Wimm Bil Dann Foods OJSC

Industry: Packaged Foods

Segment: Dairy products and Non-alcoholic Beverages

Exchange and Ticker Information

Russia: WBDF & WBDFG on RTS and MICEX
United States (ADR): WBD on NYSE
Germany (GDR): WBPA on Frankfurt
Boerse

Sales and Earnings Record

2006 2007 2008
Sales ($ mil.) 2,824 2,438 1,762
EPS ($) 2.31 3.18 2.17

EPS Projections
2009 2010
Projected EPS ($) 3.12 4.21

2008 Key Statistics

Recent Share Price 77.35
YTD Share Return 172%
52-Week Price Range 13.52-84.94
Shares Outstanding 42,438,527
Market Capitalization 3,282,620,063
5-year Net Income Growth Rate 51%
Inventory Turnover 7.84
Asset Turnover 1.82
Current Ratio 1.56
Debt to Assets 58%
Debt to Equity 143%
Gross Margin 32%
Operating Margin 9%
Operating Return on Assets 15.76%
Return on Equity 15.44%
Cash Flow to Total Debt 36.36%
Working Capital to Total Assets 16.66%

Investment Summary
Dramatic ruble devaluation in early 2009 obscured the strong financial position and superior
performance of Wimm Bill Dann Foods. The company commands a significant market share,
has excellent profitability and a healthy cash flow, along with moderate levels of debt Its
management is competent and effective. In addition to reducing expensive short-term debt
in late 2008, WBD has repurchased 2.9% of its outstanding shares so far in 2009.
Continued economic slowdown and a weak ruble may further increase sales at the expense
of pricier imports. Essential food items like dairy products and baby formula are necessities,
thus ruble-denominated sales are unlikely to decline even if the Russian economy remains
weak in 2009 and 2010. The company's debt is BB- rated by S&P and rated Ba3 by Moody's,
a high mark for any Russian company. The NYSE-listed ADR of the company returned a
172% gain year to date.

Business Description
Moscow-based Wimm-Bill-Dann Foods OJSC is one of Russia's leading manufacturers of
dairy, juice and baby foods, with 31%, 17.9% and 18.3% market shares respectively. The
company has 37 manufacturing facilities in Russia, Ukraine, Kyrgyzstan, Uzbekistan and
Georgia, and employed 18,485 workers in 2008. WBD was founded in Moscow in 1992 and
selected a foreign-sounding company name to convey an image of excellent product quality,
as Russian consumers, who account for 93% of 2008 sales, perceive imports to be superior
to domestic food products and are willing to pay a premium price for a foreign-sounding
brand. Initial company growth came through privatization of state-owned milk plants and
dairy production facilities.

The dairy product line consists of milk, cream and butter, kefir, cottage and hard cheeses,
sour cream and yogurt. The juice product line consists of juice from concentrate, enriched
(sports) juice-based drinks, bottled mineral and ordinary drinking water. The baby food
product line consists of powdered baby formula, milk and juice products for infants, and
pureed (soft consistency) meat, fish, poultry, fruit and vegetable foods for toddlers. In FY08
dairy, juice and baby foods accounted for 73%, 18% and 9% of sales respectively.

The company went public in 2002 and currently has 42,438,527 shares outstanding. 43.8%
of shares are held by seven company insiders, who also serve on the board of directors.
36.4% of shares are deposited with Deutsche Bank Trust Company Americas, the sponsor of
the company's NYSE-listed American Depository Receipts, together with 3.3% for Frankfurt
Boerse-listed Global Depository Receipts. French food manufacturer Groupe Danone, known
in Russia for premium priced flavored yogurts, holds a 18.4% stake in WDB. The company's
21 directors and senior managers gave themselves a lofty sum of $28.2 million as
compensation in FY08.

Industry Overview and Competitive Position

Size really matters in Russa, as recent regulatory and tax changes have all but wiped out
corner vegetable stands and small deli - grocery type stores. Chain-store Hypermarkets
have little flexibility in choosing reliable manufacturer for stocking their shelves, as they
must maintain consistent brand and package variety in each chain store to take full
advantage of chain volume purchasing and media advertising. WBD commands leading
market share in dairy products, yogurts, and baby foods, and holds the third place in juice
product sales.

Demand for packaged dairy products in Russia is low relative to Western European
consumption and has remained mostly flat in the last 3 years with per-capita consumption
of 65.3, 67.4 and 65.5 kg per year in 2006, 2007 and 2008, respectively. There are 1,400
milk producers in Russia and milk is considered a staple commodity. Without strong brands
increasing milk prices brings immediate decline in sales. Major competitors are domestic
dairy manufacturers Unimilk and Voronezhsky, with 14.7% and 3.7% market share
respectively. Strong growth is observed in dairy-based desserts and flavored yogurts, an
upscale product segment, favored by imports like Danone with 7.2% market share (Danone
owns 18.4% of WBD), Campina (1.2%), and Ehrmann (4.1%). WBD's is the leader in this
profitable segment with 44.2% market share. Overall WBD maintains a 31% market share
of dairy products, which accounts for 74.2% of 2008 sales.

