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

Ladies and gentlemen, welcome to Kofola's 2020 Second Quarter Results Conference. You will now hear a recording of summary group's results presented by group CFO, Martin Pisklák. This will be followed by business insights from Czechoslovakia and the Adriatic, presented by Country CEOs Daniel Buryš and Marián Šefcovic.

Good morning, ladies and gentlemen. Welcome on our conference call, and let me guide you through our second quarter results. Let's start on the Page 13. From the Page 13, it's visible that our revenues in the second quarter decreased by 16%. Our EBITDA during the second quarter decreased by CZK 76 million compared to second quarter of 2019. These results are very strong. Basically, we keep EBITDA margin above 15% during the second quarter, and we managed to finish the second quarter in a positive net profit. This excellent result came from our strong markets: Czech Republic, Slovakia and Slovenia. We had no problems with working capital, a structure of our receivables remain practically the same, and we had no issues, with a better debt. Net debt-to-EBITDA ratio totaled 3.5, which is on the age of our bank covenants. However, after the agreement with our banks, we received a waiver for the end of the second and third quarter of 2020. Overall effect of COVID pandemic on the profitability of the second quarter was approximately CZK 100 million. Approximately such a number was also expected in the end of the first quarter, so we are quite satisfied with the results and our forecasting abilities. I'm also very happy that this positive trend continued also during the season in July and August. In July, we finished approximately 1%, behind the last year. And in August, we were even 3% above the last year net revenues. So overall, season was slightly above the last year number. Because of such a good results, we increased our target for the year 2020 to CZK 950 millions -- to the interval of CZK 950 million to CZK 1 billion. We also announced dividend on the level of CZK 13.5 per 1 share, which is basically on the last year level. We believe that we have a very strong cash flow. And also, the projections for the year 2021 are allowing us to pay such a exceptional dividend. However, please note that in the case of the -- but pandemic situation in the third and fourth quarter, this dividend can be reconsidered. To summarize second quarter, we are very happy with our results. We are considering these results as very good. And we are still keeping to be very -- to have a very high discipline in cash flow and our costs also for the rest of the year 2020. Ladies and gentlemen, thank you very much for your attention. And now I'm handing my words to Daniel and Marián.

Hello, everybody. Here is Daniel speaking. I'm responsible for Kofola Czech and Slovak soft drink business. I think it is a waste of time comment how Q2 was complicated. HoReCa was 2 months lockdown, and sales were on 50% of our plans. Similar situation was in On the go segment. People stopped traveling at all. Retail was stable. And June weather was very negative. It was the worst weather in the last decade. What we did? We implemented cost-saving program, including simplification of organizational structure and personnel cost savings. We significantly changed priorities for top season. But one priority wasn't changed, post-merger integration of ONDRÁŠOVKA and Korunní. We understand that biggest acquisition in our history needs extra focus. Project is successful. And ONDRÁŠOVKA and Korunní is on projected level. Integration will completed by SAP implementation in January 1. Top priority for summer was Kofola brand. We successfully launched new 0.5-liter can including new innovated no sugar version. We had to postpone other launches and also prepared start of coffee distribution by Kofola sales team. We totally updated also our trade marketing activities for summer, usually based on big music festivals. We changed it to small open air cinemas events and tourist destination promotions, again, based on [ draft ] Kofola maximum penetration. We could report increase of market share in HoReCa, also in retail. There is visible consumer preference to strong traditional brands during crisis. That was Q2. Now let me briefly comment summer season performance. It was very successful. Sales were not just above our expectation, but also above last year and budget. Success is based on HoReCa development out of foreign tourist destinations. We are not dependent on Prague market. Czech and Slovak people spend holiday in local tourist destinations, and we were well prepared on it. High sales, in combination with cost saving and positive raw material price development, delivered extraordinary successful profitability. That's the end of positive messages. Q4 will be complicated due to virus return, especially HoReCa is in Q4 based on conference tourism, which is practically fully canceled, and Christmas events -- and that will be reduced. Negative is also trend of home office employment. Retail, we expect unstable level, including Christmas top season. On the go will be dependent on school opening or closing. Ladies and gentlemen, year 2020 is crazy, but Kofola Czechoslovakia soft drink division confirm stability and anti-cycling base of business model. Thank you for your attention, and see you soon after Q3 report.

I'm proud to say that we did carry out very well in the most difficult period after the start of the epidemic. I'm aware of that and thankful for it. After the lockdown, we took a lot of measures to protect our employees, and of course, to ensure the production and distribution of our products. We started the measures before they were introduced by the government, and all this proved to be very important. Till this day, we have not had any case of infection among our employees in both countries. We also managed give state aid related to the lockdown. In terms of businesses, I could divide Q2 into the 2 parts, lockdown part and after lockdown. Because of the strength of our brands, we had very good results in retail. We managed to keep and somehow also increased our results. Of course, the biggest loss was still in HoReCa and On the go segment due to the fact the movement of people was completely lost. We are fighting more successfully in Slovenia, where we are one of the market leaders. We lost more on the Croatian market, where we are still in the process of building our presence. The lockdown and everything connected with the COVID also changed the habits of our consumer, to which we need to adapt. The biggest change is the reduction in the number of visits in stores, which means putting pressure on compact packaging activities and also increasing sales in the online segment. Summer was much better for sure, including the HoReCa segment. We ended the summer season with good results also in Croatia, where they had a roughly good tourist season. What is important, we continue with this positive outlook in September as well. In general, I can say that I am very satisfied with our work in the second quarter, that we managed such a difficult period and also that we continued to do so in the upcoming months.

