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

Ladies and gentlemen, welcome to Kofola's 2020 First Quarter Results Conference Call. You will now hear a recording of the summary of the group's results presented by Group CEO, Janis Samaras, and Group CFO, Martin Pisklák. This will be followed by business insights presented by CzechoSlovakia CEO, Daniel Buryš.

Dear investors, we finished third quarter of 2020, and we can proudly say that EBITDA in third quarter was the highest in the Kofola Group history. We are very satisfied with the strength of our traditional brands and our customers' loyalty. Also both Ondrášovka and Karlovarská Korunní, our important acquisitions, make me happy. Their integration is smooth and performance even above our expectations. But there are also bad news. Currently, we all have to face second lockdown and its consequences on our personal lives and businesses. Mainly, HoReCa segment is reporting huge losses. However, due to strong summer season, our EBITDA target for 2020 remain above CZK 950 million. Utilizing lessons learned in that current year, we are intensively preparing for the upcoming year. We believe in our ability to produce even better results. Last but not least, I would like to thank all our customers, suppliers, employees and other important parties who are helping us overcome these difficult times. Thank you. I am now handing you over to Martin and Daniel who will comment on our business results in greater detail.

Good afternoon, dear investors. My name is Martin Pisklák, and I am Group CFO. Yesterday, Kofola Group published financial results for the third quarter. I am happy to announce that we were successful, not only in the financial numbers but also in business innovations. We managed to launch a new Italian coffee brand named Trepallini, and also we enlarged our rPET portfolio with Radenska Naturelle 0.5 liter in a fully rPET PET bottle, which was also significantly light weighted. Our key financial indicators were improving. We increased our revenues by 11.6%, and we managed to increase our EBITDA to CZK 557 million, which means increase by 27.8% compared to third quarter in 2019. This extraordinary growth was attributable mainly to our CzechoSlovakia business, which was extraordinarily successful in 3Q 2020. On the other hand, our revenues in Adriatic region decreased by 6.7%. This was mainly attributable to lack of tourists in Croatia during the main season. Due to this fact, our EBITDA in Adriatic region decreased by CZK 15 million. We see negative trends also in our Fresh & Herbs division. Decrease of this division is driven mainly by weaker UGO performance. In 3 quarter, revenues of Fresh & Herbs division decreased by 11.6%, and the EBITDA remained almost flat, however, still negative, minus CZK 5 million. Year-to-date results are also positive. Our revenues are practically flat in the first 9 months of 2020, and this is mainly to very good third quarter and our acquisitions Ondrášovka and Korunní. EBITDA for the first 9 months totaled CZK 906 million, which represents increase by CZK 46 million compared to first 9 months in 2019. We are also keeping healthy balance sheet. Our trade receivables are still in very good quality. We improved a lot in cash flow management. In the end of September, we did not utilize our overdraft credit facilities, and we are also benefiting from the fact that the interest rate decreased very significantly in 2020. However, fourth quarter is slightly different story. Our UGO outlets are closed and the HoReCa segment is reporting huge losses. We expect that autumn lockdown will be more negative compared to the spring one. We expect that the HoReCa segment will be significantly limited at least until the year-end. However, due to strong third quarter, we are still keeping our EBITDA forecast between CZK 950 million to CZK 1 billion. Worth of mentioning is also the fact that the general meeting of Kofola Group approved the annual dividends on the level of CZK 13.5 per share. This dividend will be paid off in the beginning of December. Thank you very much for your attention.

