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

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

Dear Investors, on Wednesday, we published our annual report for 2020, trades figures and lots of other data. I would like to highlight a few things that brought me a bit of joy in the previous year. The first is the confirmation that our clients and consumers are simply great. They love Kofola and enjoyed the summer with us to the full. Thank you all. Last year, we finished the diversification of the group's portfolio. Our water segment currently represents around 1/3 of our revenue, thanks to Radenska and Korunní. This is very important to us, mainly as it reduces our dependence on sugar. We haven't stopped our work on environmental projects, quite opposite. We are continuing with creating the right organic value habitat. Our pilot project for production plants, which we would also like to spread to other areas which we operate in. We supported the planting of 20,000 trees in Slovenia and Croatia. And finally, I would like to thank everybody once again, who accompanied us through 2020. I believe that this difficult year has made us stronger and that 2021 will put us back on the drag on stable and long-term growth.

Good morning, dear investors. Here is Daniel speaking again. I'm responsible for Kofola, Czech and Slovak soft drink business. Let me briefly comment Q4, summarize 2020 and add some business expectations. But first, I have to comment March virus versus HoReCa. March is in 13 months I hope that's last quarter of March. And virus win 7 to 4, 7 months was HoReCa lockdown and just 4 months open. The rest are 2 months with strong restrictions. Q4 success, retail on expectations, including post-merger of acquisition Ondrášovka and Korunní. Sales hit CZK 1 billion, we lost 5% compared to last year. Excluding acquisition, 18%. HoReCa was opened just 1 month. From EBITDA perspective, our savings program was very successful, and we were able to deliver CZK 142 million EBITDA, what I consider as a big success. Full year picture. Market situation. Generally, retail food market was one of winners of pandemia with 6% growth. For example, beer or cheese grew more than 10%, but soft drinks lost 4% mainly because of water category drop, minus 7%. The main reason is change of buying capacity and frequency, minus 7%. Even worse is on the go segment with minus 12%. People mobility was limited. And of course, HoReCa, minus 57%. Positive is our market share progress in 2020. HoReCa, Czech Republic, we gained 28%. In Slovakia, we capped 41%, in retail, 19% in both countries. So I can summarize 2020, half year from a sales perspective, but perfect season. Successful post-merger of Ondrášovka and Korunní acquisition, positive raw material price development and extraordinary flexibility with savings. Together, increase of EBITDA margin up to 21%, unbelievable. Back to the reality. Q1. Full HoReCa lockdown, we see that 29% of PAPs is open as a takeaway with minimum soft drink sales. That's why sales are more than 20% behind last year, like-to-like. And let me notice that last year, Q1 was extremely successful. So there was not a chance to win. But we continue in good retail sales and cost direct. Q2, we see more optimistic, reopening of HoReCa during May and big goal in front of us, repeat successful season. The complication is level of raw material prices. Thank you for your attention. We are really proud how flexible our conservative business model could be. We prove efficiency in a really bad time. Thank you very much, Daniel.

