CEDC
Q2 earnings review: another weak quarter
Maintain “Sell” on the CEDC 8.875% 12/16 bonds at 71 or a Z-spread of 1524 bps
Yesterday, CEDC reported weak Q2 results, which did not come as a surprise in view of declines in the vodka market in Russia and Poland. Reported revenues for Q2 were USD 212 mn (vs. our estimates of USD 200 mn) an increase of 20% y-o-y. Expectedly, the growth in sales was driven by the consolidation of Whitehall in February which contributed USD 32 mn to earnings in Q2. Operating performance, however, continued to be weak in the wake of higher spirit prices, with gross margins dipping to 40% in Q2/2011 from 50% in Q2/10. Operating margins were further burdened by higher marketing costs and the consolidation of the lower margin Whitehall business. EBIT slumped by 59% to a mere USD 17 mn and reported EBITDA was USD 26 mn. As expected, leverage continued to rise on account of the Whitehall acquisition, reaching alarming levels of 10.2x. However, despite the weak performance q-o-q, management updated its revenues guidance from USD 880 - 1080 mn to USD 900 - 1050 mn for FY 2011. Its underlying rationale for revising the guidance is the significant pickup in volumes it expects in the coming quarters due to new product launches and re-stocking by wholesalers in Russia. It expects the vodka markets to continue to decline, yet also expects FX and favourable pricing to support revenues. In the conference call, management guided that operating cashflows for the second half will remain at similar levels (USD 43 mn in H1 2011) and no debt pay-down is expected before FY 2012. However, it guided for a USD 11 mn rise in spirit costs in Russia in Q4 on account of changes in duties. Performance in July was reasonably good, according to management. We are pessimistic about any change in fortunes for CEDC in the coming quarters. Although there could be some improvement in volumes due to new product launches, margin pressure and the company’s very high net leverage are of concern. In view of the disappointing results and market turmoil, we see little positive catalysts in the coming quarters. As a result, we keep our “Sell” recommendation (bonds have widened by c. 700 bps since the time of the last results and by almost 1100 bps since we first recommended a “Sell”). We view CEDC as “High Risk” on the LARA scale.
Q2 earnings review: another weak quarter
Maintain “Sell” on the CEDC 8.875% 12/16 bonds at 71 or a Z-spread of 1524 bps
Yesterday, CEDC reported weak Q2 results, which did not come as a surprise in view of declines in the vodka market in Russia and Poland. Reported revenues for Q2 were USD 212 mn (vs. our estimates of USD 200 mn) an increase of 20% y-o-y. Expectedly, the growth in sales was driven by the consolidation of Whitehall in February which contributed USD 32 mn to earnings in Q2. Operating performance, however, continued to be weak in the wake of higher spirit prices, with gross margins dipping to 40% in Q2/2011 from 50% in Q2/10. Operating margins were further burdened by higher marketing costs and the consolidation of the lower margin Whitehall business. EBIT slumped by 59% to a mere USD 17 mn and reported EBITDA was USD 26 mn. As expected, leverage continued to rise on account of the Whitehall acquisition, reaching alarming levels of 10.2x. However, despite the weak performance q-o-q, management updated its revenues guidance from USD 880 - 1080 mn to USD 900 - 1050 mn for FY 2011. Its underlying rationale for revising the guidance is the significant pickup in volumes it expects in the coming quarters due to new product launches and re-stocking by wholesalers in Russia. It expects the vodka markets to continue to decline, yet also expects FX and favourable pricing to support revenues. In the conference call, management guided that operating cashflows for the second half will remain at similar levels (USD 43 mn in H1 2011) and no debt pay-down is expected before FY 2012. However, it guided for a USD 11 mn rise in spirit costs in Russia in Q4 on account of changes in duties. Performance in July was reasonably good, according to management. We are pessimistic about any change in fortunes for CEDC in the coming quarters. Although there could be some improvement in volumes due to new product launches, margin pressure and the company’s very high net leverage are of concern. In view of the disappointing results and market turmoil, we see little positive catalysts in the coming quarters. As a result, we keep our “Sell” recommendation (bonds have widened by c. 700 bps since the time of the last results and by almost 1100 bps since we first recommended a “Sell”). We view CEDC as “High Risk” on the LARA scale.
