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CEDC Results review


On Friday, CEDC reported Q3 numbers that reflected little signs of a recovery in its performance. Despite a slight sequential improvement (as anticipated), results distinctly revealed the inherent weakness of the vodka markets CEDC operates in and management’s lack of an effective turn-around strategy. Q3 revenues were USD 229 mn, mostly driven by the acquisition of Whitehall, new product introductions and price increases in Russia.

Operating performance remained weak due to higher spirit prices, with gross margins dipping to 41% in Q3/11 compared to 49% in Q3/10 and marginally better than in Q2/11. The shocker of the results was a significant goodwill/brand write-down for USD 675 mn charged in Q3/11 on account of a deterioration in the Polish and Russian markets and cannibalization of volumes in Bols Vodka due to new product launches. Adjusted for impairments and restructuring expenses, adjusted EBIT was USD 36 mn (as reported in the Q3 presentation). Net debt was USD 1.2 bn, resulting in Net leverage of 9.9x (based on reported LTM EBITDA).

In view of continued decline in the Polish and Russian Vodka markets and higher spirit costs expected for rest of the year, management revised its full year sales guidance downward for the third time in as many quarters. It now expects full year sales of USD 850-950 mn (vs. its earlier guidance of USD 950-1,050 mn). Since the start of the year, we have been sceptical of management’s sales guidance as well as its optimism with regards to CEDC’s ability to outperform the declining consumption trends and would not be surprised if it is misses again in Q4.

The impairments (unexpected for most analysts), although deemed as prudent, are a further sign that significant revenue revival in CEDC’s core markets is not expected any time soon.