Good morning, investors. Here is Daniel speaking. I'm responsible for Kofola Czech and Slovak soft drink business. I think Janis summarized the main trends in 2020, so let me briefly comment Q3's success and Q4 expectation. Q3. Retail on expectations, including post merger of Ondrášovka and Korunní, we grew 30%, and excluding of acquisition, 9%. We are very surprised of successful launch of Kláštorná Kalcia onto very competitive Czech market. We tripled sales of this brand year-to-date. Key role in top season played HoReCa segment. Market unfortunately dropped for 8% in Czech Republic and 20% in Slovakia, but we were able grew not far from 10%. For example, our HoReCa market share in cola category in Slovakia is unbelievable, 60%. Key factors of success: maximum focus on growth of Kofola; flexible change of trade marketing strategy from big events, festivals to direct outlet support, Cannes, KOFOKINO seasoned outlets. And of course, we are not so dependent on foreign tourist destinations like Prague. But Q3 is history. Now HoReCa is locked down again. From my point of view, it's a positive fact that more than 30% outlets are open for takeaway. Soft drink sales are, of course, close to 0, but it shows that HoReCa as a segment could survive. We expect reopening next week in Czech Republic. In Slovakia, the situation is more complicated. We, of course, fully focus on retail Christmas season. HoReCa team fully supports retail. Q4 lockdown impact will be similar as spring. But for HoReCa as a segment, the situation is now more complicated because of -- because after spring lockdown, they entered to top season. Now they will open their outlets to lowest season, which is for many of them unprofitable. We expect more outlets closing. It could reach a level between 15% and 20%. We have to be ready for negative market development in first half 2021. Thank you for your attention. And I believe that Kofola confirmed in bad times that our business model is efficient and flexible. See you next time. Bye.

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

First of all, thank you for the presentation and congratulations on a very good third quarter result. My question is directed at the comparison between the current quarter, the fourth quarter and the spring situation. So you said that you think this is going to be more difficult for you than in the spring. A connected thing is that I was, to be honest, a little surprised by the guidance. I saw that after the relatively strong third quarter, the guidance could be raised because the difference between EBITDA for the first 9 months of the year and your goal, your current guidance, is quite small. So it seems to me that this implies that the fourth quarter should be very weak. So if you could comment on the expected drop in the main categories in the fourth quarter and why you think that even the strong Christmas season is not going to compensate for the losses in October and November.

We really believe that the second lockdown will be much more difficult for us compared to the first one. As already Daniel Buryš said, there are several differences in between of these 2 lockdowns. First one is that the first lockdown was followed by the main season. The second lockdown should be followed by the biggest off-season which we have during the year. We are also talking to restaurant owners. And in the spring, basically some 10% of the restaurants were expected to be closed after the lockdown. Now during the second lockdown, the number increased from 15% to 20% of the restaurants. And that's why we believe that these are the main drivers for our very conservative estimation for the last quarter. The true is that during the first lockdown, we calculated the COVID impact to approximately CZK 100 million. Now we are calculating the COVID impact to almost CZK 200 million because in 2019, the last quarter -- EBITDA in the last quarter totaled some CZK 250 million. Now we expect EBITDA in between CZK 50 million and CZK 100 million.

So if I can have 1 or 2 follow-ups. It makes sense what you are saying, this logic with the high season and the off-season. Still, I was thinking that maybe the retail sales around Christmas are strong enough for you to compensate for the weak HoReCa in the winter. And second question touches more the next year. What is your input prices outlook for next year, as usual, the prices of sugar, the PET resin and other prices? So what do you think? Is it going to be pretty much the same as this year? Or do you think there will be some big changes in some of your main inputs?

So first part of your question regarding the retail sales. Our retail sales, especially in December, are traditionally very high and very strong. So we do not count on some extraordinary sales through the retail channel in December as we have usually very strong sales already. And regarding the second questions on the input prices. At the moment, we are finishing the negotiations and monitoring very closely the situation for the next year. It seems that our 2 major commodities that increase the price -- I mean, sugar and PET, the prices will increase by some 10% to 15% at the moment for next year.

[Operator Instructions] We have next question from Mr. Jan Raška.

I have one question on Kláštorná water. It seems that this brand has good performance in the CzechoSlovakia market. So can you tell us what revenues do you expect from Kláštorná this year?

This year, we expect the revenues from the Kláštorná around CZK 100 million on the CzechoSlovakia market.

[Operator Instructions] Now we have a question from [ Mr. Josef Karasek ].

Congratulations to very strong results for Q3 versus the previous year. I'm interested to understand, but what contributed to your strong growth versus previous year? What were the drivers or contributors on revenue, profit and margin?

Thank you for this question. In general, the biggest contributor in the third quarter was our business in CzechoSlovakia, so the traditional beverages brands, like Kofola, Vinea, Rajec; and syrups. We saw the huge trend in local consumption during the summer, mainly because people were not traveling abroad. They spend their holidays at home. And we have very loyal customers and consumers. So basically, people spending holidays in Czech Republic and Slovakia, they were drinking Kofola, and that's why we are able to report such a very nice results.

