LETTER TO
Shareholders
Dear Fellow Shareholders:
On behalf of Central European Distribution
Corporation directors, management and
employees, I would like to welcome our new
shareholders and thank our existing shareholders
for continuing to support our company. Last year
was an important year for us as it marked the first
full year as a consolidated operation of spirit
production, marketing, sales, import and
distribution. The improvements in margin and
operating results driven by the addition of the Bols
and Polmos distilleries acquired in 2005 are
evident in our 2006 results.The foundation of our
business, our import, production and distribution
platform, was further developed during 2006
which drove sales of our higher margin produced
brands and exclusive import brands. As a result,
we sold approximately 8.5 million nine-liter cases
of brands we own making us one of the largest
producers of vodka worldwide.
We continue to benefit from the synergies
obtained from our platform in Poland as the
number one distributor of alcoholic beverages, the
number one producer of vodka and a leading
importer. Our leading sales teams in Poland and
Hungary are well-positioned to take advantage of
the strong portfolio we have built to meet
customers demand for more branded products.
We believe that we are well-positioned to take
advantage of other similar opportunities that exist
in the region and in other key vodka markets in
the next few years as the economies in Poland and
the region continue to grow. In 2007, GDP growth
in Poland is expected to be approximately 5% with
GDP growth in other countries in the region
ranging from 4% to 10%. In addition, European
Union grants are scheduled to reach $84 billion
for Poland from 2007 through 2013 and top an
additional $58 billion for other countries in the
region during the same period. With the
experience and knowledge we have in a region of
such robust economic growth, we are in a good
position not only to drive growth in our existing
business but to also make accretive and strategic
acquisitions in the region and capture the
consumer demand for branded products.
2006
Throughout 2006 our management team worked
to integrate our two production facilities, Polmos
Bialystok and Bols Poland, and our first
international expansion outside of Poland,
Bols Hungary.
Our local management teams in our production
facilities have responded to our integration
program. Their efforts have led to some very
positive results, including the better-than-expected
growth of many of our key brands. For example,
we had a record year for sales of Absolwent, the
best-selling vodka in Poland with sales of over
4 million cases. Soplica, the fastest growing vodka
in Poland broke the 1,000,000 case mark for the
first time in 2006. We also redesigned the
packaging for Zubrowka for the domestic and
export markets to better reflect the premium
image Zubrowka has achieved in the marketplace.
All in all, we are quite pleased with the successful
integration of these entities and the positive
numbers they have delivered from top to bottom
line.We are confident that the management in our
production facilities will continue to execute at a
high level.
In July 2006 we acquired Bols Hungary Kft, which
marks the first step in our expansion outside of
Poland. Bols Hungary’s strong platform of core
local brands makes it one of the leading alcohol
importers and distributors in Hungary.
Among other brands, Bols Hungary imports and
distributes the best selling vodka in Hungary, our
Royal Vodka and imports Jagermeister on an
exclusive basis. Hungary is one of the strongest
markets for the Jagermeister brand, world-wide.
The integration of Bols Hungary has gone well and
exceeded our expectations in 2006, and as we
continue to position our exclusive high margin
import products through the platform developed
in Hungary, we expect the management team in
Hungary to build on their success of 2006.
Our export team signed three key export / import
agreements in 2006. We signed a long-term
agreement with Pernod Ricard for 68 markets
concentrated mostly in Europe and including
France where Zubrowka, one of our key export
brands, is one of the leading imported vodkas.
In the United Kingdom, where Zubrowka is the
leading premium imported vodka and where
Soplica is gaining popularity in the hypermarket
arena, we signed an agreement with Marblehead
Brand Development Co. In Japan, we signed an
agreement with Lead Off Ltd. Earlier this year we
signed an agreement for all of Scandinavia with
Chris Wine and Spirits. We are currently in
discussions with other importers around the
world and expect to have a number of other
agreements signed in 2007.
We considerably strengthened our exclusive
import portfolio by signing import agreements
with Gruppo Campari and Disaronno Amaretto.
The Campari agreement gives us exclusive import
rights in Poland for the Campari, Skyy Vodka and
Cinzano brands, among other brands in the
Gruppo Campari portfolio. We have worked
diligently to create brand awareness and sales for
our exclusive import products. As a result of this
work, our import portfolio has the number one
selling mainstream wine, Carlo Rossi, and the
number one selling varietal wine, Sutter Home.
In addition, each of the following products that we
import on an exclusive basis is the number one
seller in Poland in its respective product category:
Jim Beam bourbon, Sierra tequila, Metaxa brandy
and the entire range of Bols liqueurs. With our
sales force, distribution platform and demand for
branded products fueled by a strong economy,
we believe we can continue to see significant sales
growth in our exclusive import portfolio including
our most recent additions, the Campari and
Disaronno product lines.