Hello. My name is Marián Šefcovic, and I'm CEO of Adriatic. I would like to share you with you my view on our results from the last year. 2020 was a very different year to all we had now before. We started with a very successful first quarter. Our targets were quite high. But despite this but we were successful in achieving them. However, right after the pandemic came, all our plans and expectations were hit by unpredicted precaution measures. In Slovenia, we managed to adjust well to the situation, thanks to quick and successful cost reduction and flexibility of our team. We are a well now highly appreciated company on the domestic market with very strong brands. We are locally based which give us a strong competence to react instantly to new challenges and situations. With our strongest brand in the category of carbonated non flied water, Radenska Calvert, we have a constant market share of 53%. In 2020, we became a market leader in the CSD orange category with our ORA brand, where we increased our share to 35%. As the biggest innovation. We have launched new powder, vitamin drink called ORA [ Rakita ] by the end of the year reached a 6% market share in Slovenia. Originally, we had especially high expectation from the Croatia market and its HoReCa sector. But unfortunately, it was -- the HoReCa sector that was hit by the pandemic the most. In Croatia, the 2020 challenges were bigger as our brands are not so strong there and the country itself is very much dependent on the tourism. However, we were able to achieve some important results. Radenska Karrels [indiscernible] which is also present on the Croatian market. Together with our local mineral water students achieved a total share of 10% in the non flared water category despite the drastic decline of 21% in the whole category on non carbonated water on the Croatian market, we managed to increase the share of our brands to dena in value by 1 percentage point. To sum up, we ended the year with the decrease of the volume of sold products by 18% Croatian and by 11% in Slovenia, considering the difficult situation and all COVID precaution measures these are very positive outcomes. They were achieved by successful cost reduction, flexible adjusting of the production in order to operate all the times. Successful implementation of the whole Pepsi line production in Croatia, implementing of 0 25 little returnable glass bottle in both countries. And because we were partially using agency workers for 2 -- last 2 years in the production and logistics, we were able to quickly ramp and reduce headcount costs. The first quarter of 2021 in Slovenia was also quite challenging, while we did not expect the total lockdown when we started this year. However, the sales in Croatia were very good, close to the plan as we managed to compensate the loss of HoReCa segment in retail. According to this trend, we adjust the plans to realistic, achievable and positive growth. For the rest of the year, we have set high-growth in retail and works -- work as much as possible on improving HoReCa. We hope for the better the growth sectors open soon, and the situation allows us all to brand normally and bring Radenska to that.

Dear investors, Martin Pisklák speaking. Financial year 2020 is definitely over. Please, let me comment on the key financial numbers. Last quarter of the year 2020 was again very demanding due to COVID pandemic and general lockdown in all of the countries where we are present. Like-to-like revenues adjusted for the Ondrášovka and Korunní acquisition decreased by 21%. This had a huge impact on the EBITDA profit. Like-to-like, we decreased by CZK 145 million compared to the last quarter of 2019. However, overall view on 2020 is a bit more optimistic. Like-to-like revenues adjusted for Ondrášovka and Korunní decreased by 12%. However, adding Ondrášovka and Korunní to our portfolio compensated this loss a bit. On a full year basis, we lost 3.7 percentage points of our revenues. Therefore, our annual EBITDA decreased by CZK 89 million compared to 2019, and reached CZK 1,030,000,000. EBITDA margin exceeded 16 percentage points. These are very good results. Please bear in mind that 2 quarters in 2020 were very significantly affected by COVID pandemic. We see 3 main reasons for such a good result. Firstly, cost cuttings and flexibility in cost management, which we executed in 2020. Secondly, raw material prices and trickly excellent sales execution during the summer season. We had the best summer season ever. Net debt-to-EBITDA ratio totaled 3.7x. Currently, we are still facing lockdowns. During the first quarter of 2021, our revenues decreased by approximately 20% compared to the first quarter of 2020. However, we expect that we should be growing in 2021. Our EBITDA expectations for 2021 remains in the range between CZK 1.030 billion to CZK 1.150 billion. Thank you for your attention.

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

I have 2 questions. One regards costs this year. So you have just said that you still expect your revenues to grow despite the drop in the first quarter. And EBITDA should be better year-on-year. So what's the -- what's your outlook for costs at the moment, overall, the main items of costs this year? And my second question is given that you paid out the dividend for 2019 at the end of last year, later than usual. And that you said that you want to bring down your net leverage ratio this year. Is the last dividend amount, CZK 13.5 per share sustainable for a payout to shareholders from the profit of last year and maybe this year?

Thank you for your question. Answer for the first question is provide a simple, the 1 of the big reasons why we are predicting that we should grow in the profitability in 2021 is simply the fact that we are prepared and that we were aware that 2021 will be full of restriction that's why we completely change the budgeting process and we [indiscernible] understand the timing of the costs during 2021. During the normal years in the past, the first quarter was about the preparation for the season and about the investments. A lot of costs were spent in the first quarter to be able to start the season and launch the new product, let's say, in the -- of the second quarter. And we changed this in 2021. So we are still waiting with a lot of commercial costs to the end of the lockdown to be 100% sure that each Czech, crown which we are spending on the business should be spent very effectively. And that in such a case, we are able to we are able to sell our products in restaurants and in the stores. In 2021, there should be a big effect of growing raw material prices, which should be very significantly offset by savings in the operational cost, partly also due to the better timing of this operational cost and the flexibility in the cost cutting. Regarding the dividend, we are considering the dividend in 2021 for sure. And -- but about amount of the dividend and about the timing, we will decide once the lockdown will finish, and we will have more clear visibility on our business performance till the year-end.

