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

Ladies and gentlemen, welcome to Kofola's Second Quarter '22 Results Conference Call. You will now hear a recorded presentation of Group CFO, Martin Pisklák, and business insights from CzechoSlovakia and the Adriatic presented by countries CEO, Daniel Burys and Marian Sefcovic.

Dear investors, Martin Pisklák speaking. Please let me comment on our second quarter results. We are satisfied with our revenue performance. Reporting for the first quarter of 2022 is still continuing. During the first 6 months of the year 2022, our revenue increased by 25.8 percentage points. This is a very solid performance. Of course, such growth includes also the effect of the price increase which we realized during the first half of the year. This price increase was sufficient and covered our increased production costs. That's why gross profit for the first 6 months of 2022 increased by CZK 284 million, no more than 22%. On the other hand, EBITDA dropped down by 11%, which means approximately CZK 50 million. This was caused mainly by increased selling, marketing and distribution costs due to restarted sales activity and brand costs. Please note that such EBITDA decrease is in accordance with our annual budget. Second half of the year will be complicated due to increasing input and energy prices. We expect full year EBITDA from CZK 1,080 billion to CZK 1,150 billion. We did significant changes in our debt structure. We transferred 60% of our debt from Czech crown to euro currency. This should help us to mitigate increasing interest based on the preborrow rate. This is also in line with revenue currency split. Thank you for your attention.

Dear investors, here is Daniel from CzechoSlovakia soft drinks division. Let me comment on Q2 results and top season performance. We have 2 messages as usually, one positive and one negative. I prefer negative first. Inflation boom is faster than our reaction. We increased prices properly, but material and energy prices were increased more than expected and we had to cover higher cost of services, especially logistics and personnel costs. The result is that our EBITDA in Q2 was CZK 202 million, and it is CZK 93 million behind last year performance and it is behind our budget expectation. Positive message is that our sales are significantly above last year: 28% in Czech Republic compared to last year and 10% in Slovak. Year-to-date sales were 9% above the margin. Higher dynamics in Czech Republic is coming from water category. Total Slovak market is declining. There are 3 reasons: price impact, weaker tourist season and impact of deposit system implementation. Top season. In July and August, we continued in very high sales performance. August will be the most successful month in company history. Weather was hot and eliminated tourist exodus. Czechs and Slovaks enjoyed the holidays abroad so we lost positive COVID effect from last 2 seasons. Top season was very demanding and therefore, with lack of logistic capacities on the market, we had problems in primary distribution. We realized a second price increase to cover increasing cost, but still, energy situation is not safe and we have to realize cost saving program to deliver expected EBITDA performance. Thank you for your attention. Daniel.

Hello. This is Marian Sefcovic speaking from Radenska Adriatic. Adriatic region has been very successful in 2022. We have gained double-digit growth about 25% in Q2 in all markets, Slovenia, Croatia and export countries. In total, in 6 months 2022, we have increased sales by liters by almost 15% compared to last year; in pieces, more than 20%. In 2021, there was a lockdown in Q1 and later start of tourist season. Revenues in 6 months have increased by 19% compared to the last 6 months. Big contributors to sales growth in 2022 are also export markets, mainly in Kosovo and Bosnia and Herzegovina. We are noticing increased demand, especially in HoReCa due to very good tourist inflow in Croatia and Slovenia and boost of all sorts of events from live concerts to local events. Our sales of smaller packaging in HoReCa formats have increased almost by 50% in Croatia and about 25% in Slovenia in 2022. Nevertheless, we are experiencing a trend of rising increase in prices in our main cost categories, raw materials, energy and transportation costs, caused by high inflation in the market and global instability in Europe. Due to rising input costs, also sales price had to be adjusted. EBITDA 6 months this year was 10% better compared to the last year due to good sales performance. Due to high price pressure and rising input cost, EBITDA margin is flat. We are balancing our profitability and customers' ability to endure higher prices on the market. In Q2, we have introduced the instant vitamin drinks category in Croatia with our brand, Oraketa. 100% rPET packaging was introduced for Radenska Classic and Medium [ average ] format. From now on, all [ average ] formats of Radenska and Studenac drinks are 100% rPET, which is a step in the next direction of our sustainability mission. On 60th anniversary International Affairs of Agriculture, AGRA, we have received 2 gold and 2 silver and 1 bronze award out of our product Radenska, Oraketa and Radenska with taste. Also, sales in summer months, July, August, are also above expectation and in double-digit growth compared to the last year.

