Kofola CeskoSlovensko a.s. (KOFOL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Kofola's 2019 Results Conference Call. I'll now hand you over to Mr. Jakubík, the group CFO. Please go ahead.

Good morning to everyone. This is Pavel speaking. Thank you for joining our call today. We appreciate your interest in our company. I'm joined today by our CEO, Janis Samaras. Janis will start today's presentation by sharing some of the strategic highlights. I will then follow with a review of full year and fourth quarter financial performance. Finally, we will shortly comment on 2020 outlook. Afterwards, as always, you will have a chance to ask the questions. So now I hand over to Janis.

Hello. Good morning, dear investors, ladies and gentlemen. I will try very briefly to go through the most important highlights concerning last year and our future for this year. Last year was a very successful year, an important milestone in our history. We significantly simplified our business. We divested operations in Poland and Russia. And by this step, we unlocked internal resources, which we were able to focus to our most profitable businesses. The most important financial KPIs, like revenues and EBITDA, overcome our expectations. We resulted on CZK 6.4 billion revenues, which is more than 4% growth. And also EBITDA grew by more than 5%. It was almost 6% with CZK 1.1 billion EBITDA. This is mainly because of our successful organic growth. Our organic growth was based on distribution development and also innovations development. The most important innovations which would -- which I would like to stress were energy drink, SEMTEX, Royal Crown Cola and mineral water, Kláštorná Kalcia, in Slovakia. These were the innovations which we had double-digit growth and got very important position in their segments. We also were focused on acquisitions. We concluded last year acquisition in our segment, Fresh & Herbs, we bought Café Reserva. And by that step, we widened our assortment for HoReCa segment by coffee and premium tea. But the most important acquisition which we are going to conclude this year was mineral waters, Ondrášovka and Korunní. Also, we were also focused on sustainability topics. We invest a lot of our efforts on sourcing of organic raw materials, lowering our carbon footprint and many other topics around recycling PET and decreasing waste which we create. This was, let's say, one of the main topic we want to focus on the next years. And looking to the future, this year, we can say that the most important topic we will have to solve is the integrating acquired mineral water company with 4 facilities and also to mitigate our last biggest problem, which is named pandemia of COVID. This is also why we are going to make some changes in our top management. Pavel Jakubík will stay in our company from 1st April as a financial manager focused on treasury. And we promoted Martin Pisklák, former CFO from Radenska, group CFO. So I would like to welcome Martin Pisklák today on our conference as well. And this is briefly my comments. I am ready for your questions. And I would like to pass the word back to Pavel.

