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

Ladies and gentlemen, welcome to Kofola's Second Quarter of 2024 Results Conference Call. You will now hear a recording presented by the Group CFO, Martin Pisklak, with a summary of the Group's results together with comments related to the recent floods and their impact on Kofola Group. This will be followed by business insights from Czechoslovakia and Adriatic presented by country CEOs Daniel Burys and Marian Sefcovic. Finally, you will hear a recording describing current performance of a new segment based in ciders commented by the CFO of the breweries, Martina [indiscernible].

Dear investors, Martin Pisklak speaking. Please let me comment on the second quarter results. Accumulated revenues for the last 12 months exceeded CZK 10.5 billion and LTM EBITDA reached CZK 1.7 billion. These are very strong results. All of our segments are doing very well, and our leverage remained on approximately 2.4x EBITDA. Also the sales numbers for July and August 2024 are extremely strong. As you probably know, recent floods affected also Kofola, namely our production plants in Krnov, Litovel and Hanušovice. In Hanušovice and Litovel, our fixed assets are without major damages. However, we are solving infrastructure problems and accessibility of our employees. Our Krnov production plant is temporarily closed. We are currently determining the extent of the damages. We are cleaning up and focus on getting the plant back up and running as quickly as possible. Our estimate is 4 weeks until the operations are running or at least partially running. However, Kofola is able to cover the vast majority of Krnov products from other production plants in the Group. The amount of the niche is currently estimated roughly at CZK 100 million to CZK 200 million. Part of these damages will be reimbursed by the insurance company. Despite the floods, I believe that our annual EBITDA in 2024 can be very close to CZK 1.8 billion. Thank you for your attention.

Dear Kofola friends, here is Daniel again. Let me briefly comment Q2 in soft drinks division, Czechoslovakia. We can enjoy positive market development in both countries this year. Retail growth in value 10% and volume 5%. Nonflavored water is the most growing category and CSD juices are losing because of shortage of orange concentrate. HoReCa is volume stagnating due to June rainy weather, and [indiscernible] increase in Czech Republic. Long-term development is very positive and June was just a market correction. Our performance was excellent, and we were very efficient and very proud of 18% EBITDA margin. Top season arose in positive rate, sunny weather and growing consumer confidence compensates extraordinary level of a broad holiday of Czech and Slovak citizens. I can underline our strong marketing support on music festivals [indiscernible] square and real festival weddings. Actually, we face historical flood in Krnov production plant, situation, commence Martin. I can just say thanks to all employees for unbelievable intensive work on Krnov recovery. Brief comment, Q3 Kofola sales won't be significantly affected because of this crisis. We supply consumers from Rajec, Kláštorná and [indiscernible]. We have 2 most important news for next month, slowing sugar tax approved negative and sugar price decreasing back to EUR 500 per ton level. That's positive. Thank you for your attention, and please donate our recovery fund, hashtag people in Krnov, Hanušovice and Litovel. Thank you.

Hello, everyone. This is Marian Sefcovic, CEO of Adriatic speaking. In the first half of the year 2024, the Adriatic region demonstrated strong sales across all markets with revenue up by 13% year-over-year despite the challenging weather in the region. Slovenia saw a 5% increase, Croatia 12% and export market achieved impressive growth at 8.5%. We are a special content with Croatia revenues improving by double digit. EBITDA has improved significantly in 2024 by 33% compared to last year. The second quarter has brought us challenges with heavy rainfall and thunderstorms in May and June which affected the overall sales and also caused some damage to Radenska plant. We have completed repairs and resumed normal production and even so achieved a good result in this quarter. Looking ahead, we are committed to sustainability growth with promising results. We continue our fourth national campaign for Radenska in Slovenia, featuring and [indiscernible] as the ground price, alongside the good campaign for Studenac brand in Croatia. Additionally, we have launched a strong marketing NPR initiative for Radenska Naturelle in the steel water category after a long time. We have also successfully launched a redesign of Oraketa brand. In May, we organized our traditional marathon of Three Hearts in Ardent, which has become the largest zero waste event in Slovenia this year, broadening the [indiscernible] Thank you, Marian.

