Purcari Wineries Public Company Limited (WINE) Earnings Call Transcript & Summary

Hi, good afternoon, everybody. It's a privilege to open this call. I know it's uncertain times in the market. Now I'm sure everybody is feeling that at the moment. So in that context, we're actually quite excited to come, I think, with another strong quarter and more importantly, with a strong guidance for the year to come. And here I speak as the Chairman of the company, and I've been involved with the company, as you may know, for the last 9 years. But also as a representative of one of the large shareholders, Horizon Capital, whom, as you know, has sold out of their previous 2008 vintage fund by an ABB in October. And I'm extremely excited to have entered the company from our newest fund, which is a 2017 Vintage Fund. And given the very high return expectations we have on this fund, which are at least 20% IRR per year, I think it's also a testament to our conviction in the company and our conviction that this company has a very bright future in a midterm to long-term perspective. So with that, I'm passing the word to Eugeniu Comendant, who is the CEO of our company, who will take you through the annual results we achieved last year.

Thank you, Vasile, and good afternoon, everyone. Eugeniu Comendant speaking. Indeed, so today, we'll be looking at the 2019 preliminary results unaudited for Purcari Wineries Plc. The presentation is called exactly about 2019 Preliminary Annuity Results, dated February 28, 2020. I'm sure most of you have received via e-mail, but it's also available on our website. Now I'll jump straight to Page 5. And in fact, that page has not drastically changed aside from for some small changes in share of sales from our markets. But one thing that I'd like to do here is to re-welcome Horizon Capital in retaining as investor in Purcari, indeed, following their ABB in October last year. But equally, I'd like to welcome new investors that have joined and some investors that also have increased their positions in 2019 and also in early 2020. Some of the investors that have joined, it has been after the -- after some investor events and road shows. And to us, seeing the effects of our meetings -- actually converting into getting new investors just reconfirms that we have solid financial and business foundations and commercial strategies to gain interest of the investor community. Okay. So the next 4 pages, so Pages 6 to 9, they encompass our positioning and growth strategy, which we have formulated many times. And I'm sure most of you, if not all of you, present in this call are familiar with. So allow me to jump to Page 10. So if we all go to Page 10, we have 2 charts here. The chart on the left shows again that we retain our brand authority among social media users. And the chart on the right, an important one, shows the high appreciation for the actual wine in the bottle based on Vivino ratings. These 2 combined, these 2 effects together, of course, allow for sort of natural growth of our customer base and our fan base of Purcari Wines. I will turn to Page 11 now. Here, we see inspection on the right that Purcari clearly dominates its price segment in Romania with 8 out of top 10 best ready wines being Purcari. I'll quickly move to Page 12. In the chart on the left, you can see Purcari, again, retaining the status of most awarded winery in Central and Eastern Europe at Decanter. Decanter, of course, is arguably the most important wine competition in the world or we call it the Wine Olympics. And on the right, also importantly, we can see that the number of medals at Top 5 wine competitions are increasing, and they're actually increasing while continuously increasing production of millions of bottles. So I think this is quite a feat. Moving on to Page 13. I -- So here, we're looking at our market shares in Romania and other large players. Romania, of course, is covered by Nielsen, so we can have this [ detailation ]. We can see that the market is still fairly fragmented. We are continuing to grow our market share as a group in the chart on the left. We also see that other players are also experiencing some growth. Though I must point out that let's say, the Top 2, for example, are not direct competitors to us since they mainly play in the low-end price segment. But here also worth noting that the trend of the market with market shares increasing for the largest players, in a way, confirms the consolidation component of our growth strategy, and it confirms that we -- relying on that tactic strategy is correct. On the right, we see the 30-plus RON market shares. Clearly, Purcari dominating this segment, and we're further increasing our share with 22% for Purcari or we can say, 25% for the group overall for this segment. We'll move to Page 15 now, please. So Page 15. Here, we're happy to report very strong growth with 18% growth in revenues, reaching RON 199 million. EBITDA has grown by 23% to RON 68 million with EBITDA margin at 34%, very solid. On net income, I would like to draw your attention that we are showing here the normalized net income since it is most representative of the operational results. So normalized income has grown by 19% with net income margin at 22% for 2019. The normalization has been around gains incurred in 2018 through the revaluation of Purcari stake in Glass Container Company. There was a positive effect there in 2018 of RON 4.17 million. And then in 2019, there was actually a slight -- over there was a slight negative effect much more, of course, in size of RON 240,000. So together with -- we are applying this normalization. Without this normalization, the