Thank you. Janis shared some of the strategic highlights from across the businesses. And I'm going to give you now some more color on financial results and performance in each of our reporting segments. Moving to slide, Kofola 12 months' highlights. I'm very pleased to report another year of strong progress. In 2019, we have delivered robust performance across all our key financial metrics, revenue, EBITDA, cash and earnings. In 2019, we delivered revenue growth of 4.1% or 3%, excluding the impact of LEROS and Espresso acquisitions. This growth was very broad-based across all our business segments. Our market share performance continues to progress very well. During the course of 2019, we gained or maintained share in the majority of our markets. The good progress on top line growth, together with our continued effort to control costs and drive efficiency in the business, enabled us to exceed our EBITDA target by CZK 39 million, means by 3.6%, reaching CZK 1.119 billion EBITDA, which is the highest operating profit in Kofola Group history and confirmation of our operating profit growth strategy in our core markets in Czechoslovakia and Adriatic. In those markets, we have been able to achieve continuing growth of more than 5 years. EBITDA margin grew by 30 basis points. We also generated strong free cash flow, closing the year at CZK 419 million despite increased capital expenditures into our business. The cash position is further strengthened by the proceeds from the sale of Russian associated Megapack and second tranche of payment from the sales of Polish subsidiary, Hoop, both we have received earlier this year. We have been able to keep our net debt/EBITDA ratio at a level of 2.4x, which is in line with prior year. Our profit for the period increased by 21% to CZK 319 million due to improved EBITDA. It was partly offset by higher financial costs and taxes but compensated by profit from discontinued activities due to the sales of Polish and Russian business. This financial growth was accompanied by continued progress in our effort to build more sustainable business. In terms of the input costs, in 2019, we have approached positive development in raw materials, mainly sugar and sweetener. PET resin was more or less flat, increase in the first half of the year followed by some decrease in the second part. Due to the pressure on labor market in 2019, personnel cost increased by CZK 130 million across all our businesses. If we move now to our fourth quarter highlights. In Q4, we have even accelerated our performance with the growth of revenue 5.7% or 4.1%, excluding the impact of Espresso acquisition compared to Q3 growth. In terms of operating profit, in Q4, we reached EBITDA of CZK 259 million, which constitutes growth of nearly 29%. Very good result were visible mainly in Czechoslovakia business due to favorable product mix and positive development of material costs. Moving now to slide, Consolidated Adjusted EBITDA and Revenue, Long-Term Review. It's visible that Kofola Group and its core markets, Czechoslovakia and Adriatic, were able to achieve outstanding 7% compound annual growth rate, both on top line and EBITDA, which is a great success, considering the fact that those markets are quite mature and Kofola already well positioned there. If we look now across the businesses, starting with Czechoslovakia. I'm pleased to say that we have enjoyed a [ good ] year of growth with revenue up by 1.9%, driven mainly by Royal Crown Cola, successful launch of energy drink, SEMTEX, and new mineral water, Kláštorná Kalcia, in Slovakia. All formats exceeded last year performance with on-the-go, smaller formats growing by the fastest pace and the home formats in retail growing at the modest rate. In 2019, Czechoslovak EBITDA has increased by 7%. The EBITDA margin even stepped forward 100 basis points to 20.6%. This was mainly driven by higher contribution product mix and favorable input price development. In 2019, Czech and Slovak retail markets have been flat in terms of the volume with the growth driven just by the value. The main growing categories were cola, non-flavored waters and energy drinks. Kofola has been improving its market share mainly due to energy drink, SEMTEX, and mineral water, Kláštorná. In Q4, Kofola reached historical volume share on Slovak retail market. We have achieved this success mainly thanks to growth in non-flavored water, especially a really strong brand, Kláštorná Kalcia, the main contributor to this success. Kofola also continued keeping the highest HoReCa market shares on both Czech and Slovakia markets, which also positively contributed to the increased revenues and profitability of this segment. In Czech HoReCa market, we reduced our main competitor's lead in the market share by a total of 4.6 percentage points. In Slovakia, we have been able to further strengthen our leading market position and increase the gap between us and the second player on the market. Moving on to Adriatic. In 2019, we have further continued with a strong growth and increased revenue by 7.6%. All formats exceeded last year performance with on-premise formats growing by double digit. Revenue increase was more visible in Croatia market, followed by the solid growth in Slovenia and export mainly to ex-Yugoslavia countries. Sales realized in the Adriatic region grew basically in all key brands with the main impact of Radenska water and distribution of Pepsi. In 2019, Adriatic EBITDA has increased by 8.5% and EBITDA margin has stepped forward 