Wimm-Bill-Dann Foods OJSC (NYSE: WBD) Talks International Distribution and Global Demand

Wimm-Bill-Dann Foods OJSC
Tony Maher, CEO & Chairman

Wimm-Bill-Dann Foods OJSC (WBD) is a Russian manufacturer of dairy and juice products. As of the year ended December 31, 2007, the Company’s dairy, beverage and baby food products accounted for 76%, 17% and 7% of its net sales respectively. WBD’s principal geographic market is Russia, it also has production facilities in Ukraine, Georgia, Kyrgyzstan and Uzbekistan. It distributes its products through a variety of channels, including independent distributors and wholesalers, supermarket chains, small- and medium-sized grocery stores, open-air markets and restaurants. In October 2007, WBD announced the acquisition of Georgian Foods Ltd, based in Tbilisi, Georgia. Georgian Foods produces both traditional and local varieties of dairy products.


WSR: Good day from Wall Street. This is Juan Costello, Senior Analyst with The Wall Street Reporter and joining us today is Tony Maher, CEO and Chair of Wimm-Bill-Dann Foods OJSC and Wimm-Bill-Dann Foods is a New York Stock Exchange company, the ticker symbol is WBD. The company is a Russian manufacturer of dairy and juice products. Thanks for joining us today, Tony.

Tony Maher: Hi Juan.

WSR: Start off by talking to us about the sales increase, which was particularly strong.

Tony Maher: I think we’ve been doing pretty well for the last number of years generally across the entire businesses. Actually, we are also the largest baby foods company in Russia, something that we really were a very small player in three years ago where we’ve gone from being Number 6 player to now Number 1. In this market we’ve got the usual international players like Nestle and Numico, which is now Danone. I think really what differentiates us as a dairy company, in particular if you compare it to other peers globally, is that we are not just in traditional dairy; we are also in yogurts and desserts and all the value-added areas.

Also what differentiates us I believe is that we’re a heavily branded business and that’s quite unusual for mainstream dairy companies globally, which grew up really as a route to market for farmers as opposed to FMCG type mentality companies. I think the other thing that has helped us in last number of years has been the huge growth in disposable incomes in Russia and across former CIS, former Soviet Union. We are also in the Ukraine, which is 45 million people in Central Asia and so on. So, it is a pretty large platform of about 280 million people.

I think clearly 2009 is little bit different to maybe 2006, ‘07, and ’08 with the global crisis that we’ve seen which has affected consumer demand globally and not just in Russia, in fact only laterally in Russia. Certainly, we are expecting some slowdown as we go forward, but I think what we’re seeing in the last couple of months, baby food continues to be very strong as strong as it’s ever been; dairy slightly down versus prior year, but nonetheless is still very strong; and juice business actually in positive territory, which you would expect given that it’s probably the most discretionary of our businesses would be even more affected by consumer slowdown, but actually we are seeing positive growth there in the first couple of months of this year. So, it’s a mixture of things. I think we are in strong categories, which is a positive thing; daily consumption categories, which is also positive; and very heavily branded, which I think is an additional strength of our company.

WSR: Continue talking about some of the trends in the market and how well positioned the company is to capitalize on these trends.

Tony Maher: I think right now it’s difficult to be predictive not only in Russia, but globally and we all know how wrong usually predictions are in today’s environment. But I think there is a number of things that put Russia still apart. First and foremost, consumption levels here are relatively speaking on almost every category not just our categories, but in particular ours, are low. The second thing is that incomes themselves, per capita incomes are low. The average income in Russia right now is about $500 to $600 per person per month and that’s by any western standards extremely low so you can only expect those to go up.

What we are seeing is if you look at the last couple of years for example, baby food which is growing as a category, but we in particular are growing faster, is really a result of increased disposable incomes which has led to parents moving from home prepared baby food, which was down as a result of lower incomes historically, into the branded sector of purees and formulas and so on, which in the Soviet days for example they didn’t really have. So, I think there, there is an underlying change in habits regarding that whole category, which as I said historically wasn’t commercial. I think another interesting phenomenon of that is that historically mothers when they had babies in the Soviet days and even post-Soviet era would have had two to three years off work and then come back. Russia has changed dramatically and what we are seeing now is that mothers are tending to come back to work much earlier not only for financial reasons, but also for career reasons and typically this also leads to a need for convenience, which has driven a lot of that sector.