growth in net income will be 6%, but we do believe that applying this normalization and having a better representation of the operational performance is the way to look at it. In such the growth in net income is 19% year-on-year. Going further to Page 16. We are looking -- so here, just sort of highlights the key operational highlights for 2019. I have already mentioned the growth figures. And when we speak about growth in absolute terms, Romania has been a key contributor to the growth, growing at 26%. In relative, but also absolute terms, we see very strong growth and top and bottom line contributions from Moldova, Poland, Ukraine and China, all with solid double-digit growth. We maintain our high margins, both EBITDA and net margin, despite an increase in brand and trade marketing expenses in 2019, but in combination with a slight decrease in G&A, in some part, due to lower professional fees comparing to 2018 when Purcari . Quickly on harvest. Harvest 2019 was good. We mentioned this in our last report on call. And combined with the stock buildup from 2018, we are fully ready to support the planned growth in 2020. Our wines continue to excel in quality and the way they interest consumers. I have mentioned, our high rankings from Vivino and also worth mentioning that our flagship brand, Negru de Purcari, has reached #1 top spot across the world on Vivino in its price segment. This is really amazing. We're mentioning the 2020 guidance here but I will -- I guess, I will elaborate a bit more. We have a separate slide for this later in the presentation. So moving on to the market dynamics overview. Firstly, in Romania, we see a very strong performance here. As a share of sales in the group, 42%, and with a growth of 26%. Here, Purcari has led the growth. Crama Ceptura grew at a high single digit and Bardar sales actually ramping up in Romania, too. They have increased fourfold. Of course, from a smaller base, but very promising. Moldova. We see strong growth in Moldova, too, 90% increase with 23% of the share of group sales with Bardar and Purcari here being the star performers and contributing to the growth. The operations with Coca-Cola Hellenic, our distributor in Moldova, we see them as fully ramped up, having also activated around 700 new selling points in traditional trades, which is, of course, very important for our Bostavan and Bardar brands. Also, improvements in covering HORECA, some processes changes, improvements in receivable policies and so on. So we do see a good foundation in going forward with Coca-Cola Hellenic and allowing for growth in 2020 here in Moldova. Poland grew solidly at 80%. And of course, Bostavan has a large share of sales here but very important to mention that Purcari and Bardar are showing very strong growth in Poland, too. So again, this allows for sort of new lanes for growth there. Asia, which is, for us, is primarily China for now, a strong growth of 52%. Worth mentioning that in topline exporting countries to China, Moldova now has reached 13th position, which shows that Moldova wines are increasing in popularity in China and are also in -- sort of in the consideration range of more and more in the consideration range of Chinese customers. Now of course, a topic for today may be coronavirus. We are closely monitoring the effects. We can discuss this perhaps in the Q&A, but we also -- we are planning to potentially come up with a statement in some time from now, once we have more clarity on the effects of the coronavirus. Czech Republic and Slovakia. So if you look at these 2 markets, we do see a decline. And this is in part due to restructuring at one of our key distributors, but also partly due to sort of in comparison to a higher base in 2018 when one of our distributors has stocked up heavily and has increased volumes, especially towards the end of the period, end of 2018. Our sales, however, it's important to say that our sales and marketing teams, they are closely evaluating the sort of creating an inflection point and other growth opportunities, and that's being done through new channels. So looking at increasing the existing channels, but also adding new distribution channels to the way we address the market, but also looking at the product portfolio that we are marketing in Czech Republic, given the trends -- the market trends that we see there. Ukraine. Ukraine shows a strong growth, 20%. Both Purcari and Bostavan, very strong growth there. So I think everything is well -- everything goes well. Now moving on to Page 18, looking at the brands. We're sort of covering some of the points, but this is just kind of looking from a different angle. Purcari has shown very -- in fact, Purcari has shown solid growth in all key markets, but with an overall increase in 2019 of 33%. Particular growth, strong growth, I would say, are in Poland, Ukraine and Asia with 50%, 39% and 71%, respectively. Also important, Purcari sparkling sales are picking up quite fast, and this is adding more to the growth opportunity to the Purcari overall sales. Bostavan. Strong growth for Bostavan in Poland, China and Belarus. In Moldova, the growth is milder, which we believe will improve with the geographical penetration that I've mentioned of Coca-Cola Hellenic into the fragmented trade. A large impact, which has offsetted the overall growth figure comes from Czech Republic, which is for Bostavan, the second largest market in terms of sales. As mentioned, the teams have clear strategies to address Bostavan sales in Czech Republic. Crama Ceptura grew at 18 -- sorry, Crama Ceptura grew 11% year-on-year. In Q4, we have invested in an omnichannel branding campaign