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

Ladies and gentlemen, welcome to Kofola's First Quarter '22 Results Conference Call. you will now hear a recorded presentation of Group CFO, Martin Pisklak, and business insights from Czechoslovakia and the Adriatic, presented by country CEOs, Daniel Burys and Marian Sefcovic.

Dear investors Martin Pisklak speaking. Yesterday, Kofola reported very strong numbers for the first quarter of 2022. Our revenues grew by 30%. Of course, we benefited a lot from the fact that in 2022, there were no strict lockdowns. However, I have to say that our revenues are very promising. We continued in strong trend, also in April and May. Our EBITDA increased by 23%, and totaled CZK 112 million, and also I believe that all of our 3 segments were profit-making in the first quarter of 2022. Despite increasing interest expenses, our net profit remained stable. Also, net debt-to-EBITDA ratio remained stable and slightly above 3x. Increase of raw materials and energy prices were so far recovered by the price increase negotiated with our customers. However, macro economical situation still remains very unpredictable and difficult. Despite this fact, our goals for 2022 are remaining unchanged. Thank you very much for your attention.

Dear investors, here is Daniel speaking again. Let me comment Q1 results and latest Czech and Slovak market expectations. From a sales perspective, Q1 was the most successful start of the year in history. Sales were even higher than in 2019 or '20. Compared to last year, we grew 31%, mainly thanks to return of On the go segment and on-premise. COVID disappeared. Retail confirmed market stability. We increased market share in Czech, thanks to Penny market deeper cooperation. We realized first wave of price increase. In Slovakia was implemented deposit system for PET bottles and cans. Risk of negative impact to consumption was not confirmed and deposit system has very positive perception. We are surprised by market dynamics in both countries, and results are above our expectations. We have realized the most important investment in Korunni production plant CapEx, CZK 70 million, new bottling technology allows short-neck lightweighting and better capacity utilization. From the cost perspective, we are on an expected level, raw material prices, services, personnel costs. Unfortunately, energy prices impact is above our budget, and we had to announce second price increase. The process will be completed in Q2. Our market expectation, positive market development continued in April, May, and we expect the same in June. HoReCa was opened last year in May. So market situation is now comparable. We successfully launched key innovations, Cirkulka, returnable glass bottles in retail, Kofola flavored less sugar, SEMTEX Street Water and Royal Crown, no sugar. We need to improve our position in energy drinks category, where we are losing market share. I believe that expected market downturn in soft drink category will not come during hot summer. We are ready for top season, market activation, logistics, winning spirit. Thank you for your attention. Daniel.

Hello. This is Marian Sefcovic speaking, General Manager of Adriatic region. The Adriatic region has started the year successfully with the revenues in local currency in Q1 2022, exceeding 2021 by more than 15% due to lesser editions connected to pandemic COVID. Our sales of on-premise and On the go have increased significantly. We are predicting in greater growth with Q2 with the revenues of approximately 40%, about 2021, caused by nice warm weather in the Adriatic region and tourism blossoming in Croatia. We are confident about our main season, and are expecting good sales results in the upcoming months. Even so, Adriatic Q1 2022 EBITDA result is comparable to Q1 last year. The main reason is higher cost of raw material, energy, transport and other services. Due to high inflation in the market and war in Ukraine, we are faced with great inflationary pressures in all main raw materials categories for our PET material scare bottles, and energies with a growth in price that has not occurred in the last couple of decades. Adriatic sales are not impacted by war in Ukraine since we do not sell our products to this market. In Slovenia, we have successfully organized and held before, the marathon of Three Hearts in Radenska continuing with this traditional event after 2 years break. Our marathon has obtained a zero-waste certificate for recycling more than 90% of all waste at the event. This is the first sport in Slovenia to receive this certificate. We started with the sales of new segment of drinks in Croatia, Instant Vitamin Oraketa and also coffee Trepallini, and we continue our good cooperation in sparkling wine distribution with Radgonske Gorice. We are continuing with our commitment to environment and community, lowering sugar content in drinks, for example, Cola [ Studenac ] iced tea, Pepsi brands, continuing and extending a project with local community named [indiscernible], and expanding our portfolio of drinks in rPET and glass portfolio to launch in the main season.

[Operator Instructions] We have first question from Mr. Dmitry Vlasov.

Congratulations with a good set of results. One question for me for now. As the inflation rises, and you hike in the prices further, do you expect any change in consumer behavior or their spending patterns? Would you think this would partially affect their spending?

Thank you for this question. We were really afraid of this trend in the beginning of the year, and we were counting from the downturn of our revenues in the first quarter or that we will see that the purchasing power of consumers will decrease also in the first quarter. But so far, this trend is not visible. And also in the second quarter, consumers are still buying our products, and the volumes are growing in a very promising way. So yes, the true is that we are forced to increase the prices for the second time this year. So now in the second quarter, we are finishing the second price increase. And -- but so far, we do not see any decrease in the consumption. And we hope that the decrease will not come during the summer as a [ doubt ].

Now we have a question from Mr. Petr Bartek.