In the case of diary, as I said earlier we are not just in traditional dairy with milk and cheese and so on, we are also in yogurts and desserts and we are the leader in yogurts and desserts. What we are seeing there I think the category is definitely slowing down, but we actually are gaining market share in that area. Our main competitor there is Danone, which is globally the biggest player in that sector. I think there we feel we are able to probably have a bit of an edge than Danone given that we are a local company and we would think and believe that we’ve got just that little bit closer to the operation. This is our head office, we don’t have to go any place else to make decisions and I think that probably is a little bit of a help to us.

WSR: What else differentiates you from other players in your sector such as Danone?

Tony Maher: We’ve got many players. If you go to our juice business, the juice market was entirely Russian dominated companies up to recently. Then about four years ago, the first one got bought out by Coca Cola, company called Multon; then the second one got bought out by a private equity company called Needham; and the third one got bought out by Pepsi just last year. So, it’s gone from being a completely Russian-based business to three foreign players and us. We are the third player, but very close to being the second one.

If I can examine why these companies were successful in the first place, I think a lot of it had to do with being close to the market, quick decision making, and not too much hierarchy and so on. I think this is one of the reasons our juice business actually, we’ve been gaining share last 12 months to 18 months and also interestingly gaining profitability. So, I think being close to the market is important. I think also while we are a Russian company albeit with about half our equity is non-Russian; it’s US and funds through Wall Street and indeed through the Moscow Stock Exchange and also UK funds; we have a blend of international management and Russian management, which also has probably been instrumental in turning the company around the last three years because we think we’ve got an advantage in terms of fast decision making.

But also we wanted to bring some of the western management discipline into the company, which I think we’ve done and maybe not in full yet, but certainly we are on a good track there to bring in things like productivity measures, key business indicators, and so on. It’s the blend of the two I think that maybe gives us a strength that helps us to compete with many competitors across various categories.

WSR: Perhaps you can walk us through your background and experience as well as that of some of your key management team.

Tony Maher: I was 30 years with Coca Cola System. I was with the second biggest bottler in the world, a company called Coca Cola Hellenic, and I spent long time with them and very happily with them I have to say. I was managing quite a lot of their business when I left. I was responsible for countries like Russia, but also Ireland, Italy, Austria, Greece, and so on. So, I had about 60% of their business. I started the business in Russia for that company way back in 1994 just to start it off and then as I got promoted, I held responsibility for that business. There is a large learning curve in Russia and I think I being around that for long time helped me, but also helped the company to gain a strong position and indeed market leadership against the key international competitor at that time, which is Pepsi. So, I was with that company for long time. I started off in sales and distribution and ended up in general management.

Of course we have a beverage business here in juices, but the key skill I bring along to that business is really around building strong teams of people and making sure we turn around where necessary and grow opportunistically where the opportunities are. In that respect, we have strengthened the team over the last couple of years. We brought some people in from outside, two of them which are expats, the rest are Russians and both are important actually. The person who now runs the foods division, which is our dairy and baby food businesses, is also an ex-Coca Cola guy in his early 40s, has a strong background in sales and distribution, but also in Russia and Ukraine in that geography.
Then the other person that is ex-Procter & Gamble who has strong marketing background, was our VP of marketing for a while, actually was instrumental in turning around the baby food business as well, and is now in-charge of beverages.

But it’s not just about foreigners at all, in fact far from it. I think we had strong people to begin with, but we also supplemented that team with strong Russian managers who came also from other western companies. I think they got in those Western companies strong training and what they did find themselves career capped a little bit because any foreign company with their business in Russia, it’s a branch of a foreign company, it’s not the head office so the decision-making at a certain level gets taken some place else. Unless you want to go international, i.e. leave Russia and go some place else, sometimes to US and sometimes to Europe depending on the company, you’ve got a cap into your career. So, we feel actually and what we’ve seen over the last couple of years is that the ability to recruit bright local management talent to well trained and well experienced from companies; Nestle, Procter & Gamble, Coca Cola, Pepsi, Kraft Foods, and many others; into our business also has been quite positive for us and also quite positive for them I would say.

WSR: What specific objectives have you and management set for the company and milestones over the next 12 months?

Tony Maher: Like many other companies, we haven’t given any guidance for 2009 given the level of uncertainty has definitely increased. Our intent is that and maybe I should also say to you that unlike you see many things printed about Russian companies highly leveraged and shareholders highly leveraged and so on, we are not like that. We’ve got very little leverage, we’ve got less than one times debt-to-EBITDA ratio so we’re in a very comfortable debt position. In that respect, actually we have been using some of the excess cash because we’ve got quite a lot of excess cash to buy back shares. We bought back at this stage in excess of 2% of the company because we felt our shares were such good value. But clearly through whatever length of time this current recession lasts, our intention is to come out the other side of this period stronger than what we went in.