in Romania. From one, that to support the growth; and two, maintaining our relevance in customers' choice during the holiday season, given the fact that some of our competitors became aggressive in promoting above the line. So our campaign went on TV, outdoor and online and radio. Bardar. Bardar keeps showing great growth and further opportunity for growth. In Moldova, there is strong growth and particularly, fast growth acceleration in Romania and Poland. Of course, from smaller numbers, but very promising. Also in Moldova, we have invested in a campaign. And in Q4, these were, of course, campaigns to generate sales, but also to grow brand awareness, both to Bardar and Crama Ceptura, and many of these effects we'll see them long term in 2020. So if we move to Page 19 now. We'll be looking at the P&L. As I mentioned, strong revenue growth at 18.4%, and this is within our guidance for 2019. Gross profit has increased by 23.9% to RON 102 million with a gross profit margin of 51.4%. The premiumization has allowed gross profit to actually grow at a higher rate than revenues, though worth mentioning, there were some accounting effects on cost of goods sold or cost of sales relating to fair value of linear and assets updates in 2019 as per IFRS. Marketing and sales expenses are now at 10% of revenue. This is also following our brand and trade marketing investments in Q4, particularly with the above-the-line campaign I mentioned for Crama Ceptura and Bardar. G&A reduced to 11% of revenue due to a combination of lower professional fees compared to 2018 when Purcari IPO and some salary cost reallocations towards cost of sales and of course, some other efficiencies. Strong growth -- sorry, the strong gross profit numbers and SG&A control have also led to EBITDA margin being solely at 34%, RON 68.2 million in absolute figure. Net profit for 2019 is at RON 44.3 million and with a margin of 22%. The growth here is 6%. However, when depicting the growth compared to 2018 and to have a better view on the actual operational performance, which have normalized 2018 and 2019 net profit figures, having adjusted for net gain on the evaluation of our stake in Glass Container Company. So in such, the normalized net profit growth is actually at a very solid 19% year-over-year. Now in this presentation, we do talk quite a bit about adjustments and accounting effects. So to have full transparency and to allow for a maximum understanding on your side, on the next page, Page 20, we have included all items and the effects that have occurred due to the application of IFRS 16. So you can look at this. But if you do have further questions, though we have Mr. Victor Arapan, our CFO, here on the call, who -- if you do have those questions, he'll be able to go into detail. Moving on to our guidance for 2020 on Page 22. So for 2020, our guidance are the following. We are looking at organic revenue growth between 16% and 20%. The relative figure has slightly decreased, but of course, we -- I guess we all understand that our base is largest. So we, as a company, are largest. So 16% to 20%, these are, we believe, good figures. EBITDA margin conservatively between 30% to 32% and net income margin between 20% and 22%. The -- if I were to go into the organic growth or the organic topline growth, we'll have multiple components. We see further growth opportunities in Romania, which is now our largest market. We see there opportunities of growth already with Purcari and Crama Ceptura. We do believe that some investment in the brand can lead to strong growth in Crama Ceptura sales. But also, there's a large opportunity in penetrating the market with wine from our Bostavan wineries. And there, we have the opportunity to cover -- well, the price segments between Purcari and Crama Ceptura. And if you think about it, we have all synergies. We have the team distribution, we have the relationships in the market with the market knowledge. So we believe that this will be -- in the components that I mentioned, this would be one component and the new broadline. Another growth component will be entering new markets with long-term agreements. Of course, this is important. Yes, we are present in 30-plus markets with our wines, but the idea is that we want to enter a strong, consistent, long-term agreements. There is already progress. I can tell you, in Western Europe and Scandinavia, but we are planning to add efforts also in other regions. Then there is overall focus here on product development. Maybe I can say, product and brand development. Already this year, we have made great progress towards launching new products, which will allow us to better cover end channels such as HORECA as well as customer preferences with new single variety and as well as launches of and brands. We always mention and it is so that we will continue premiumization, both in our product mix, but also with price increases. So for example, this year, we have already pushed in a well-calculated price increases in certain markets. And of course, besides the organic growth, we are continuously exploring M&A opportunities with, maybe I can say, warm and promising prospects for 2020. Now there is -- moving on to the next slide. Of course, the growth that we're planning must rely on strong foundations. So here on this page, Page 23, there are a few notable investments that we have done in our production facilities. Basically, all of these removing any barriers or any bottlenecks towards achieving the growth that we're planning for 2020.. This was the presentation. So with this, I'd like to thank you for your attention so far, and we can move to the Q&A session.

