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

Ladies and gentlemen, welcome to Kofola's 2020 Third Quarter Results Conference Call. You will now hear a recorded presentation of Janis Samaras, Group CEO, followed by a summary of the group's results presented by Group CFO, Martin Pisklak, and business insights from CzechoSlovakia and the Adriatic presented by country CEOs, Daniel Burys and Marian Sefcovic.

Dear investors, this is Janis Samaras speaking. First of all, I would like to thank you for your interest in Kofola's third quarter results, which we are very pleased with. Our revenue grew by 1.6%, which is a very good result considering that last year was a record benchmark with the best summer season in our history. In terms of EBITDA level, we are 7.2% below last year's third quarter, but this is in line with our expectations. At present, the whole economy is facing considerable inflationary pressures, and we must increase our prices accordingly. The prices of input materials especially PET resin and rising -- are rising. PET is becoming our key material item from both financial and sustainability perspective. For this reason, we have become part of the beverage producers initiative to start a deposit system for PET bottles and cans. Just like in Slovakia, Kofola takes the topic of recycling and circularity very seriously. We have evaluated many scenarios for sustainable packaging management. And we think that the deposit system is the best solution. As a result, more used packaging is sorted and most importantly, the circular system of managing PET bottles and cans will be closed loop. Our goal is to achieve a repeated recycling of packaging whereby a PET water is produced again from a PET bottle and can again from a can. We also secure access to quality and affordable raw materials in the future. The final quarter will be difficult again due to the ongoing pandemic, but we believe that we will achieve our annual EBITDA target. Thank you for your attention. And now I would like to give the floor to my colleagues.

Dear investors, Martin Pisklak speaking. I'm pleased to present our very strong results for the third quarter of 2021. Compared to previous years, our revenues in the third quarter of 2021 increased by 1.6 percentage points. Given the fact that last year was the best summer in our history, these results are very promising. Our EBITDA totaled CZK 517 million. This represents a slight decrease compared to previous year, mainly because of increase of raw material prices. Results for the first 9 months are also very strong. Revenues increased by almost 5% and EBITDA is higher by CZK 80 million. Our EBITDA for cumulative last 12 months totaled CZK 1.1 billion. Our net debt-to-EBITDA ratio decreased even below 3x. At the moment, economy is facing strong inflation trends. Energy, raw materials and interest rates are increasing very significantly. That's why we were forced to increase our sales prices as well. We also updated our outlook for 2021. Growth of the new revenues is predicted to more than 5%. EBITDA should finish in the interval in between CZK 118 billion to CZK 120 million. This is in line with our accumulated EBITDA for last 12 months. Net debt-to-EBITDA ratio should stay below 3.5x. Dear investors, thank you for your attention.

Good morning, dear investors. My name is Daniel, and I'm responsible for Kofola CZK softdrink activities. Let me comment top season and current market situation. Top season was successful. Sales in Q3 were CZK 1.5 billion, CZK 30 million below last year. But when we add to top season June, we grew 5.8%. June had extraordinary impact to season evaluation. Last September was behind expectation, 6% below last year. The reason, declining retail performance. We fully exploit summer market opportunity. No COVID, no stress. Positive effect that sales were stable, although people returned back to foreign holiday destinations. Market share position is flat, even though our strong categories, syrups and flavored waters are under pressure. Innovations, Targa Florio lemonades and [ Rigsbio ] were successfully launched. Negatives. Negative fact is inflation situation in economy. We had to cover higher costs, and we had to start price increasing procedure. Logistic problems in top season because season peak was so high that we were not able to supply consumers on time. Summary, last year EBITDA margin was extraordinary, about 30%. Actual, 25.6% is a very good result. The same level as in 2019. Q4, we are in process of price increase. It was realized in HoReCa announced in retail. And now we are negotiating with retailers. The retail market has slightly declining performance from September. We think that its impact of consumer confidence. HoReCa is again under COVID restrictions, but still open in Czech and partly in Slovakia. We are losing, but still significantly above last year. For example, total sales in October, plus 23% compared to last year. We should expect additional restrictions, but still we have positive forecast. Thank you for your attention, Daniel.

Marian Sefcovic, General Manager, Radenska, Adriatic region. For the Adriatic region in the first half of the year of 2021 was very successful, and this positive trend continued also in Q3 in our main season. We finished Q3 with excellence of performance, especially in Croatia, with sales high by almost 40% versus last year, mainly due to strong summer tourist season and clear route-to-market strategy, which help us to achieve brand distribution, volume and profit growth. Results in Croatia were also about 2019, which showed that we are on the right track. Overall, the Adriatic region finished Q3 with double-digit growth with sales performance about 2020 by more than 13%. Radenska has also been awarded with the privilege of being the official water in Slovenia house at Expo 2020 in Dubai. We also started with the cooperation with Radenska Goritseke, one of the best Slovenian product of sparkling wine with the aim to improve our distribution power and cost savings. We are continuing with our commitment of lowering sugar content in our drinks, for example, Studenac iced tea, and our effort for a more sustainability economy. We have finished with our 2 -- second campaign for planting trees in Croatia and Slovenia and started a new project together with the local community in Larabenski with the name of [indiscernible].