So, the objectives we have is maintain or grow our margins and we believe that is actually happening as we speak, but also grow our market share in all our business categories and that we see as a key win for us coming out the other side of however long this period is going to be. I think they are the key objectives I would say. Indeed I would say also maintain a strong position because while leverage for the past maybe ten years has being seen as a strength, I think right now being free of the need for heavy borrowings is today seen as a strength and that’s been something I guess that we’ve been fortunate in coming into this position where we didn’t need to refinance debt and so on, we had our own funds to be able do this.

WSR: Talk a little bit about the company’s growth. Are you going to be looking for M&A opportunities as a catalyst towards continued growth?

Tony Maher: We have been growing mainly organically for the last couple of years. There has been some acquisition, but not so much. I think in this landscape, if I look at the dairy business there is not a lot to buy to be honest and I think the key thing there is to continue doing what we do best and grow our business organically. If valuations come down quite a lot, then maybe something comes along that’s worthwhile, but typically valuations in this market have been very high in the last couple of years and we found actually it’s not worth participating in the area of dairy.
In the case of juice, I don’t believe Pepsi or Coke are going to sell their businesses so I don’t see much acquisitions there. Then you’re into baby food and there may be some things there and there may be some other geographies as well that we can look at. But quite honestly the reason we did the share buyback is we see the best acquisition that we could make for creating shareholder value at the moment was our own stock and that was one of the reasons that we went and took that decision.

WSR: Earlier in the month, company achieved its ADR, WBD achieved the target price of $35.01. Talk a little bit about this. Do you think investors understand the general direction that the company is headed in?

Tony Maher: I think they do. I just completed a road show in London, Boston, and New York and now I know most of the funds that I met from prior road shows. I think there is a lot more positiveness about Russia generally and I think that Russia has been on the back foot since most of last year and in particular since about August when it started with the war with Georgia and so on, which really was a negative investor sentiment and was one of the reasons we didn’t do any road shows obviously in the last year. We thought it was for that and other reasons a waste of our time and their time. That’s changed, definitely a lot more positive sentiment towards Russia as an opportunity.

Then from our side, I think certainly the strong message I get is that we are seen as a very good vehicle for investment by investors in Russia. We are a leading consumer stock, which they see as important. We enjoy very strong ratings on corporate governance, we don’t have the debt issues that many other companies not only Russian companies, but in particular Russian companies and I think that is one of the reasons. In fact yesterday, our stock closed at over $41. Of course that is well down from where it was a year ago, but the world has changed also versus a year ago.

So, I think if we keep doing what we do best, the market rewards us long term and that’s our view. The stock price will be the stock price, I can only determine what that is going to be by hard work and good results. Also a good open dialogue with investors and analysts, which we are also noted for and I think that’s also important.

WSR: Once again, joining us today is Tony Maher, CEO and Chair of Wimm-Bill-Dann Foods OJSC, a New York Stock Exchange company, ticker symbol WBD as I mentioned earlier trading slightly north of $41 a share. Once again, the company is a Russian manufacturer of dairy, juice, and baby food products. Before we conclude, what are some of the key reasons why investors should consider the company as a good long-term investment opportunity?

Tony Maher: Obviously different investors have different objectives and different ideas about valuations and so on so I can only speak nothing in direct terms as to why people should invest. But I think when I look at our business, we are sitting in very strong positions in three very key categories in everyday consumer lives. Juices, which are seen as a health and wellness area of beverages, diary which is right across the entire portfolio of dairy from value-added right into daily products, milk and cream and so on, and also of course baby food. We are leaders in two of those three categories and also we are 280 million people. When you look at Central Asia and Russia and Ukraine, the population is bigger than the United States and all with very low incomes, but ultimately incomes that will grow.

So, in putting all that together, I think Russia and this geography over time has to be a very strong opportunity from a consumer standpoint. We don’t manage the business for the next quarter, we manage the business for the long term and I think this is what I say it depends on people’s view as to what they are looking for. If they are looking for a quick return, sometimes you get that from stocks like ours and sometimes you don’t because as I said we are not a company that manages with a view to returning maximum value on the next three months. We want to do it for the next 30 years.

WSR: We do look forward to continuing to track the company’s growth and upcoming events. I’d like to thank you for the update.

Tony Maher: Thank you too. Take care.

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