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

Ladies and gentlemen, welcome to Kofola's Third Quarter '22 Results Conference Call. You will now hear a recorded presentation of Kofola Group CEO, Jannis Samaras; Group CFO, Martin Pisklák; and Business Insights from CzechoSlovakia and the Adriatic presented by country CEOs, Daniel Burys and Marian Sefcovic.

Dear investors, at the end mid of September, I gave an interview that resonated strongly throughout society and was variously quoted, interpreted and even misinterpreted. I did not hide my pessimism and concern about the impact of huge energy prices on large energy-intensive businesses by concerns that there would not be a rapid systemic solution at European Union level and my concerns about the decline in purchasing demand. I want to make it clear, however, that I am not concerned about the Kofola Group. We are able to benefit from our flexibility, from our diversified product portfolio, and we are able to keep a tight grip on our costs to achieve the results we require. I am confident that we will be able to handle this crisis. At a time like this, it is important to look for positive signs and hope for the best, at the very least, for the situation to stabilize. We believe that the inflationary potential will soon be exhausted and that the exchange rate of koruna against the euro will remain stable. I also think that the moderate rise in unemployment will put the brakes on wage pressures and the labor market will steady down. We are confident that our EBITDA will be at the previously announced target. We will -- it means we will achieve this year target of CZK 1,080 billion. I will now hand over to my colleagues, who will comment on the third quarter results in each region and the developments expected up to the end of 2022. Thank you for your attention and for your goodwill towards Kofola.

Dear investors, Martin Pisklák speaking. Please let me present short financial summary of the third quarter of 2022. Group revenue went up by 11%. Our sales volumes are growing and the market share seems to be very solid. However, our group EBITDA was lower by more than 10% and totaled CZK 462 million. Considering the current macroeconomical situation, such a result is a very solid. Third quarter was impacted mainly by extremely high energy prices. Despite the fact, we increased the prices 3x in the past 12 months, we were still one step behind the increase of input prices during the third quarter. That's why we were forced to introduce a new cost optimization projects in September. Development projects were temporarily freeze and we also decreased the number of employees. We are still focusing on our annual target. Current expectation is that 2022 EBITDA will total CZK 1.080 billion. This means the lower end, or lower edge of our predicted interval. Our EBITDA for the first 9 months totaled CZK 880 million. So CZK 200 million are ahead of us in the last quarter of 2022. We have no crucial problems. We paid out the dividend at the beginning of November as expected. Now, it's time to prepare a budget for 2023. This can be a very challenging task. However, I believe that we will still be successful company with a very high profitability and optimistic future. Thank you for your attention.

Hello Kofola friends. Here is Daniel speaking. I'm responsible for Kofola CzechoSlovakia business. Let me comment top season and Q4 expectation. Q3. From a sales perspective, it was best season ever. We grew 11% compared to extraordinary successful 2021. Of course, it was driven by price increase, but the volume was above last year, too. Summer weather was okay, only raining and cold September finished season earlier. More than 50% people traveled abroad this summer. Generally, we can say that consumers enjoyed summer spends before coming crisis. Best sales were in water category, plus 19%. The only declining brand Semtex, 99% compared to last year. The most successful innovation is Royal Crown no sugar. Royal Crown, as a brand, performed 55% above last year. The problem is energy and raw material prices, the level was above our expectation. We had logistic problems in primary distribution due to limited transport capacities. Year-to-date, EBITDA is CZK 650 million. It represents 16% drop compared to last year. Expected performance in the end of 2022. The main cost problem is sugar price now. We had to stop promotions, activities in syrup category, which is very important from a margin perspective. We see extraordinary -- grow due to last year COVID restrictions. We started process of commission and price negotiations for 2023. We announced more than 20% price increase. We focus on cost-saving projects with simple goal to deliver group EBITDA target. We are finishing financial plan for 2023, respecting the fact that significant price increase will cause volume reduction next year. Thank you for your attention. Daniel.

Hello. My name is Marian Sefcovic, and I'm CEO of Radenska, Adriatic. Adriatic results for Q3 2022 have been quite successful. We were ready for the season. A nice weather did help. Overall, we see that consumer habits are returning after COVID time, and retail purchase isn't that strong anymore. On the other hand, we see the other segments HoReCa and On the go are getting stronger. Due to extremely bad weather in September, slightly decrease in Q2 results is noted, but overall, our results are positive. Sales and volume have increased versus last year in Slovenia by 2, 3 percentage in Q3 and our sales in HoReCa has out down 2019 Q3 numbers by 10% increases. We are somehow struggling with our main [indiscernible] as there is quite competition with [indiscernible] labels due to high inflation in the market. Croatia sales have reached a new records. It sales have increased by 11% in sales volume compared to Q3 2021. We are proud to say we have increased our presence in HoReCa churn and our sales are 35% higher than in Q3 2019 and in above our expectations. We launched a special marketing campaign in Croatia for Studenac water brand, with a playful and young-oriented campaign surrounding the positive message about the importance of hydration. Marketing campaign has been executed by TV and radio coverage in June and July. For digital campaign, we also received an awards. As a result, we have gained sales with double digits about last year, plus 16% in PCs and even exceed our plans. Unfortunately, due to higher input price for all sorts, we have had to adjust our sales price in midyear. Inflation in both countries is a record high, about 10%, and the consumer confidence are -- and price sensitivity is increasing. Our profitability suffers due to great increase input prices and even with positive sales results, our Q3 EBITDA result is below last year, first and foremost, due to higher cost of energy, transport and personnel expenses, and also due to more investment in trade marketing and brand activities. More importantly, we have been able to maintain our market position and market share in all our brands and even increased our market share in water and CSD on the Croatian market. This is especially important for our future growth in this market. And it's an indicator that we are on the right path and we are doing the right things. We are exceptionally proud to report that Radenska has been recognized as the most environmental-friendly company in Slovenia, awarded by #1 business newspaper finance and public found for investments in Slovenia. Here, we've received the so-called environmental Oscar for our environmental and sustainability projects campaign of planting trees, our strategy over terminal packaging and organization of zero-waste marathon [indiscernible].