Dear investors. This is Martina [indiscernible] speaking. So let me provide an update on the progress within the beer division, which has been part of the Kofola Group since mid-March. In the first 6 months of 2024, our breweries experienced considerable revenue growth of approximately 13%, primarily driven by increased sales volumes in both Czech and export markets. All brands and packaging formats outperformed last year results, and we are very pleased with the overall performance. EBITDA grew by around 10%, though the EBITDA margin slightly declined due to limited sales prices increase this year that did not fully offset rising costs, particularly in labor and energy. Recent flooding had no material impact on our operations. The Zubr brewery was unaffected, while at the Holba brewery only minor nonproduction areas were impacted. The Litovel brewery was completely underwater, but there was no damage to production equipment. We are optimistic that both affected breweries may receive production within the coming days. Although over 60 customers were impacted by the floods, we remain confident that the results for the fourth quarter and the full year will remain strong. Thank you for your attention, and have a nice day.

[Operator Instructions] We have the first question from Mr. William. Mr. William, you can ask your question. So Mr. Ryska can ask his question. Mr. Bartek, you can ask your question.

Can you hear me?

Yes, we can.

And first of all, congratulations for the strong results. And also happy to hear that the flood didn't cost that much damage, market was worried about. Question on my side would be very strong results. Can you a little bit elaborate on your view, how much of that was thanks to, say, increasing consumer confidence and improving sentiment and how much was driven by the weather conditions in the second quarter and maybe also in July and August -- can you split the revenue increase in July and August to organic growth and to the acquisitions to have more color? And third question actually would be on the prices of sugar. What you see in the market? How much are they dropping? How we are hedged this year until whether you are already hedging for the next year, some color on that?

Okay. Thank you very much for your questions. I will start with the last one. Sugar prices are currently like falling down. At the moment, they are around EUR 500 per tonne and the trend is decreasing. The prices for next year are typically contracted in the end of September, beginning of October. So now we are in full negotiation for next year. At the moment, we cannot provide you with the data how much we are like hedging for next year and how much we are like believing in decreasing spot prices. But the trend is very positive, what we see. The fact is also that thanks to decreasing sugar prices, also the selling price or realization prices on the market will be decreasing so we can promote more of the products, which are like strongly dependent on sugar or where the sugar costs are a significant part of the recipe. Regarding the consumers' confidence, it's very hard to split in between whether and consumer confidence. And I would rather say that what we see in all these segments, we have consumer confidence. It's really like increasing. After 3 complicated years, we really see that all the marketing campaigns and all the efforts we have like in the retail and also in restaurants is paying back that people are buying our products and basically, we see really like strong demand for our products in general. Of course, the weather during the summer was quite good. So we had no rainy weeks during the summer. I would say that weather was comparable also with last year. So the weather effect would be not so strong where we can feel very strong weather effect, maybe beginning of September because like this September in the first 2 weeks were very exceptional. It was really good weather. And also our sales in the first half of September were very strong. What is also very important for the profitability of the group is the fact that also the pillars like go, for example, our Fresh & Herbs in general, where we had some negative development in the past. It's still like improving, and these improvements are driven mainly by the organic growth and by increasing the efficiency of the operations. So UGO is really like the huge contributor to the EBITDA and profitability, which is, for sure, very positive news, because if you look on the Fresh & Herbs segment, so for example, in 2020, the EBITDA was negative, 2021, the EBITDA was like CZK 11 million, 2022 around CZK 50 million and now we are enjoying EBITDA almost CZK 150 million. So like compared to the average for 2020 to 2022, we are basically gaining CZK 115 million organically only in Fresh & Herbs segment, which I think is a really strong contributor for the group profitability. What is also very positive is the performance of the breweries. Typically after the acquisition, there is 1 year of the drop of the profitability because of the change of -- changes in management, changes in processes and so on. I'm very happy that we did not experience the situation this time. We can see that the growth breweries is volume-driven. So we are successful in Czech market as well as on the export markets. And even, for example, energy costs are increasing in breweries compared to prior year. Because of this, like volume increases, we are still able to perform slightly better compared to last year. EBITDA almost CZK 160 million in the first 6 months of 2023 like very strong. You can also see that the EBITDA margin is basically 20%, which is 5 percentage points higher compared to the nonalcoholic beverages. The season was also very solid in the breweries. So like overall, we are like very satisfied so far with the acquisition of breweries. And did I forgot to answer some part of your question, maybe if you can.

Yes. If you can split the July and August sales to organic and acquisition. So we have some color on the organic development.

I don't have the data in front of me at the moment. So I would not comment on that at the moment.

Maybe one additional question. Would this approximately the level of sugar prices hedged in 2024?