Ladies and gentlemen, now it's time for your questions. If you wish to ask a question, please click on the Raise Hand icon on your participant panel. If you have no further question, click on the Lower Hand icon. We have a first question from Mr. Dmitry Vlasov.

I have a couple. So the first one is on your updated revenue guidance. Could you please maybe break down what would you expect of this revenue? What should come from pricing and what should come from volumes? That's the first question.

Okay. Thank you very much for these questions. At the moment, we expect 19% revenue growth, out of which, approximately 12% is related to price increase and the rest is related to volume increase.

That's very clear. The second one is on your cost initiatives to achieve the EBITDA which you are guiding. Just curious if you maybe could talk a little bit more about the specifics of those cost initiatives.

Okay. Maybe this question would need a bit more broader comment. First of all, it's really hard for us to implement proper price increases because the imported material prices are changing during the year very frequently, and basically no one is able to expect what will be the, for example, electricity price for the next months. So during this year, we implemented several price increases to the -- on all of our markets. Overall, the price increases are sufficient, what is visible from the growth of the gross profit. So all the input prices and majority of energy, which is included in the production facilities, is covered by the price increase we realized for our customers. And what we also did in the second quarter of 2022 is the fact that we restarted the commercial activities. Like 2 years during the COVID pandemic, we basically freezed all the development activities. We did not invest to the market a lot because there were no certainty that the market will be open and we can realize the profit. This year, we restarted the commercial activities. This is also one of the reasons why the EBITDA dropped down in the second quarter compared to prior year. And now during the summer, which was very successful for us, we see that the autumn and beginning of the winter is very unstable regarding the input prices again. So that's why we are basically again cutting all the commercial costs or -- and we are again freezing the budget to be prepared for the rest of the year and to cover the increase, especially energy cost in the last quarter of 2022. So the cost cutting or the, like, cost initiative is related mainly to commercial activities. The main season is behind us. So the work was done during the summer. And now we should again be very patient and wait for the right moment to invest to the market again.

Next question is from Mr. Petr Bartek.

Please, if you can elaborate a little bit on the opportunities and risks to our full year guidance, the imports, energy prices, maybe what's in your budget in terms of prices of electricity and the opportunities as well.

Okay. So basically, the biggest risks are energy prices for the rest of the year. Still, there is a huge difference between the forward prices for, let's say, December 2022 and the current spot prices. The current spot price of electricity is around EUR 450. The forward price for December is still a bit higher. So we are basically analyzing the situation very deeply. It's not easy to say for us where the price of electricity will terminate, but we are working with several scenarios. In each scenario, we are able to deliver the end-year forecast for EBITDA, which we announced. We freezed the commercial costs. That's the fact. But I still believe that the electricity prices will be not so critical in the end of the year and that we will be working around the current spot prices basically, so EUR 450. That's the situation. For -- just like to have a feeling how much the electricity prices can be important for us. So electricity and gas, like overall energy, together in the last quarter, the difference between the spot price and current forward price can be close to CZK 100 million, the negative impact. So basically, we are working also with this scenario, and we prepare our -- the remaining cost structure in the way that we are able to cover such an increase because until the end of the year, just 4 months are remaining. So basically, we cannot increase the prices so quickly again. Particularly, we need some 3 months to realize the price increase. But we are working very intensively on the price increase from the beginning of next year. I mean, like, all the competitors should do the same basically because the energy prices are the same for all. So that's the current task we have, right, to increase properly the prices for the beginning of next year.

Okay. Could you elaborate, please, on what you see in terms of demand after the -- until the summer season. You see some changes already or not?

No. Basically, we have to say that the numbers which we see in our sales report are still very positive. We are growing and we do not see any like drop down of the market or decrease of revenues or whatsoever. So we are still like analyzing the situation because like basically all the months are the same. That we have a record month in the Kofola history, but we are expecting that the demand will drop down because of the general macroeconomic situation. So far, it did not happen. I believe that also September will finish in this way. So for 2022, we are still very positive in terms of the result. Next year, it's a bit more crucial because based on the first price indications we have for the raw materials and energy prices for 2023, it seems that we should increase the prices again. So far, we do not have precise number but it may finish in the interval in between 10% and 20%. That's our like current estimate. But as I said, the situation is very unstable, the prices are changing every day, so I cannot tell you a more precise number.