Annual juice and mineral water consumption increased from 18.7 in 2006 to 21.1 in 2007
and remained virtually flat in 2008 at 21.0 liters per person. However consumption of
bottled drinking water has increased and is now equal to juice consumption. Juice
production is highly concentrated, with the four largest producers accounting for 84% of
sales with 10 leading brands accounting for 72% of sales. Major competitors are domestic
manufacturers Multon, Lebedyansky, and Nidan, with 22%, 26% and 15% respectively.
Bottled water market is comprised of a large number of domestic brands, many of them
never seen outside of their production region as well as imports Coca-Cola and Pepsi
branded bottled water, with 34% market share between them. WBD's market share in
bottled mineral and ordinary drinking water is 2.7%. There is potential for price increases in
juice market and consolidation in domestic bottled water market. Demand for bottled water
is increasing, while sale of juices remains mostly flat. Overall WBD holds 17.9% share of
juice and bottled water market, which accounts for 16.8% of 2008 sales.

The most promising segment for WBD is the relatively new, fast growing, and highly
profitable baby food market, with consumption doubling from 2003 to 2008. The
competitive environment is highly concentrated, with 6 top manufacturers accounting for
73% of sales. With 80% of baby food sold in the European region of Russia, there is high
potential for strong sales growth, as baby food product marketing is expanding to Eastern
and Southern regions of Russia. Presently imports dominate powdered formula and baby
cereals, while domestic producers lead in dairy-based liquid baby foods and supplements.
Overall WBD maintains 18.3% share of the total baby food market in Russia, but commands
a leading 73% share of dairy-based baby foods. Baby food accounts for 9% of 2008 sales.

Financial Analysis
After 70 years of Socialism, Russian companies are notorious for poor operational efficiency.
WBD is a noteworthy exception with 2008 inventory turnover ratio of 7.85. Based on the
first two quarters of 2009 performance, this ratio may increase to 10 this year. Sales per
employee were $152,750 and the company employed 18,485 workers in 2008.
Already strong 2008 balance sheet liquidity with the Current Ratio of 1.56 has further
improved to 2.21 in the first half of 2009.
The company is solvent and uses financial leverage prudently with Debt to Assets of 0.58
and 0.54, and Debt to Equity of 1.43 and 1.19 in 2008 and the first half of 2009,
respectively.
The company reported a 49% reduction in net debt (calculated as long-term debt + short-
term debt - cash and cash equivalents) in the first half of 2009 from a comparable 2008
period. Reduction in short-term debt and a stronger cash position account for this result as
follows: long-term debt rose 12%, short-term debt fell 90% and cash increased 53%. Total
debt declined 27% in the first half of 2009, compared to the first half of 2008. WBD is
prudent to reduce financial leverage, especially expensive short-term debt, during the
current economic downturn. With strong operating cash flows, it may consider acquisitions
and continue share buyback in 2009.

The company increased gross margins in the first half of 2009 to 32.5% from 30% in the
first half of 2008. Segment gross margins were as follows: 29.1% in Dairy, 36.9% in
Beverages, and 48.3% in Baby Foods. Segment sales in dollars fell 33.5%, 19.5% and
10.3% respectively. A 45% ruble devaluation in early 2009 explains the declines. Selling
and distribution expenses decreased 23.5%, while General and Administrative expenses fell
34.1% compared to the first half of 2008. While net income in the first half of 2009 fell
17.4% in dollar terms, in rubles net income increased 12.3% in the first half of 2009 and
almost doubled in the second quarter of 2009 compared to the same periods last year. For
the first half of 2009 Free Cash Flow jumped to $131.1 million from $13.5 million in the first
half of 2008.

2008 Return on Equity of 15.4% is attributed mostly to operational efficiency and leverage
as follows: ROE= Tax Burden 0.71 x Interest Burden 0.59 x EBT Margin 0.09 x Asset
Turnover 1.82 x Leverage 2.36. Based on the first half of 2009 results, the tax burden is
improved to 0.76, the interest burden - to 0.7, EBT Margin increased to 0.092, Asset
Turnover declined to 1.42, and Leverage declined to 2.3. Thus the 2009 ROE based on the
first 6 months performance is projected to be 16%. The company earned $64.937 million or
$1.50 per share in the first half of 2009.

Investment Risks
In 2009 WBD must repay $248.6 million in debt, 93% of it in rubles. Operating cash flow in
the first half of 2009 covered 72.5% of this sum. By the end of the second quarter the
company had already repaid $185.6 million in short-term notes and $27.4 million in long-
term debt. In addition WBD repurchased $27.6 million of its stock, the share price rising
300% from its early 2009 lows. With a strong balance sheet and high credit ratings, the
company should have no difficulty servicing and refinancing its debt.