10 basis points to 15.2%. This was mainly driven by higher contribution, well-managed costs and price increase execution. In the Fresh & Herbs business segment, we have experienced a tougher year from profitability point of view with revenue up 12% or 1.5%, excluding the impact of the LEROS and Espresso acquisitions. The decrease in EBITDA in this segment was mainly allocated to UGO PET bottles and packaged salad business and also influenced mainly by LEROS investing in its marketing activities and sales support on its Czech and Slovak markets. Despite positive development in Q4, the further improvements in operational efficiency for the whole fresh supply chain are necessary and remains the challenge for 2020. Let's move now to slide, Selected Financial Performance Indicators. CZK 480 million capital expenditures incurred in 2019, it accounts for around 7% of revenue but invested mainly into new production lines in Slovakia and Croatia and in commercial investments to HoReCa and were in line with the previously declared range. Improved EBITDA was the key contributor to free cash flow performance. Despite worsened working capital mainly due to higher inventory, working capital management is sustainably delivering [ 3 native ] brands with our standard and competence. On top of our ability to generate strong cash flow, we also had quite significant cash on balance sheet in the amount of CZK 775 million. Despite our significant capital expenditures, payment of CZK 300 million dividends and negative IFRS 16 impact of additional CZK 217 million leases recognized as debt item, we have been able to keep stable and save net debt/EBITDA ratio of 2.4. Let's have a look at quickly financial results and income tax. The growth in finance cost is mainly a result of increase in interest expense from bank loans by CZK 40 million and foreign exchange losses. The reason for increased interest expense, mainly the significant rise of average annual interbank rate, which is a base for calculation of interest from bank loans. If we move now to our M&A strategy, during the year 2019, we have also further strengthened our newly created business segment, Fresh & Herbs, with the acquisition of coffee brand Café Reserva, distribution of Café Vergnano and the premium tea, Dilmah. During first quarter 2020, we started distribution of those products also through Kofola sales team, mainly to our HoReCa clients. Our next major challenge will be the integration of the cider brand, F.H.Prager, which is this year's acquisition and the finalization of the acquisition of Korunní and Ondrášovka mineral waters, followed by their successful implementation into our structure. As you probably notice, antimonopoly office approved a transaction on March 11 this year without limitations. At the moment, both Kofola and sellers are working on fulfillment of remaining conditions prior to the closing. The closing of the transaction is expected in the coming weeks. As we already presented in December during the separate event, after successful integration of the acquisition, Kofola will double its market share in Czech retail in the most important water category. It will complete Kofola portfolio with high-quality mineral water sources and enable us to benefit from Kofola's strong distribution in main HoReCa channels. Additionally, mineral water market is relatively well protected against market fluctuations because of growing number of health-conscious consumers. In terms of our divestments, a few words. As I already mentioned, during 2019, we successfully divested our business in Poland and Russia and improved our cash position both in 2019 and in first quarter 2020. The proceeds from the sale of Russian associate occurred just in January and February 2020. Let's move now to slide, Goals 2020. Due to the current COVID-19 situation in all countries where we operate, there is currently too much uncertainty regarding the period of government restrictions. This emergency impacts mostly group sales in the HoReCa segment as well as sales of UGO salateries and fresh bars in closed shopping centers. Currently, our production is in operation. We have continuing supplies of key materials. And we are in close contact with our key suppliers. Additionally, we have increased hygienic precautions in our production plants and offices. And our administrative employees work from home. We are reviewing all significant cash outflows, look for savings both in capital expenditures and operating expenses. Impact of COVID-19 on commodities prices in 2020 remain uncertain at this stage. We remain very vigilant and monitor closely the situation on day-to-day basis. As of today, the reasonable estimate of the financial effect of COVID-19 on full 2020 year cannot be made. Overall assessment of impacts will be possible just after the termination of the emergency situation and clear end of government compensation, if any. For those reasons, the goal for 2020 will be presented, together with the publication of the first quarter results, in mid of May. To sum up, despite current uncertain environment, Kofola is strong and resilient. And we will continue in its strategy to further build our leading brands, strengthen our market shares in both retail and HoReCa and focus on products supporting also lifestyle. The year 2019 was very successful with positive development in our financial results that lay a strong foundation for further growth in the company value to shareholders. Now it's time for your questions, if any.