We have another question from Mr. Pavel Ryska.

I have one question which arises directly from your second quarter earnings results. So we saw quite a sharp drop in EBITDA on the back of rising sales. And my question is, for you in order to fulfill the full year guidance, what will be different in the third quarter from your point of view in terms of sales and EBITDA? Sales are again expected to rise quite nicely. But if EBITDA was to drop again due to cost escalation, then the full year targets apparently would not be met. So what is different in the third quarter, in the main season in terms of the relationship between sales and costs? So what will allow you to fulfill the guidance?

Okay. Maybe the biggest difference is the fact that in the beginning of the second quarter in CzechoSlovakia, we announced the second price increase, and the full effect of the second price increase will be visible in the third quarter. Because as I said, basically, we need some 3 months to like implement it properly to the whole market. So there should be much better margin related to this price increase, which we announced to the market in the second quarter. So the profitability will increase just for this reason. And the second basic effect is that there will be lower sales and marketing expenses because usually or particularly, we're investing to the market during the second quarter as a preparation for the main season.

Okay. That makes it much clearer. And maybe a follow-up question on the things that you discussed a while ago. So you mentioned an expected 10% to 20% increase. And now I'm not sure if this was meant to be your sales prices next year or if this was meant to be your estimate of input prices increases for next year or both, maybe.

It seems that this is integral for the sales prices. So to cover increasing energy and input prices, at the moment, it seems that we should, for the next year, increase the prices again by some 10% to 20%. I know it's very broad interval, but really the situation especially on the energy market is very unstable.

Okay. So we can maybe say that if this should maintain the margin, so this is also an estimate of the average input price increase for you next year?

No. It's not so exactly because the input prices are typically 1/3 of our output prices. So -- because if you analyze a bit more, the raw materials represent approximately 1/3 of our revenues. So if we are increasing the sales prices by 10%, it's sufficient to cover approximately 30% increase of input prices.

Okay. So assuming that the other costs do not rise at the same pace, of course?

Yes.

Mr. Petr Bartek, do you have an additional question, please?

No.

Okay. So if you have no questions, please lower your hand. Thank you. As a reminder, if you were to ask a question, please click on the Raise Hand icon on your participant panel. We have an additional question from Mr. Petr Bartek.

Sorry. One thing comes to my mind. In terms of the potential sale of shares from Radenska, if there is any change from the previous quarter regarding that. Are you still looking to the market, waiting for a more stable condition? So if there's any change on this.

No, there is basically no change in this respect. We are not forced to sell the shares. We are watching the market and waiting for the proper moment, waiting for the situation once we would like to reinvest this money to something else. But there is no change at this moment.

And then maybe you had quite a good operating cash flow in the second quarter, a decline in [ debt ]. So why is the lower proposed dividend? And what was actually the reason for the solid cash flow? Was it the settlement of the derivates? Or...

Yes. Absolutely. The settlement of the derivatives helped us in the second quarter. It compensated a lot to the increasing CapEx investments in this year. So altogether, the free cash flow for the first 6 months is basically very similar to the previous year. Why we decreased the expecting dividend from CZK 13.5 to CZK 11.3 per share is basically the fact that there is a very unstable situation on energy market. And we basically decided to, let's say, create some provisions for the potential hard times which are likely ahead of us. So we decreased the dividend a bit. The saving in the cash flow is approximately CZK 55 million for the group, and it's also approximately the amount of money which we are currently investing to our production facilities to become more, let's say, independent in respect of the gas because some of our technologies are running on gas. It's not the major like energy for us. The production lines are running based on -- basically using electricity. But for example, in some production plants, there are like parts of the process which are using the gas. And we are changing this technology on the hybrid ones so that we can use in the future gas as well as electricity to be on the safe side in case that there is no gas in the Europe so we are still able to produce properly. So we're also like expecting that there will be a slight increase in the CapEx investments in the end of the year in this respect, and the decrease of dividends should also like cover this cash outflow potentially. But the main reason is like unstability in the energy market, and we would like to create some provision for the winter.

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