Wimm-Bill-Dann's Spilt Milk

At first whiff, the first-nine-months results reported yesterday by Russian dairy and juice concern Wimm-Bill-Dann (NYSE:WBD) (pronounced "Wimbledon") smell pretty ripe. Sales were up nearly 27% over the equivalent 2003 period, but net profit fell almost 10%.

Passing strange. Looking closer at the numbers, you'll see that selling and marketing expenses weren't to blame -- they rose roughly in line with the increase in sales. And the company's execs aren't padding their pockets with bonuses -- general and administrative expenses increased only about half as fast as did revenues.

So what's to blame for the lower profits? Margins. Gross margins for the first three quarters of 2004 were just 28.4% vs. last year's 30.4%. Judging from the company's comments in its earnings release, the culprit here was primarily a continuing growth in raw milk prices -- not at all a local affair, as similar growth was seen recently in the U.S., hurting dairy manufacturers such as Illinois kefir makerLifewayFoods (NASDAQ:LWAY) and helping cheese producerLucille Farms (NASDAQ:LUCY). But an increase in interest expense on Wimm-Bill-Dann's quarter-billion dollars in long-term debt also hurt its net.

Between the continuing slide in GAAP profitability and the accompanying decline in Wimm-Bill-Dann's stock price (down 36% since its debut on the NYSE on Feb. 8, 2002), investors in the company can be forgiven for shedding a few tears. But wipe them away for a moment and take a look at its cash flow statement -- it just might turn that frown upside down.

Sure, Wimm-Bill-Dann remains free cash flow negative. But to date in 2004, it's experienced cash outflows of just $5 million or so. Whereas by this time last year, it was much more seriously in the red, cash flow-wise, down $62.5 million due to heavy expansion costs.

In Russia, nothing's ever quite certain (with the possible exception of taxes, as YUKOS (Pink Sheets: YUKOY) can aver). But the trend certainly looks optimistic for Wimm-Bill-Dann's emerging into free cash flow positive territory in the not-too-distant future. Considering that it still dominates the Russian and Ukrainian markets and is expanding elsewhere, once you add free cash flow to the mix, this company could ultimately prove to be the cream of the crop of Russian equities.

Before investing in the "Wild East," learn the lessons of YUKOS, and enter this market at your own risk:

• YUKOS' American Brain Drain
• Death and Taxes in Russia
• Russia Names Its Price
• YUKOS: From Dismal to Worse
• YUKOS' Slippery Situation

Fool contributor Rich Smith has no position in any companies mentioned in this article.