[Operator Instructions] We have a first question from Mr. Pavel Ryska.

I have a couple of questions to ask you. So the first one, there was a spike in your CapEx expenditures, as you have just shown in the presentation, last year to almost CZK 500 million. Could you give us some outlook on CapEx if they are going to stay this high or if you think that they can normalize to a lower level? Or let's say which is the approximate number that we can count on into the coming years? Second, the net debt-to-EBITDA ratio was presented as 2.4 at the end of last year. I suppose I just want to make it clear, that was before the loans that you have taken to finance the acquisition of the mineral waters. So after the loans, where do you expect this ratio to go? And finally, just to make it clear, I understand that the current situation doesn't allow you to present your outlook for this year. Could you give us some more color on whether your Annual General Meeting is going to be postponed or if you are going to wait with the dividend decision until like the very, very end of any negotiation with the Czech government on some compensations? Because that can take a lot of time or that can go months and months. So investors would be -- wouldn't maybe understand entirely the situation if any dividend is going to be paid out or not. And finally, in yesterday's announcement, there was a sentence which says that you may not fulfill some of the bank covenants. So if you could just explain to us if the bank covenants that you have, if they, for example, prevent you from paying out the dividend in some cases?

Okay. Thank you for your questions. Let's start with the first one. The CapEx in 2019 were quite robust. And as I mentioned, there were some investments into production line in Slovakia, Croatia. For each year, we have some priorities. But at the same time, we are able to cut capital expenditure if necessary, despite having negative impact on our performance in short term. In mid-term, we have to invest to ensure further grow. Definitely, taking into account this current negative situation today, we are working hard to find the right CapEx to be cut. But it's too early to say now how much we will be able to decrease our CapEx. On the other hand, it's also necessary to take into account that once we acquire Ondrášovka and Korunní, our total CapEx will include also those 2 companies. However, we don't expect a significant increase of CapEx due to this fact. In terms of net debt/EBITDA, the net debt -- 2.4 at the end of 2019, as you correctly noticed, was before drawing acquisition loan because the acquisition will be finalized just in 2020. As we already mentioned in some of our presentations, our ultimate goal is to keep net debt/EBITDA indicator below 3.5. And we strongly believe that we will be able to keep it despite this negative situation on the market now, which definitely will influence our EBITDA performance. Well, yes, and this -- bank covenants are calculated and reported on a quarterly basis. And generally, there are 2 sets of covenants, leverage ratio on the EBITDA and debt service. And well, if our EBITDA will be significantly and negatively influenced, definitely the calculation of both of those covenants is at risk today. And due to the uncertainty, we can't currently state how big the negative impact of EBITDA would be. And we are in a close discussion with banks. They are cooperating, understanding the situation. So if there is a need to ask for a waiver for not meeting the covenants, we strongly hope it will not have any negative impact on us. In terms of the dividends, generally our general meetings take place in May or beginning of June. So far, we don't predict what kind of government measures will be in place at that time. So we haven't considered moving general meeting to a later date because we have not sent invitation so far. So we are monitoring the situations. And if there will be no government restrictions at the time, we will organize the general meeting as usual and prove the results and discuss dividend policy at the general meeting hopefully in end of May or June.

Mr. Ryska, do you have an additional question?

Maybe one more. One of the positive things of last year was the drop in the price of sweeteners and of sugar. What's the situation this year? Do you see similar prices to last year? Or is there some significant change in these costs? And maybe if when we are speaking about cost, if you could also comment on the other important costs in the business, such as packaging, if the prices are moving in a certain way. And then that's all for my part.

Okay. So let's start with the second part of your question. Packaging costs, mainly PET resin, as I already commented, the price decreased starting from third quarter 2019. And now it's more or less stable at this lower level, let's say. So we are benefiting from that. And I hope that it will stay as it is for some period of time. But it's very difficult to predict because there are a lot of influences, exchange rate, U.S. dollar, oil price and then many, many others. But at least in the mid-term, we benefit from low PET resin price. In terms of the sugar, we already indicated during our previous calls, for Czech and Slovak markets, our production, we have been able to negotiate very good contracts, keeping the sugar and sweetener price at a similar level to 2019 for majority of our yearly volumes. In terms of Adriatic, we expect some increase. The spot price of sugar currently is much higher but will not have any significant impact on us in, let's say, coming months. And in terms of increased sugar in Adriatic, we are ready to implement it in our negotiation with customers and increase our prices to reflect the increase in sugar price as our competitors will do in the same way.

[Operator Instructions] And we have a question from Mr. Petr Bartek.

Sorry, I was a little bit late to the call. So maybe my question was already discussed, your outlook for the impact on EBITDA from the coronavirus in Q1 and in Q2.