The company holds $250 million of variable-rate dollar-denominated debt. The incredibly
favorable lending terms are based on a 3-month LIBOR (currently 0.28%) + 1.75%.
Presently the company enjoys a remarkably low interest rate of 2.03% on its $250 million of
dollar-denominated variable-rate debt, which represents 37% of total debt. The company
has a moderate level of interest rate risk and, with strong marks from rating agencies,
below-average level of refinancing risk.

The company is exposed to foreign exchange risk insofar as 97% of revenues are in rubles,
while 37% of debt and most packaging and refrigeration equipment purchases are in
currency.

Deteriorating physical infrastructure in Russia, as well as inadequate maintenance of power

generation facilities, rail lines and paved roads may disrupt WBD's production and
distribution activities.
 ACTIVITY RATIOS

Inventory Turnover Ratio = Cost of Goods Sold divided by Average Inventory

$ $
Cost of Goods Sold 1,910,528 1,071,458
$ $
Average Inventory 243,602 212,943
Inventory Turnover Ratio 7.84 5.03
2008 Fist half 2009

Total Asset Turnover = Sales divided by Average Total Assets

$
Sales 2,823,564
Average Total $
Assets 1,555,034
Total Asset Turnover 1.82

Sales per employee = Sales divided by number of employees

$
Sales (USD 1,000) 2,823,564
$
Employees 18,485
$
Sales per employee (USD 1,000) 152.75

Liquidity Ratios
Current Ratio = Current Assets divided by Current Liabilities
Current Assets 734941 641992
Current Liabilities 472212 289844
Current Ratio 1.556379338 2.214957

Quick Ratio = Cash + short-term securities + receivables divided by Current Liabilities

Cash 277252
Short-term Securities 0
Receivables 225950
Current Liabilities 472212
Quick Ratio 1.065627303

Cash Ratio = Cash + Sort-term Securites divided by Current Liabilities

Cash 277252
Short-term Securities 0
Current Liabilities 472212
Cash Ratio 0.587134592
 Solvency Ratios
Debt to Assets ratio = Total Debt divided by Total Assets
$ $
Total Debt 920,665 779,102
$ $
Total Assets 1,576,965 1,431,990
Debt to Assets Ratio 0.58 0.54

Debt to Equity Ratio = Total Debt divided by Shareholder Equity

$ $
Total Debt 920,665 779,102
$ $
Shareholder Equity 644,437 652,888
Debt to Equity Ratio 1.43 1.19

Financial Leverage Ratio = EBIT divided by Average Shareholder Equity

$
Average Total Assets 1,555,034
Average Shareholder $
Equity 658,781
Financial Leverage Ratio 2.36

Net Debt = Short-term Debt + Long-term Debt - Cash & Cash Equivalent

Credit Analysis Ratios

Cash Flow to Total Debt = Cash Flow From Operations to Average Total Debt
CFFO $ 321,190
Average Total Debt $ 883,391
Cash Flow to Total Debt 0.36

Return on Assets = Net Income divided by Average Assets

Net Income $ 101,712
Average Assets $ 1,555,034
Return on Assets 0.07

Total Debt to Total Assets = Total Debt divided by Total Assets

Total Debt $ 920,665
Total Assets $ 1,576,965
Total Debt to Total Assets 0.58

Working Capital to Total Assets = Working Capital divided by Total Assets

Working Capital $ 262,729
Total Assets $ 1,576,965
Working Capital to Total Assets 0.17
 Profitability Ratios
Gross Profit Margin = Gross Profit divided by Sales 1 Quarter 2 Quarter
Gross Profit $ 913,036 $ 168 $ 195
Sales $ 2,823,564 $ 517 $ 555
Gross Profit Margin 32.34% 32.53% 35.21%

Operating Profit Margin = Operating Income divided by Sales

Operating Income $ 245,143 $ 50 $ 61
Sales $ 2,823,564 $ 517 $ 555
Operating Profit Margin 8.68% 9.75% 11.07%

EBITDA Profit Margin = EBIT divided by Sales

EBITDA $ 245,143
Sales $ 2,823,564
EBITDA Profit Margin 8.68%

Pretax Profit Margin = EBT divided by Sales

EBT $ 143,639
Sales $ 2,823,564
Pretax Profit Margin 5.09%

Net Profit Margin = Net Income divided by Sales

Net Income $ 101,712 $ 13 $ 52
Sales $ 2,823,564 $ 517 $ 555
Net Profit Margin 3.60% 2.44% 9.43%

Operating Return on Assets = Operating Income divided by Average Assets

Operating Income $ 245,143 $ 50 $ 61
Average Assets $ 1,555,034 $ 389 $ 389
Operating Return on Assets 15.76% 12.96% 15.79%

Return on Assets = Net Income divided by Average Assets

Net Income $ 101,712 $ 13 $ 52
Average Assets $ 1,555,034 $ 389 $ 389
Return on Assets 6.54% 3.24% 13.45%

Return on Equity = Net Income divided by Average Equity

Net Income $ 101,712
Average Equity $ 658,781
Return on Equity 15.44%