In December 2006, we completed the listing of
our shares on the Warsaw Stock Exchange, and
are now a dual-listed company, with shares actively
trading on both the Nasdaq Global Select Market
and the Warsaw Stock Exchange. We believe the
listing will create new shareholders and will
increase holdings of existing shareholders within
Poland and Europe. Combined with our listing on
the NASDAQ Global Select market, we believe
the dual listing will increase liquidity of our shares.
2007
Our strategic objectives for 2007 include
continuing the integration of our production
assets and continuing to consolidate our Polish
operations. In addition, we will actively pursue
distribution and production acquisitions
opportunities within Poland and the region.
In January of this year we successfully installed a
fully integrated SAP system at Polmos Bialystok
and upgraded the SAP system at our Bols facility.
We also have bought the source codes for our
distribution software. As a result, we now have a
fully integrated system within and between our
production and distribution segments. We have
also implemented hand held units for our 700 plus
sales force throughout Poland and developed a
general company-wide database. These initiatives
have streamlined our selling, ordering, warehousing
and delivery processes significantly. We are also
planning to create one back office operation by
2008 to process all accounting, accounts
receivable, accounts payable and consolidation
work for all of Poland.
As we currently produce approximately eight and
a half million nine liter cases of vodka annually, it is
important for us to delve deeper into our supply
chain starting with the largest cost component,
raw materials.Therefore, we are currently involved
in the following initiatives to ensure we will have
more control over our cost of goods. We are
currently constructing two rectification units one
each in our Bialystok and Bols facilities and expect
them both to be fully operational in the third
quarter of this year. We expect these units will
have a return on capital invested in 3 to 4 years.
On the back of this rectification investment and
future investment in this area, we are targeting to
further lower our cost of goods in the Polish
market through 2008-2009.
We have identified a number of distribution
targets in those areas of Poland where we would
like to strengthen our distribution presence.
We expect to close these distribution acquisitions
throughout 2007 and expect the annualized
revenue of these companies, in 2006 terms, to be
approximately $100 to $120 million dollars of
annualized revenue. Our production / distribution
platform should give us the necessary presence in
the market to drive organic growth in the
on-trade and off-trade as evidenced by the
increase in our organic growth from 3% in the
fourth quarter 2005 to 10% in the fourth quarter
2006. Since acquiring our two production facilities,
we have worked diligently at integrating our
production and distribution entities to give our
sales force the tools it needs to drive sales and,
more importantly, to drive organic sales by
increasing sales with existing clients and capturing
new clients by offering our must-have vodka
brands at attractive pricing. In addition, our sales
force can offer our import portfolio to these
clients as end use customers call for branded
imported products.
We have and will continue to identify production
and distribution opportunities in Central and
Eastern Europe that meet our acquisition criteria.
We are looking for companies that have a fast
growing import business, a sound distribution
platform and a solid local business presence.
We believe that brands, and specifically premium
brands, are going to continue to grow as individual
credit and income rise in the region. Companies
with a fast growing import business, a sound
distribution platform and a solid local business
presence will be well-positioned to take advantage
of the consumer shift to branded products, and
we feel we can add additional benefits with our
import portfolio and the relationships with
international drinks companies we have forged in
our years in Poland. In addition, we can take the
benefits of our critical purchasing power within
the region to reduce key SG&A costs of the
acquisition targets such as bank services,
administrative services and insurance costs to
name a few.These opportunities outside of Poland
will be a primary area of focus for us in 2007
and 2008.
It was our intention from the beginning of our
involvement with Polmos Bialystok to acquire
100% of the company.To that end, during late 2006
and early 2007, we have increased our stake in
Polmos Bialystok from 66% to just over 90%
through two tender offerings.We are pleased that
we have obtained this position and would like to
increase our position to over 97% with the
addition of Polmos Bialystok employee shares of
approximately 6% that will be available in May
of this year as the lock up of these shares expires.
As part of ongoing efforts to reduce financing
costs, we have successfully retired approximately
20% of our 8% Senior Secured Notes and will seek
to continue reducing costs associated with the
Senior Secured Notes, including our exposure to
foreign exchange swings, with lower debt facilities
in local currency thereby lowering our debt
obligations and strengthening our balance sheet.
Looking Ahead
We are excited about the opportunities we see
available to us in 2007 in Poland, Hungary and in
the region. Like in 2006, we have set ambitious
plans and goals for 2007. The Polish economy and
the economies in the region are expected to
continue to grow fueling an increase in consumer
demand for branded products in the region.
We feel strongly that the production / distribution
/ import platform we have built in Poland and the
distribution / import platform we have built in
Hungary puts us in a solid position to meet this
demand and to drive our business forward.
William V. Carey
Chairman