[Operator Instructions] We have a first question from Mr. [ Marek Dongres ].

So my first question, how big was organic growth in [ the segment ]? And how much [indiscernible]

I'm sorry. Can you please repeat the question? We didn't hear you well.

Can you hear me well right now? So once again, how big was the organic growth in HoReCa retail? And how much would you expect it to be in the second half of the year?

Well, you mean grow in the second quarter?

How big was it in the first half on the group level? Or [ how big ] would you expect it to be in the second half of the year? Low-single digits or these are stable?

Well, basically, this question should be splitted by the individual divisions. Of course, if we have a look on our business segment, the biggest part of our HoReCa business is coming from the Czechoslovakian business, where the share on the HoReCa sales, it's approximately 30%. During the second quarter and the lockdown of the HoReCa segment, we basically reduced our revenues in this segment by some like 50% in Czechoslovakia. And we had very similar numbers in Adriatic region as well. In Adriatic region, just for your information, the share of HoReCa segment on the overall sales of the company, it's slightly higher, and it's approximately 36%. During the summer season, they basically stabilized on the last year levels, so we cannot report some -- or it's very hard to report some kind of organic growth because of the COVID impact. But I can say that, basically, the revenues from the HoReCa segment are on the same level as during the last year -- I mean in the summer season.

Next question is from Mr. Jakub Mician.

Quick one from my side, would be on the outlook for the second half. And if there is a potential downside -- or if there is a potential downside to your EBITDA guidance for 2020, why is there more cases rising in the core markets of Czech Republic and Slovakia, and potentially some more measures are going to be taken in the near term? Do you expect that this number that you are now expecting, CZK 950 million to CZK 1 billion of EBITDA could be scaled down after the third quarter results as there is a potential risk on the consumption patterns?

Okay. Our current expectation is that we will finish CZK 950 million to CZK 1 billion, and this estimate for the full year results include already certain limitations in the HoReCa level. We do not expect that there would be some lockdown, but we are not expecting to the numbers for the last quarter. They'll be significantly affected by some kind of limitations in HoReCa. I mean that you should wear masks and that there will be limited opening hours of the restaurants and bars. In case of a lockdown, we are now experienced from the spring, so we are able to react very quickly. I would say that if the lockdown will come, the negative impact on us could be in terms of millions of Czech crowns or higher in the last quarter for sure.

All right. And if I may, one more question from my side. Given there has been such a good performance on the [ program ] side in the second quarter, what should be [ possible ] for the second half? Or what are your general predictions?

Can you please repeat the question?

Yes. So on the OpEx, the sales rate, OpEx to sales ratio has grown materially compared to the gross margin contraction in the second quarter. What is your expectations on the operating expenses for the second half?

For the second half of the year, I would explain this question like through 2 parts. First, like material cost. In terms of material costs, we do not expect any significant changes in trends in the second half of the year compared to the first half of the year. In terms of other operational costs, we are still going to realize some savings. We did a headcount reduction in the spring. So we expect that in the second half of the year, we should benefit from savings in the personnel expenses. Then we revised all the significant development and marketing costs. So in the second half of the year, there will be still savings also in the segment and marketing costs which are related to development projects. And that's why I think that our operating expenses ratio should be even a bit lower compared to the first half of the year.

We have the next question from Mr. Jan Raška.

Jan Raška speaking, Fio Banka. I have some questions. What was the contribution of Korunní and ONDRÁŠOVKA into second quarter revenues and EBITDA? And when did you integrate growing Korunní mineral water into HoReCa segment? And so do you plan the same step with ONDRÁŠOVKA?

Yes. So the HoReCa, I will maybe start with the last questions. At the moment, we do not plan to step into -- in the HoReCa segment with ONDRÁŠOVKA. Basically, the revenue of ONDRÁŠOVKA and Korunní in the second quarter amounted to CZK 174 million, so -- which is basically according to the development of ONDRÁŠOVKA and Korunní in the last year. These 2 companies are quite stable during the year 2020 compared to year 2019 because majority of their activities were related to retail segment. We stepped into HoReCa segment with Korunní products in July 2020. Now we are trying to benefit as much as possible from this because ONDRÁŠOVKA and Korunní products were included in the portfolio of the Kofola sales representatives. And the last questions, regarding the ONDRÁŠOVKA in HoReCa, we don't want to comment at this moment on [ respect ].

Okay. And can I have another question about costs? Can you say any details about expected development of sugar contracts for 2021? Is it cost risk for the next year? Or can we expect only a slight increase of sugar contracts or stable development? As we know, Kofola this year, still benefits from relatively low sugar prices contracted 2 years ago, so what can we expect next year in this matter?