We partly touched this question. There is too much uncertainty. In the first quarter, the first 2 months, let's say, and into first half of March, our performance was on a very good level. So the impact of COVID-19 would be very limited in Q1. And regarding Q2, it's really too early to predict because we don't know for how long there will be restrictions and government limitations regarding the movement in the HoReCa segment as well. So we hope that after Easter, at least some regulation of restriction will take place, but we will see. The crucial is the summer season that generally start already in mid of May, depending on the weather and then through June up to September, it's a major part of our EBITDA. So we hope that the summer season will be more or less with limited restrictions, but we will see.

And sort of an additional question, in Q3, if the borders are still closed, would you expect a positive impact on your summer volumes? Or would you rather expect some kind of price war after these problems in first half of this year? And also, if you have any CapEx guidance for this year and what flexibility and CapEx you have for this year.

Let's start with the CapEx, already had this question. So we are monitoring our planned CapEx for 2020. And definitely, we will come up with some cuts. But some CapEx were already not spent but negotiated and contracted. So it will not be easy for us in such short period of time to cut it significantly without negative impact on our performance and our relationship with suppliers. But definitely, we -- CapEx is our priority to limit the unnecessary outflows. In terms of restriction on border movement, I think with the still current situation, it can be beneficial for us because our position in HoReCa is very strong. So if people will be allowed to travel across Czech Republic and maybe hopefully also Slovakia, it would be beneficial for us. Our position in Prague is not dependent on tourists. So limitation of foreign tourists visiting Czech Republic and Slovakia is not so painful for us.

Sorry. So what's the general CapEx plan for this year?

It was slightly below the level of this year. But as I mentioned, we have to take into account also on the capital expenditures into our newly acquired businesses, Ondrášovka and Korunní. So that could -- originally, it would be a little bit higher. But we are already doing it in [ Poland ] and cut all necessary CapEx that are possible to be cut.

And do you have a similar CapEx to revenue ratio or different?

More or less similar, yes.

Mr. Ryska, do you have an additional question, please?

Yes. Maybe one last question from my part. I was wondering, we are seeing these days higher retail sales all across the country. So I was wondering this negative impact that the current situation will have on your HoReCa segment, to what extent do you think it can be compensated by higher sales in retail? Or can you give us any indication about the growth of your sales in supermarkets and the like? Because I think that's one aspect of the current situation that investors are interested in.

Yes, you are right. It's -- such switch is visible in our daily sales reports. The question is how long do I take, whether just the first wave or whether it could be considered as a kind of, let's say, short-term trend? But definitely, our revenue in retail isn't higher comparing to, let's say, previous months and also comparing to our budget.

Mr. Petr Bartek, do you have an additional question, please?

Maybe if you touch the dividends outlook already?

Yes, it was. Petr, it was already discussed. Dividend due to this uncertainty will not be disclosed now. But we move this topic to our general meeting that will take place probably in May or June, if there will be possibility and the government restrictions will allow us to organize it.

And would you be asking for the government support for wage payments and so on? Would you try to utilize the government measures?

We are monitoring on daily basis all the actions and the possibilities, including also some kind of government compensation. But I think it's really too early. Because our production is still going. We have not stopped the production. We definitely see a decrease in revenue to HoReCa segment. But in these first 2 weeks of March, it's just a very short period of time. So it's too early to ask for some kind of compensations from the government at the moment. But we are monitoring it.

Maybe what is the quarterly amount of wages in the group chain, which I believe is directly hit?

So pretty tough question. It's not -- from the group point of view, definitely it's not so significant. There were some agency workers, some non-core employees. I'm not able to answer it now. But if there would be potential compensation, definitely the goal will be they will the first ones we will ask for that because of fairly closed operations comparing to Kofola business, which is still, to some extent, continuing.

There are no more questions. I would like to ask Mr. Jakubík to conclude this conference call.

Okay. Thank you very much for your time and participation in this morning's call. We are pleased with the progress we have made to date, and we look forward to updating you on our progress throughout the year. Thank you, and have a nice day.

This concludes today's conference call. Thank you all for your participation. A recording of today's call will be available on our web page. You may now disconnect.