the summer months. However due as well to the extreme weather conditions and fires as noted above, the benefits of this spend were not realized as planned, thus driving a lower average sales price without the benefit of the incremental volume gains, The local currency sales reduction was partially offset by a strengthening of the Russian ruble against the U.S. dollar which accounted for approximately $2.7 of sales in U.S. dollar terms.
Total gross profit decreased by approximately 19.1%, or $18.2 million, to $77.3 million for the three months ended September 30, 2010, from $95.5 million for the three months ended September 30, 2009, reflecting the decrease in gross profit margins percentage in the three months ended September 30, 2010. Gross margin decreased from 50.9% of net sales for the three months ended September 30, 2009 to 49.0% of net sales for the three months ended September 30, 2010. The primary drivers of this drop were lower margins generated in Russia due to the factors described above, namely the impact of sales mix and higher trade marketing spend. In addition the cost of goods sold for the period was adversely impacted due to higher spirits prices in 2010 as compared to the same period in the prior year. Spirit prices which increased by 20%-25% during the quarter due to the heat in Eastern Europe during the summer however have now stabilized. The value of this increase in spirit price would represent approximately 3%-4% of gross margin on a normalized basis. However, as the Company still had reserves of spirit at old prices at the beginning of the third quarter of 2010, this actually translated into a value equal to approximately 2%-4% of gross margin.
Operating expenses consist of selling, general and administrative, or S,G&A expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses decreased by approximately 29.6%, or $20.3 million, from $68.5 million for the three months ended September 30, 2009 to $48.2 million for the three months ended September 30, 2010. This decrease resulted primarily from the impact of cost reduction programs in Poland and Russia as well as lower sales as compared to the same quarter in the prior year. Operating expenses net of fair value adjustments decreased by $5.3 million, from $53.5 million for the three months ended September 30, 2009 to $48.2 million for the three months ended September 30, 2010. The 2010 cost base was decreased by approximately $6.7 million resulting from savings mainly in Russia and Poland offset by certain cost related to reorganization of the Russian business resulting in increased non-recurring costs of approximately $3.4 million. The table below sets forth the items of operating expenses.
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Central European Distribution Corp. has a market cap of $1.82 billion; its shares were traded at around $25.74 with a P/E ratio of 10.6 and P/S ratio of 0.8. Central European Distribution Corp. had an annual average earning growth of 33.8% over the past 10 years. GuruFocus rated Central European Distribution Corp. the business predictability rank of 2.5-star.CEDC is in the portfolios of David Dreman of Dreman Value Management, Columbia Wanger of Columbia Wanger Asset Management, Steven Cohen of SAC Capital Advisors, Jim Simons of Renaissance Technologies LLC.
Highlight of Business Operations:
In connection with the completion of these investments the Company completed three capital raising initiatives comprised of two public equity offerings, with net proceeds of approximately $491 million, and a notes offering with net proceeds of approximately $930 million. The primary use of the equity proceeds was to fund the remaining buyout of Parliament and to partially fund the remaining buyout of Russian Alcohol. The proceeds from the notes offering were used to (i) fund a portion of the buyout of Russian Alcohol, (ii) to refinance approximately $380 million of the Companys outstanding Senior Secured Notes due in 2012, and (iii) to refinance approximately $264 million of debt in place in Russian Alcohol. As a result of the notes offering the Company has extended the maturities of a significant portion of its debt to 2016 and settled its payment obligations to Lion Capital for the purchase of Russian Alcohol.As described in Note 2 of the Consolidated Financial Statements, in June 2009, the FASB issued new guidance on variable interest entities. ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, amends current guidance requiring an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity. ASU 2009-17 is effective for the Company from January 1, 2010. As a result of adoption ASC Topic 810, the Company changed from consolidation to the equity method of accounting for its 49% voting interest in Whitehall Group effective as of May 23, 2008. This change was applied retrospectively to all the periods presented in the financial statements. Adoption of the requirements of ASC Topic 810 resulted as of December 31, 2009 in net decrease in assets of $108 million, liabilities of $85 million and non-controlling interest of $23 million. The following management discussion and analysis is prepared on the basis of the adjusted balances for 2009 and therefore does not include the results of operations for the Whitehall Group.
Net sales represent total sales net of all customer rebates, excise tax on production and exclusive imports and value added tax. Total net sales decreased by approximately 15.8%, or $29.7 million, from $187.5 million for the three months ended September 30, 2009 to $157.8 million for the three months ended September 30, 2010. Our business split by segment, which represents our primary geographic locations of operations, Poland, Russia and Hungary, is shown below:
Sales for Russia decreased by $13.1 million from $111.8 million for the three months ending September 30, 2009 to $98.7 million for the three months ending September 30, 2010. On a local currency basis, organic sales declined by approximately 14% which was due to a volume drop of approximately 8%, which is in line with what we believe were the overall trends in the vodka market for the quarter, as well a 3% reduction due to mix and a 3% reduction due to higher trade marketing spending. The volume decline was primarily due to the overall weaker vodka market during the quarter as vodka sales were impacted by the record heat wave and forest fires effecting Russia during July and August 2010. Although volumes recovered in September, the recovery was not enough to offset the double digit declines in July in August. The higher trade marketing represents extra spend that the Company made beginning in June 2010 to drive volume in the summer months. However due as well to the extreme weather conditions and fires as noted above, the benefits of this spend were not realized as planned, thus driving a lower average sales price without the benefit of the incremental volume gains, The local currency sales reduction was partially offset by a strengthening of the Russian ruble against the U.S. dollar which accounted for approximately $2.7 of sales in U.S. dollar terms.
Total gross profit decreased by approximately 19.1%, or $18.2 million, to $77.3 million for the three months ended September 30, 2010, from $95.5 million for the three months ended September 30, 2009, reflecting the decrease in gross profit margins percentage in the three months ended September 30, 2010. Gross margin decreased from 50.9% of net sales for the three months ended September 30, 2009 to 49.0% of net sales for the three months ended September 30, 2010. The primary drivers of this drop were lower margins generated in Russia due to the factors described above, namely the impact of sales mix and higher trade marketing spend. In addition the cost of goods sold for the period was adversely impacted due to higher spirits prices in 2010 as compared to the same period in the prior year. Spirit prices which increased by 20%-25% during the quarter due to the heat in Eastern Europe during the summer however have now stabilized. The value of this increase in spirit price would represent approximately 3%-4% of gross margin on a normalized basis. However, as the Company still had reserves of spirit at old prices at the beginning of the third quarter of 2010, this actually translated into a value equal to approximately 2%-4% of gross margin.
Operating expenses consist of selling, general and administrative, or S,G&A expenses, advertising expenses, non-production depreciation and amortization, and provision for bad debts. Total operating expenses decreased by approximately 29.6%, or $20.3 million, from $68.5 million for the three months ended September 30, 2009 to $48.2 million for the three months ended September 30, 2010. This decrease resulted primarily from the impact of cost reduction programs in Poland and Russia as well as lower sales as compared to the same quarter in the prior year. Operating expenses net of fair value adjustments decreased by $5.3 million, from $53.5 million for the three months ended September 30, 2009 to $48.2 million for the three months ended September 30, 2010. The 2010 cost base was decreased by approximately $6.7 million resulting from savings mainly in Russia and Poland offset by certain cost related to reorganization of the Russian business resulting in increased non-recurring costs of approximately $3.4 million. The table below sets forth the items of operating expenses.
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