Ladies and gentlemen, now it's time for your questions. [Operator Instructions] We have first question from Mr. Dmitry Vlasov.

I have a few. So the first one is on the consumer behavior. Just wondering if you've seen any pressure on the demand side, especially in October and early November? That's the first one.

Okay. Thank you very much for this question. To be honest, until the end of the third quarter, we didn't see any like decrease in consumers' behaviors, or like the decreasing volumes, especially in HoReCa channel, which is typically the first indicator if something is happening on the consumer side. October was weaker. And now we are analyzing why because typically for October it's important that the end of September is still a nice weather because first half of September, people are still living on some like, let's call it, summer mode and are visiting restaurants and still are spending the holiday money. And then it's important in the second half of September has a nicer weather as well because second half of September usually starts very good and solid sales also in October. This year, the second half of September was weak in weather, and that's why also October was heavily impacted. The impact was quite strong. So we are now discussing if this was purely the effect of the cold weather in September, or if we see the first signs of the decrease in demand in general. November sales, so far, are on our original outlooks in Adriatic, even above our original outlook. So it seems that nothing significant is happening in consumer behavior so far.

That's very clear. And another question on the cost side. Yes, obviously, I've noticed that oil and PET prices corrected since the peak during the summer. I was wondering if you started seeing maybe a little less pressure on the cost side, especially in energy and plastic? Obviously, I know that the sugar price is the main issue, but wondering about the energy and PET.

PET is quite stable with price. At the moment, the, I would say, average purchase price of PET for us in 2022 is around EUR 1,400 per tonne, and we expect approximately the same price also for 2023. So the price quite stable. In terms of energy, of course, the summer was extraordinary expensive the -- because we are buying -- or we were buying a majority of the market's electricity and gas on the spot market. So during the summer, we were paying like over EUR 500 for electricity. Currently, the electricity is significantly lower. So during the last quarter, it seems that the cost will be below our original expectations. On the other hand, sweeteners price is already increased. So here, we expect that the increase of sweeteners will be very significant. If the average price for the sweetener -- or for the sugar in 2022 was around EUR 500 per tonne, in the end of 2022 and first half of 2023, we expect the price almost EUR 1,000 per tonne. So here is a very significant increase of the input prices. And we already reacted on this and announced significant price increase also for retail and HoReCa channel. So we are increasing the prices from the 1st of January, approximately by 20%.

And the 20% is for CzechoSlovakia and Adriatic region as well, or just for CzechoSlovakia?

It's average for the group. But I will not specify the purpose, individual market.

Next question is from Mr. Pavel Ryska.

Maybe a follow-up question in [indiscernible] after the last one. I wonder about the sweeteners, which are increasing in price so much. You mentioned roughly 100% increase for the next year. Can you outline roughly what percentage of your direct costs is the sweeteners? And my second question is -- so you showed that for the fourth quarter, you will need something like CZK 200 million of EBITDA to reach your full year target. So given that October was kind of weaker, as you said, what are the measures that you will take maybe on the cost side so that you aim to fulfill the target?

Okay. So regarding to your first question, the share on the overall cost of -- the share on overall -- direct cost is approximately 11% for the sweeteners. And then to your second question, we have basically implemented several measures. First, what we did is that we cut it a lot of commercial costs. So basically, old image campaigns except or the Christmas peak in Czech Republic and Slovakia was canceled. We are using just the marketing tools with a very specific marketing message. So no image campaigns, just specific campaigns. Then we already implemented cost saving programs in all the other departments, for example, with all the team buildings and similar events, which we planned for the year-end. And what is helping us generally, the situation on the market in 2021, the Christmas parties were not standard. In 2022, we see, in HoReCa, that Christmas parties are back. So also our sales now in the second half of November starting to be very robust in this -- in HoReCa channel. So we believe that November as well as December will be significantly stronger compared to 2021. Also, if we look back into the history, how we can perform in the fourth quarter. So typically, in the best years, for example, 2019, the fourth quarter result was around CZK 270 million. On the other hand, in the weaker year, for example, 2020 with the lockdown due to the COVID, the fourth quarter finished somewhere CZK 125 million, if I remember correctly. So CZK 200 million is nothing, I would say, special for us. It's not a record-breaking number. Yes, the results should be significantly better compared to 2020 or '21. On the other hand, we have cost pressures, but I believe that still it's a very realistic expectation and developed initially on CZK 1.080 billion.

[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 website. You may now disconnect. Thank you. Goodbye.