[Operator Instructions] And the first question comes from the line of Stefan Lungu at Wood & Company.

Congrats on the results. I just got a couple of questions. So the first one is, can you comment more on Ceptura sales in the fourth quarter? They seem to be lower than the same quarter last year and lower quarter-on-quarter as well. Could you give like more color on that? And the other one is, can you comment more on how you feel the overall wine market in Romania developed in 2019, maybe both in the mid-market and premium segment? That's all from my side.

Stefan, thank you for the questions. Indeed, Crama Ceptura did have a relatively slow -- let's say, slow growth in Q4 of 2019. This is also comparing to strong numbers in Q4 2018. But overall, we do realize that we need to invest more in the brand to allow it to grow at the pace at which Purcari is growing in Romania. We have done that. So we have realized that probably earlier. So we know somewhere in the middle of the year to 2019. We have launched this omnichannel campaign that I mentioned towards the end. So it was in November, December 2019, and we are planning to further continue investment in the brand in Romania because we know that to sustain the growth that we are planning double-digit growth is required from Crama Ceptura, too.

Yes. Just to add to this, Stefan. So I'll just check the numbers. So in Romania, Ceptura has grown 9% year-on-year. So the Ceptura brand in Romania has grown 9% year-on-year in RON. And overall, the brand is flat year-on-year, but that's also takes into account the drop in exports for Ceptura. But I think your question referred to the growth in the core market, which is the key one for Ceptura. We always position Ceptura as a Romania-focused brand. So the growth for Ceptura is 9% year-on-year.

And yes, the second question just on the -- maybe some comments on the overall market in Romania.

Overall, we do -- we still see the medium to upper segments increasing and our focus on this segment is still important. But overall -- in fact, the overall market is increasing, but with -- if we were to look at specific, we're looking between [ EUR 8 and EUR 10 ] segment, which has -- is growing around 25%. Kind of similarly, the 10 to 20. This is, of course, very high. So the higher segments are growing quite fast. We are growing at a very solid -- this is based not only on our sales, this is based on the market audit on Nielsen. We're growing at 38% in 2019. So we are definitely dominating, and we're also riding the wave of this growth of -- this higher segment growth.

And would you -- do you know of any reports, let's say, how much the market in Romania grew last year?

Well, we do -- of course, we do access the news reports. We have to monitor the market. And yes, overall, I think if I'm not mistaken, it's around 20 -- maybe I just add -- let me just have a look. We do have it here in front of us. Yes, I would call it, it's around maybe 15% of the growth. Stefan, I'm confirming, its 14.5, so I was pretty close.

The next question is from of LBB.

Great results. Congratulations on that. Two questions from my side. If you could provide some more comments and the extensive comments on the virus situation in China. What are you seeing on the beginning of the year? What -- if you have any plans to -- in case that there's a longer slowdown, what can you do there? So just some more color there. And then the second question is on the CapEx. So if you could provide some -- after a year of strong CapEx, if you can provide some kind of guidance or some ballpark to what we can expect in terms of CapEx going forward.

Okay. So of course, we definitely expected the question on coronavirus. Unfortunately, it's actually affecting all the markets, as you well know, its affecting our -- we believe it's the reason for the -- for some effects on our share price. In China, we do see -- already, we do see a slowdown in orders. There is some sort of bracing from our distributors in terms of the effect. We are working with them to make sure that the orders continue, but yes, there is an effect. There will be an effect. We decided to maintain our guidance for 2020 at 16% to 20% because that's the planned -- let's say, we plan our business around this growth. But if we do believe that there will be a much stronger effect of the coronavirus, we are planning to come up with a statement about this for sure. The next one on the CapEx. The total CapEx investment in 2019 was RON 52 million. And in 2020, we are planning to launch -- yes, I'm being told here. So we're planning to invest less than half of that figure. Yes. Yes. So -- and in fact, we specifically want it in this presentation to add a slide because one thing is to mention the investments that we're doing in CapEx, but another thing is to actually show the actual results that are -- and the output from these investments. And that's why we also added the slide in the presentation.

Just as a clarification here. So that CapEx also includes the acquisitions we've done. So that includes also the acquisitions. So you may see it in the report, we've done -- we've acquired over 240 hectares of new vineyards, and so that is including that figure. And that was the peak CapEx year for us, 2019. So 2020 is going to be less than half that. So it's going to be -- we're probably talking RON 20 million. And next year, we expect probably half of the 2020 amount. So basically, you can assume that we'll get into low double-digit million RON figure by next year.

The next question comes from the line of Keyus Repalyu of BCR.