Yes. So just if I get it right. So also the dividend from the profit of last year is dependent on the ending of the lockdowns and the situation there upon?

Of course, because dividend is affecting cash flows significantly. So first, we should be sure that our cash flow is still very strong and sufficient for the rest of the year and for the beginning of the year 2022, because typically, first quarter of the year is the most, let's say, demanding period for the cash flow because our sales are very low, and we are typically investing during the first quarter so that's why we should consider the dividend also in this point of view.

Next question is from Mr. Petr Bartek.

First, if you can elaborate a little bit more about the raw material prices, what increase you expect from sweeteners, what would you see now in the market of plastics? And maybe also a little bit about the regulation, if there are any changes, what are the new regulations in terms of plastic bottles and so on? And then I would like to ask you about your view on the market situation in the Czech Republic like Adriatic, if you will be able to raise prices this year inflation seems quite good improving. So if you see an opportunity for you to compensate its -- compensate the cost pressures with rising prices. And last question is to 2020, you had relatively weaker margins in Q4 in Czechoslovakia, I believe there were some alone is for receivables and such stuff. If you can tell us the amount of kind of one-offs, which we do support the year-on-year outlook for costs.

So maybe I will start from the last question. Summary on one-offs, included in our presentation as well as in annual report, the one-offs, which are affecting EBITDA level were approximately CZK 105 million. Which is extraordinary by a high amount for one offs we do evaluate one offs for us that are reported in the over tens of millions of Czech crowns. The biggest one-offs, which we realized in 2020 were impairment of the bottling technology for the UGO products. Then we, of course, reported also some restructuring costs, which were during 2020. Allowance for receivables was not considered as a one-off for us because it's a standard like part of our business. However, and this is also visible from the annual report, the amount of the very debt provision increased in the level of some like maybe CZK 20 million, if I remember correctly from my head. The main reason for this was very like a -- very prudent reconsideration of our receivables in HoReCa segment and so basically, we create the impairment for all of the potentially receivables. We do not have much receivables in HoReCa segment because majority of our sales to restaurants are for cash through the direct distribution. But the receivables which we have are usually related -- related to some long-term customers where we can like or we then with some like payment calendar. Your first question was regarding material prices. Material prices are increasing a bit more than we originally expected in the end 2020. At the moment, our expectation is that sugar should grow some, let's say, 15% approximately. And PET should be growing some 11%, slightly above the 10%. The key parameters for the 2021 is the fact that we expect that the prices, which are growing now, especially in the PET case should be on the peak somewhere in the June, according to our expectations. And from July, the prices should start to fall down again. So we are like quite expecting where it will be the peak in the June and how fast the prices will be declining to some more favorable levels for us, but the current expectations are 15% for sugar and, let's say, 11% -- 11% for the PET. In respect of the regulation at the moment, the biggest change for the regulation is happening in the Slovakian market, where is the full implementation of the returnable PET bottle system, the system should go live next year. So now the national agency as well as the association of the producers of the package beverages are working on launching of this project. We as Kofola, are playing a very significant role in this project because we are #1 in Slovakia. So we took over the responsibility, and we are like leading the group of the producers at this moment. At this moment, we do not see any significant risks for our business for next year together with the returnable system customers should get used to this system. It's also in other countries where we are like present, for example, in Croatia, and so the historical, let's say, experience with launching and with the effect on the sales for the next year. So that's something we have from the past. So we are not afraid that this would harm us somehow significantly. Our view on the situation, market situation in Czech rubric and the other countries where we are present in terms of the prices. This is something which we are like considering like basically each each quarter. If there is a space to increase the prices or not, much depends on the reaction of the -- of our competitors. For example, in the countries where we are #1, we are usually the 1 who is like starting the changes in the price place and weaker competitors are following us. In the countries where we are not so strong, we should wait for the reaction of the market leaders to be somehow in line with them. Yes. At the moment, I cannot comment like how much we are increasing the prices compared to prior year, it really depends country from country, segment to segment. Thank you for your question.