I have still follow-up questions because from your presentation, what I read that your growth came from CzechoSlovakia largely. It came largely from acquisitions, your growth on revenue, which I assume is Ondrášovka and Korunní, and it came from retail channel. In retail channel, your growth was about 60%. Is that correct understanding? And could you describe what happened in that retail channel? Was it due to the acquisitions and the availability? Or what happened there?

Well, I'm not sure which numbers are you now commenting, but our retail channel for sure did not grow by 60% in the third quarter. The true is that the growth was partly driven by our acquisition of Ondrášovka and Korunní, if I should make approximation. So if we grew up by some 12% on the revenue level in CzechoSlovakia, then let's say, that 9% of this growth was attributable to new sales from Ondrášovka and Korunní and the remaining 3% was the growth of our brands which were in the portfolio already in previous year.

And the last one is how much of that is recurring growth, growth that will continue? Or is it one-off? From those drivers, mainly the 9% you described?

Well, the 9% was the contribution to sales from Ondrášovka and Korunní. The numbers which we are presenting in the presentations are like without one-offs, then are recurring. So we are presenting just continuing operations.

So you would expect that those trends shall continue.

Yes. Yes. For sure, in next 2 quarters or 3 quarters -- or 2 quarters, this will be the fact, the numbers will be fully comparable. So the effects of the new portfolio members, Ondrášovka and Korunní, will disappear in the presentation in the second quarter of 2021.

Our next question is from Mr. Petr Bartek.

Congratulations to the great results. I would ask more to the cost side. If I understood correctly, you expect PET bottles to go up by 10% to 15%, and this applies also to sugar or sweeteners?

Yes.

Well, sweeteners as a whole category or only sugar?

Only sugar. The other sweeteners are more or less stable.

So it might be 10% to 15% but in single digits for the category.

It will be still double-digit because sugar is majority of our sweeteners.

Okay. So in Q3, your SG&A costs are basically flat year-on-year, which is good because this is including Ondrášovka. But still, it's some increase compared to the second quarter. So I wonder how much of a cost-cutting exercise from April is sustainable for 2021. Yes, what's your outlook for SG&A costs, if we will increase them or keep it stable?

Yes. The cost cutting is for sure sustainable. To be honest, I did not recognize any like significant trend in increase of G&A because we did a lot of cuts in the G&A. If I look to the numbers back where it's now, so most probably the answer would be that there was just like different timing of the costs. If I look on our prediction of the G&A costs for the full year 2020, our G&A should decrease for sure, and we should keep this trend also in 2021.

So it was probably because of the logistics, the increase in fees.

Yes. And most probably it would be just the timing, like, difference compared to different years.

And for the next year budget, so basically flat to administrative costs.

We are like pushing for decrease to be more effective, but the flat is the, like, worst case scenario for us. We would like to decrease it.

And if you can elaborate a little bit about your views. I know that's difficult this time, but what is your view on the HoReCa segment for the next year? Because, for example, in Q3, you said that, basically, coronavirus was negative, minus CZK 15 million. But in the HoReCa segment -- not in the HoReCa segment but in the CzechoSlovakia, originally, it was actually positive on the net basis, I would say. So what's your expectation for the HoReCa segment for the next year and also for retail segment for the next year?

Well, at the moment, we expect that the HoReCa segment will be closed until the year-end. If the HoReCa segment will be open in December, so the opening will be with very significant limitations on the operation of the restaurants. So at the moment, we are counting with the lockdown. And then we are counting that there should be some limitation basically until the June 2021 in HoReCa. If we are like looking on the predictions of the COVID situation, our current feeling is that HoReCa will be open in the first half of the next year but with some limitations. The question is how big this limitation should be, if this will be only in the opening hours or also like the number of the guests in the restaurants. So that's the most like tricky question in the model because we do not have clarity on this topic. So basically, we are expecting rather like a conservative scenario, so with the bigger limitations. And they will be like working with this scenario also in the first half of 2021.

You said that you expect that some 15% to 20% of restaurants would go out of business, right?