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

Ladies and gentlemen, welcome to Kofola's First Quarter '23 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, welcome on our conference call. We experienced a very unusual first quarter of this year. However, our volumes saw the drop down significantly. The EBITDA of Kofola Group increased significantly as well. Let me explain how is this possible. The increase of EBITDA by approximately CZK 100 million can be divided into 3 significant effects. First 1 is related to our volumes sold. Our expectations were even more pessimistic than the reality. Second effect is related to the cheaper raw materials and energy prices. And the last 1 is related to cost cuts we made based on our pessimistic expectations. We have to say that such dynamics cannot be expected in the rest of the year. In April and May, we see that the drop of volumes still continues. Our second quarter profitability is much closer to our expectations. Our goal is to finish year 2023 with annual EBITDA in between CZK 1.150 billion and CZK 1.250 billion. Thank you for your attention.

Dear Kofola friends, here is Daniel speaking. Let me briefly comment Kofola CzechoSlovakia results. Usually, Q1 is quite boring period because of long season and contracts approval. This spring was different, very dramatic because of new market situation, long-term price stability is a history and all players has to realize their new price strategy. We transparently announced, explained and realized our goal. Average price increased 20%. We became aware of expected volume impact and drop was 8% according to our expectations. The most affected category was flavored water, where we see the highest price sensitivity. We successfully launched our innovations. Above expectations are SEMTEX Extrem and Targa tonic. Cost structure is slightly better than expected, especially in energy and oil. The most important raw materials, sugar and PET were contracted for a whole season. So expected savings will be visible in Q4. We see a little bit higher market drop in April, May, partly because of cold and rainy weather and partly because of household saving. But we see positive development of top season. People will enjoy summer as last year. Thank you, and drink Kofola , Daniel.

Hello, everyone. This is Marian Sefcovic, CEO of Adriatic. You notice Adriatic, we are very satisfied with Q1 results. We are aware that Q1, as the rest, a significant part of the year for beverage companies in terms of all our results. But a good result in the first 3 months is still very important from the psychological point of view because if you start the year very well, it effects on the whole season. Therefore, we used the first quarter to prepare well for our main season and for successful production in the summer months. In the first quarter, the focus was on controlling and stabilizing the rising cost of material, such as [indiscernible] sugar, glass and others. We successfully coordinate new prices with our customers, which compensate for the rising cost of imports -- inputs, higher cost of materials, energy, transport, higher salaries. We have successfully applied to the system of [ state ] subsidiaries for energy products. Here, we expect reinvestment of part of the cost for the whole year 2023. At the beginning of the year, we successfully completed all technological overhauls and mineral investments so that we prepare production for a successful start of the season. At the end of the first quarter, activities for the launch of the new products stoops both in the production and in other departments. In the first days of April, we offered new functional drinks and Oraketa out here to the market, and we also started promotional campaigns for the both new products. Thank you, Marian.

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

Good morning, everyone. First of all, congratulations on the very good profitability in the first quarter of the year. I have 2 questions. The first one concerns revenues in the current second quarter. So you have shown us that the increase in the value sold was rather mild in April and May. I also looked at the past results in the second quarter of last year and of the year before, and I saw that there were pretty good increases in both of these second quarters. So my first question is, is it safe to assume that this second quarter will be rather flat year-on-year in terms of revenues given the high base from last year and the drop in volumes that you just mentioned? And my second question concerns margins. So you have said that you probably cannot sustain the savings that you made in marketing and administrative costs. So I'm assuming that these costs will rise going into the summer but at the same time, you have lower energy prices, which you can benefit from still. So my second question is, if it is reasonable to assume that better profitability compared to last year, will continue into the second and third quarter. Thank you.

Okay. Thank you for your questions. So first question related to the revenues for the second quarter -- from the second quarter. Yes, we see quite a big drop in the volumes, but this drop was expected by us. And its compensated by the much higher sales prices, which we have. Past 2 years are very specific because of the COVID pandemic. There is really a lot of effect related to lockdowns and so on. And also this period was very specific by the fact that we did not launch a lot of innovation during the second quarter, which we typically did in the years before the COVID. So that's why we believe that our plan for the second quarter and also for the rest of the year is safe to assume that we will continue in the trend that the volumes are decreasing. However, we are keeping the revenues or slightly increasing the revenues. And that's what we see. We see this effect on all the markets. So it's not only into Republic or Slovakia. It's also in Adriatic, the situation is pretty much the same. What is also interesting is that we expect that the -- especially that the drop will be bigger, especially in HoReCa channel. You see that the on-premise generally in the presentation is still growing, which is in terms of volume, which is quite surprising for us. We expect like much more decrease in HoReCa and a bit more stable retail, but it's vice versa. And HoReCa is, of course, more profitable segment for us compared to retail. So that's also the reason why the profitability is increasing. And your second question related to marketing and administration costs, if we can like maintain this level, of course, if we should like increase them. It's not -- we cannot like assess this based on the first quarter because what we did typically is that we budgeted the first quarter in very like pessimistic way in terms of the drop of revenues and the overall economic -- or macroeconomic situation in Europe. And that's why we like postpone -- what we can we postponed to the second quarter. So it was not invested in the first month. You see that the change -- and the same situation was also like in previous year and year before because if you look on the comparison of the first and second quarter in our report, so you will very clearly see that basically the increase in profitability is done on the gross profit level. So if the gross profit increased by CZK 120 million, so the EBITDA increased by CZK 106 million. So basically, the increase in its gross profit, selling, marketing and distribution costs, they decreased by CZK 7 million overall. And this is 1.4 percentage points. There is also effect of the rate calculation of the euro countries and so on. Administrative costs decreased by CZK 10 million, also not like -- this is 8 percentage points, and they increased. So that's not that we are like cutting them significantly, and the other stuff are mainly related to subsidies, which we received for energy prices from the government. So it's not that we are cutting the cost. It's rather than we are like compared to the previous year, some 2019, for example, we changed the timing of the costs. And overall, we're still investing to marketing. That's something which we have to do to keep long-term our profitability. So the goals did not change.

[Operator Instructions] Mr. Pavel Ryska, do you have an additional question, please? We have next question from Mr. Jan Raška.

The electricity prices are still decreasing. Can you elaborate the development energy costs in the first quarter year-on-year development?

Thank you for your question. We originally expected that the electricity and gas prices will be approximately on the government limits, which were announced in the end of 2022. We all see that the actual situation is much better and prices are lower. So we are like buying energy on the spot. So compared to the first quarter of 2022, we saved some CZK 20 million approximately. And on the -- and it's very hard to predict where we will be like on the full year level. But let's say that the difference compared to 2023 can be in tens of millions of Czech crowns.

We have next question from Mr. Pavel Ryska.

Yes. Thank you. One more additional question. Regarding the prices of the plastic that you use and the sugar or sweeteners, what is the current situation? How much higher are they compared to last year? And are they moving in any significant way at the moment? That means towards the second half of the year, if there is a change going into the next year?

[ Thank ] you for the question, still our valid information which we gave you previously this year. So basically, sweeteners and especially sugar, the price doubled compared to prior years. Price of the PET is approximately on the same level, the difference, it's in like just percentage points, so nothing significant in this respect compared to 2022. But the sweeteners in general, like doubled and of course the situation is still the same. We expect that the change with the sweeteners can come, let's say, during the summer, typically in the end of second quarter or beginning of the third quarter, the prices are starting to decrease in case that there should be a good harvest this year and so on and so forth. So our expectation is that the price can start decreasing for the sweeteners, let's say, during the summer.

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