We have a question to Q1 results. You had very nice gross margin, quite surprising. So I would like to ask what was the reason. Whether it was the mix that HoReCa revenues went up, or whether any additional cost savings in production? And how you expect it to develop further? And a related question is our EBITDA outlook for basically flat results this year isn't too conservative in the light of this development?

Okay. I will start with the first question. The reason why the EBITDA increase is exactly, as you said. We have a much higher share of HoReCa sales in the first quarter of 2022. And the HoReCa segment is more profitable than retail one. So the share of HoReCa is increasing, and that's why also the gross margin is increasing. The second fact is that in the beginning of the year, we were still consuming some materials, which we prestocked in the end of the year. So basically the first month were with a bit cheaper raw materials than we expected during the budgeting process. And answer to your second question. In this moment, it may seem that the outlook is conservative, but besides that, in the beginning, still we were afraid of decreasing purchasing power of the consumers. So far, we do not see this trend. And in case that we finished second quarter in the trend, which was in the first quarter, and which continued into April and May. We will review the guidance for the full year 2022.

A question, if you can comment a little bit on the actual development in the raw materials, what's going on with sugar and PET and so on?

The prices are increasing, maybe a bit more than we expected. But on the other hand we also like manage price increase a bit better than we expected. So like overall, on our like budgeted basis, there are no like major impacts of these fluctuations. In the first quarter of 2022, sweeteners in average were more expensive by some 30% compared to first quarter of 2021. On a full year basis, the increase of the sweeteners compared to 2021 can be around 35%, approximately. With the PET, the prices are really like fluctuating. Also, there was some fluctuation because of the war on the Ukraine, but now the prices again dropped down a bit. So here, we expect the increase on the year-on-year basis in 2022 can be around 45%. But as I said, the price increase that we already did, and the second price increase, which we now like executing on the market should be enough to cover this increase.

Do you see your competitors following the same way in terms of pricing in all regions in CzechoSlovakia, in Adriatic or...

Yes. Yes. So far, in our biggest segment in CzechoSlovakia, the feedback which we have from our customers is basically that also the competitors increased the prices in approximately in the same way. And we also have a lot of feedback from our customers. So also the other competitors are increasing the prices for the second time. So I would say that the situation is the same with our competitors in CzechoSlovakia. In Adriatic, we are strong, #1 in Slovenia. So we are a market leader. And we were the first one who increased the prices on the market. Now with some like 2 months delay, also our competitors increased the prices. So at the moment, there are no like big differences in like, let's call it, like pricing share or pricing norms compared to previous year with our competitors.

[Operator Instructions] Mr. Petr Bartek, do you have an additional question?

Yes. Actually, I have one more question related to the debt and interest costs. What is the situation of, say, hedging of interest costs or currency split and so on?

In the first -- or basically in the first quarter, there were some, if I remember correctly, CZK 25 million increase of interest costs compared to first quarter of 2021. At the moment, we are basically -- we are basically finishing the hedging and change of split between Czech krone and euros in our debt structure, and we will announce this change very shortly. On the [ later ] basis, we do not expect any significant impact on the net profit because of this because of these changes in interest rates.

So we expect the impact from interest rates will evaporate over the year or...

We will switch a substantial part of our debt from Czech krones to euros, where the interest rates are significantly lower still compared to Czech krone. So basically, in the rest of the year, we will benefit from the Euribor interest rate. And also, we will transfer the current interest rate hedges, which we have for the Czech krone. Because approximately 1/3 of our debt is hedged in significantly lower levels that we see on the market today.

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

I have one question. What is your view of on other potential of Kláštorná brand? Do you plan to implement this brand to HoReCa segment? And do you see other potential to increase revenues from this brand? And if you can indicate its actual share on your total water revenues?

Thank you for your question. We are extremely satisfied with the Kláštorná sales so far from the launch 2 years ago. At the moment, because we renewed the production in the production plant in Kláštor pod Znievom 2 years ago, and we did not renew all the sources and all the production capacities because we expected that in the beginning, there will be no need for this. But I'm very glad that at the moment, we are basically coming to full capacity of the renewed sources. And this year, we will renew some additional sources in Kláštorná. So the increase of the sales will continue. If I look on the share of the Kláštorná. So on the full CzechoSlovakia segment, Kláštorná is approximately 3% of our revenues. If I put it just on the waters, as you asked. So just give me a very short moment, I have to find the appropriate number. If in CzechoSlovakia the water sales can be approximately CZK 700 million, obviously it's a mistake. So in the water segment, we had approximately 10% share of Kláštorná so far.

Okay. And about the implementation to HoReCa segment.

Yes. During the renew of some sources we are counting also the possibility to have a Kláštorná also in HoReCa. This depends on the glass line, which is located in the Kláštor. So basically, we are now calculating the business case. And if the payback will be sufficient, we will also renew the glass wine in Kláštor and implement it into the HoReCa.

And if you can give us any update about Korunni and Ondrášovka brands. If I remember correctly, Korunni is already the part of HoReCa. And what about Ondrášovka do you offer -- do you plan to offer these brands to HoReCa?

So far, no, Ondrášovka is remaining in retail. Yes, Korunni is part of the HoReCa. Both brands are doing very well. In 2022, we are approximately 20% above in 2021 so far. So we are satisfied.

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. You may now disconnect. Thank you, and goodbye.