If I understood it correctly, when we talk about the adjusted EBITDA, there is some potential for about CZK 20 million in terms of costs of -- from the ones for receivables. Is that correct?

Yes. Yes.

And in terms of markets and prices, if I understand it correctly, you cannot say by how much, but you are increasing prices?

We are like following the situation very closely. If there is a space and we agree with the customers, then we are able to increase the prices. And generally, the situation is now basically creating because once the recovery opened, we are expecting the reopening of the HoReCa in May. We expect that the prices in restaurants will increase quite significantly. That's something which we are really like feeling from the market. And like we are communicating with the owners of all the restaurants, and we should then react properly on this situation.

Maybe 1 more question regarding the CapEx plan. If you can elaborate a little bit on plans for this year. If there are any big investments in technology or other way around, if you plan some cost savings in CapEx?

We are planning quite a significant cost savings. In 2019 and 2020, our CapEx expenditure were approximately CZK 480 million each of this year, so very close to CZK 0.5 billion of Czech crowns. In 2021, we are planning to decrease this capital expenditures. So let's say, almost to 1/2 of this amount. So to the amount of CZK 250 million to CZK 300 million. The reason for this, it's basically some like risk awareness, we try to be on the safe side with our cash flow. So once we were not able to say when the HoReCa will open and how long the COVID measures, so they will be on the market. We decided not to invest too much in 2021, simply to be sure that all the money we are investing can be effectively used. And the -- and we did not have this like certainty in 2021. So we are saving quite a lot in the CapEx expenditures.

[Operator Instructions] Next question is from Mr. Bohumil Trampota. Unfortunately, we cannot hear you. Next question is from Mr. Jan Raška.

Can you hear me?

Yes, we can.

I would like to ask you for 1 question. You mentioned a 20% decrease of revenues in the first quarter. Do I understand correctly that the year-on-year comparison is including Korunní and Radenska results. So the first quarter 2020 revenues should reach almost CZK 1.5 billion. So is it my estimate correct, that's the first quarter 2021 revenues should reach almost CZK 1.2 billion. Is it right?

The estimation, like 20% or the fact that our revenues decreased by 20%. This percentage includes on Russia Korunní sales.

Yes. Okay. And sorry?

No, nothing to add.

Yes. And I would like to ask you for a second question, if I can. Can you give us some update about the situation regarding to expected opening of HoReCa in Adriatic? So if do you have any actual information about opening this segment in Slovenia and Croatia, and to what can we expect in Slovakia in this metric?

In Croatia, the -- basically, the outdoor restaurants are opened, let's say, from the beginning of February, approximately. And that's also why 1 of the reasons why we are like above our original budget expectations in Croatia quite significantly in this respect. So it's very visible then once the HoReCa segment is reopen, the customers are returning back. In Slovenia, reopening of the restaurants starting basically next week because last 2 weeks, Slovenia had a very like strong lockdown for the esperance. Now they are returning, and they are opening the restaurants based on the actual situation in individual regions. So basically from Monday, 8 of the regions in Slovenia out of to 12 is reopening and only the outdoor restaurants. In Slovakia and Czech Republic, the situation is a bit more tough. Still, the restaurants are closed. But our expectation is that somewhere in May, the outdoor part of the restaurant should be reopened and in June, the restaurant should be reopened. Basically, if you ask me, so we are expecting the same timing for the reopening of the restaurant in Czech Republic and Slovakia as was in 2020.

Next question is from Mr. Bob Tampa. And we have another question from Mr. Petr Bartek.

Sorry, I didn't have one. That was the mistake probably.

No problem, Petr. [Operator Instructions] There are no more questions. This concludes today's conference call. Thank you all for your participation. You may now disconnect. Goodbye.