[Operator Instructions] We do have a first question from Mr. Jan Safranek. [Operator Instructions]

Yes. Yes. Sorry, my microphone was likely off. So yes, my first question is regarding the pricing. You mentioned that you are already increasing the prices? And what about competition? Do they increase also? That's the first question, my question. And second, you've said that you are going to increase price in HoReCa by about 5%. So is this correct? And is this already ongoing or happened? And what would be the increase in retail segment? That's the second question.

Okay. Martin Pisklak speaking. First, the price increase, which were introduced by our competitors. So based on the feedback we received from our customers, the price increase is very comparable to that which we propose to the market. So let's say that the prices are increasing in between of 5 to 8 percentage points on the market. The true is that we already realized price increase in HoReCa. The price increase was different for various products in our portfolio. But in general, we increased the prices in between of 5 and 9 percentage points. And in retail, we announced price increase in the same range.

Okay. Okay. And regarding outlook for next year regarding the pricing, are you confident that you will be able to pass fully the likely increasing OpEx into prices in next year as well?

Well, this price increase should be sufficient for next year. However, the price potation of raw materials and OpEx costs are not available for the full year 2022. For example, some raw materials for the second half of the year are still not quoted by our suppliers. So potentially, the prices are still growing up on the raw materials, then we will be forced to increase prices to our customers again.

But is it your view that you will be able to fully pass the material increases, right, or the price increases?

No. Basically, there is -- like it's a combination of more measures. First, we are passing the increase of raw material prices to our customers. In some cases, we are able to pass even more. In some cases, the price increase, it's not enough. But in average, it should help us very significantly. And the second measure, of course, is work with our internal costs. So basically, we are again scanning all the OpEx items and trying to find some potential savings, which can help us to maintain and increase the profitability

Yes. Okay. Great. And then I have a question regarding your hedging for the materials and/or commodities and at the prices, electricity prices. Could you please elaborate a bit about that?

Basically, for the main raw materials, the suppliers are quoting prices for the full year -- standardly for the full year. Now for 2022, majority of the suppliers quoted the prices only for the first half of the year. So we basically confirm the price for the first half of 2022 for the sweeteners as well as for the PET. And that's basically the kind of hedge we have. It's a hedge with our suppliers. So the contract is signed and the prices are confirmed. Otherwise, we are not using financial hedges for the commodities.

Okay. And regarding the energy prices?

The energy costs are also fixed with our energy suppliers.

So will there be any increase in fourth quarter and next year compared with the current conditions?

You mean for the material prices under the...

For the energy prices. For the electricity prices.

Yes. Of course. There will be a very significant increase of the energy cost. But basically, this increase, it's in line with what we see on the market. So I would say that we are like in the average of the increase of the costs.

Okay. Maybe last question, if I may, regarding your debt and hedging of the debt. You said you don't do any financial hedging. So you don't have any debt hedged or interest hedged?

Yes. We are not doing financial hedging for commodities. That's what I said. However, for the interest rate, we are hedged, approximately 1/3 of our debt is hedged.

Okay. And would you have estimated how much of the debt is in Czech Krona?

100%.

The next question is from Mr. Pavel Ryska.

Okay. Great. I will probably follow up on the previous questions. Of course, the costs are probably the biggest concern of the market at the moment. So just to sum it up, and please correct me if I get it wrong. So you said a while ago that the current price increases, which should be roughly around 5% in retail and in HoReCa should be enough for you to cover the average cost increases that you are seeing at the moment and also the cost increases that you are counting with the next year? Is this correct? Or is it that you are now covering only the current cost increases? And do you think that you may have to increase the cost -- sorry, the prices again next year?

At the moment, we hope that this price increase will cover also 2022. But it may happen that we will see in the first half of 2022 that the material prices are still increasing also for the second half of 2022. And in such a case, then we will be forced to increase the prices again.

Okay. I see. So I take from this that the increases in the forward prices of the raw materials for next year are not as high as one would probably expect. That means that maybe the prices might be peaking at the moment. I mean, the prices of, for example, sugar and PET.

Yes. We estimate that the peak will come just, let's say, in June 2022.

Okay. I see. So basically, if this holds true, this assumption of yours, then you would be probably able to, let's say, broadly keep the margin flat next year?

Yes.

[Operator Instructions] We have an additional question from Mr. Jan Safranek.

Yes, sorry. I had a question. One more question, please. Does your revenue outlook for this year assume flat revenues in November and December?

No, we still hope for some revenue increase compared to previous year because still, the restriction are significantly smaller compared to previous year.

[Operator Instructions] There are no more questions. This concludes today's conference call. Thank you all for your participation. Recording of today's call will be available on our web page soon. Thank you. Goodbye. You may now disconnect.