In 2024, we are -- like in 2023, we were like let's say, EUR 1,000. Now in average, I would say that compared to first 6 months of 2023, the sweeteners in average are some like 20%, 25% cheaper, so let's say EUR 750 approximately per tonne in case of sugar.

Mr. William Kobi, you can ask your question.

I'm going to ask if you can hear me because I had a problem with my microphone before.

Yes, we can hear you now. Please go ahead.

Allow me to congratulate you for great results. So I would have 2 questions, would be related to insurance. So if you can explain more, how much in percentage the insurance is going to cover, and probably that's going to be enough because you answered all my other questions before.

Thank you for your questions. At the moment, we are like estimating that the damages from the floods can be up to CZK 200 million. The insurance limit, which we have for all images in total is much higher. So I believe that the vast majority of the damages we have should be covered by the insurance, but we are in like very early stage with the insurance company. So we should go through the proper procedure on their side as well. But overall, I'm like very positive. I believe that the insurance which we have, is more than sufficient for the situation.

Next question is from Mr. Bartek.

One more question. More in general, now when you see the commodity prices decreasing and consumer demand looks okay. Maybe some comment on the situation in terms of competition, how it's evolving in Czechoslovakia and the Adriatic region, also maybe in the brewery business and whether we will be more focusing on the improvement of margins towards to, let's say, historical levels or whether you will be more keeping eye on the market share?

Basically, the market shares are very stable in the past periods. We do not really see any like significant fluctuation that someone is losing or gaining significantly. Now I'm talking about the main segments where we are active also in the breweries. So far, we do not see any like significant movements on the market. So that's, I would say, very positive. Of course, we focus on the, let's say, pre-COVID profitability is one of the key goals, which we have. Let's see if we can like come back to these levels. But like as I said, overall, I'm like very positive with the results like frankly speaking, if there are no like floods in Czech Republic or if there were no floods in Czech Republic, we would basically improve the estimated results for 2024 to one number only. I would say that we are targeting CZK 1.8 billion. Now after the flood, we still remaining in the interval, which we published. However, I'm really like positive that the final number will be very close to CZK 1.8 billion. So like the overall situation is very stable on the market, and basically the increasing profitability, which we now like to see also in our numbers. It's mainly driven by the stability, which we currently have on the market after 4 years of unpredictable events like COVID and energy crisis.

[Operator Instructions] We have the question from Mr. Raška.

Can you hear me?

Yes, we can.

You indicated double-digit growth in July and August, but it's a surprise for me that we see a big difference between value and volumes. Can you more elaborate the reason of this difference?

The reason is basically very simple, and that's the fact how the prices were increasing in the past 2 years with the inflation. So firstly, like in some like 3 or 4 steps, we were like increasing prices in 2022 and 2023. For 2024, we did not increase the prices basically. We did not increase the prices. So it's like 2024 is like the first period where we are like experience -- where we are like selling for the increased prices for the full -- basically a full year from the beginning. So that's the first fact that partly it's this like a timing effect of the price increase. The second effect is that we are like that we are selling -- now we have in the numbers also the beer and basically, the prices of beer like per liter are like higher compared to nonalcoholic beverages, so that's also like part of the effect. And the rest is just the volume effect, which you can like see in the numbers. So basically the timing of the price increases in past years, I would now like giving us its place to enjoy like higher revenues in 2024.

Okay. Okay. And these figures include beer segment or it's only...

Yes. It's also with the beer segment.

And maybe once again about material prices, can you give us some update about input prices also in beer segment like malt, hope these input prices in the beer segment?

At the moment, I do not have this analysis in front of me, so I cannot comment on. Still is remaining that the malt is the key material input for the breweries. So basically, it's the biggest part of the recipe in terms of cost. So far, what we see, the -- I would assume that the price of malt would be like the trend would be comparable with the price of the sweeteners in general. So rather like decrease in prices. But as I said, I do not have the number in front of me, so I will not comment on it.

Okay. Okay. And what about PET resin if you can.

Compared to 2023 to the first 6 months, the PET resin price decreased by some 20%.

So it's the same -- it's that the same like sugar you said?

Sweeteners in average, some 25%, sugar made is a glucose a bit more. But in average, I would say, 25% in terms of sweeteners. And in terms of PET resin, it's some like 20%.

[Operator Instructions] There are no more questions. This concludes today's conference call. Thank you for your participation. A recording of today's call will be available on our web page. You may now disconnect. Thank you, and goodbye.