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

Okay. We have 26 people online. I think people will be gathering more, but it's time for us to start. Please allow me to extend a warm welcome to everybody attending our 1Q. And a warm welcome to everybody attending our first quarter of 2023 financial results. I'm -- I have the privilege of opening this call. My name is Vasile Tofan. I'm the Chair of the company. And it has been a very good quarter for us. My colleagues will elaborate in greater detail on it, and I want to flag it in advance. Yes, it was against the base of last year, which has had the effect of the Russian invasion Ukraine, at the same time the first quarter of last year was also very soft quarter for Purcari when revenues grew 13%. So when you look at the results today, please factor in also the quarter last year has been a stronger quarter for Purcari. As we get into this call, I want to introduce a few new faces for Purcari, and we're very excited to introduce 2 new Board members for our company, Raluca Ioana Man and Paula Catalina Banu, both of them they accomplished the executives with a trend at the intersection of legal, commercial and branding exactly the type of background that we believe are needed for our company at this stage of development, both of them, Cyprus-based, tax license and Cyprus, so that they also come to strengthen our presence in the jurisdiction that is home to open group. So without further ado, I want to pass the word to Eugeniu Baltag, who will kick off -- so he's here, there is some best candidates here. So Eugeniu Baltag will kick off today's call. Eugeniu Baltag?

Yes. Good afternoon, everyone. So let's jump straight to the slides. So thank you, Vasile for introduction. And most of you already know about Purcari. We will organize the current call in a manner in order to leave more time for our financial and Q&A parts. When speaking about Purcari, behind the ticker wine on Booker Stock Exchange or battle of wine, on a shelf, we have to imagine about a team of more than 800 people. We have 7 different nationalities and we operate in more than 3 countries. And one most important thing this year that currently 1/3 of our assets allocated in EU countries, in Romania and Bulgaria. And hope for the near future, all 100% of our assets will be in European Union. At this moment, we have 7 production sites and 6 family brands, and only one thing which connects as well, the passion for wine. So we have more than 1,400 factors of vineyards and we can say now that the wines have come out of the winter well. There was enough rain, and we have first signs of good harvest this year. But of course, it's to elaborate on this. We believe in diversity and diversification and our group is diversified by both production platforms and geography of sales. So we are exporting in more than 40 countries around the world. So happy to see here, Bulgaria, you may see this in the right corner, like being part of our group. And currently, it represents 2% of the group's turnover. If to jump forward, of course, during the modern history of Purcari, we had some ups and downs with embargoes, [indiscernible] and neighborhood country. But over time, we stayed focused on what we can do best and delivered strong growth each year. We have doubled the sales since the IPO, and we have increased our sales every year. So increasing volumes is very important, but growing the sales and keeping high margins is part of our trade. So actually, our business model is around this affordable luxury concept. And the entire team is aiming to operate under 50%, 30%, 20% rule, where gross profit margins will be around 50%, EBITDA around 30% and net profit margin around 20%. And you may see how we have evolved. For example, on this slide since 2017 up to 2020, where we have achieved very close results, the rule I mentioned above. The performance you see on the slide comes mainly from our organic growth. Of course, we had several successful M&A deals along the years. So now that being said, we continue with operational results in the first quarter. But I have as well a good news for our consumers. We have expanded our Nocturne series with Purcari. If to jump to operational figures, we had a very strong growth in first quarter. We have increased our sales by 31% to RON 73.3 million, while keeping higher stability and of course, with EBITDA margin and net profit margin at 29% and 17% and managed to grow, of course, on a yearly basis as well, despite the macro and geopolitical situation. So our EBITDA has grew to RON 21.1 million by 3% year-on-year. Net income grew by 7% to RON 12.8 million. Need to mention quickly about our key operational highlights is to be mentioned, but we have registered double-digit growth for all brands on volume rise, which was mixed with effect on price increases, which we have pushed forward in 2022. So as a rule of thumb, volumes have increased -- has contributed to this growth by 55%, and we have received additional 45% in value term. We had a strong performance on most of our key markets, and we'll provide you with some details on later slides. Our business model proved to be resilent, once again, amid the headwinds the entire economy is facing right now. Nevertheless, we see some good signs like cost pressure is easing. We already received revised prices for packaging, but we have to understand all of us, but it takes time until we see the positive impact on margins. Of course, most of the supply chain bottlenecks have cleared. So we have right now sufficient trucks and containers to ship our wine to consumers. So the situation is completely different from 1 year -- from the last year. And of course, you had a teaser from me on our hope, but all the assets of Purcari will be in European Union. So Moldova is doing active steps towards this direction. And on 21st of May, we will have a national assembly here in Ticino, called European Moldova, where all the citizens of Moldova are welcome on the central market to express their willing to go to the west, to go to join European Union. And on 1st of June, Moldova is suppose to set a meeting of European political community, which will bring Ticino over 40 heads of state. So indeed, very important things are happening on the political agenda for Moldova. And of course, new accession negotiations with Moldova are going to start by the end of 2023. As well, we are looking forward to see you at our Annual General Meeting on 26th of May, where one of -- I think agenda will be the approval of dividend amounting to RON 0.55 per share. And of course, we will have additional topics on discussion -- on table of discussion. So first quarter was very good, not only from an operational perspective but was very good from a stock market perspective, too. We -- wine stock was #4 best performing among companies in that index, with 18% increase year-to-date. So next up, we have Mr. Victor Arapan, the CFO of the group, who will provide additional insights on financial evolution during the first quarter of 2023. Victor, please, the floor is yours.

Thank you, Eugeniu, and good day to everybody. As my colleagues mentioned, the group had a good performance in Q1 with sales above guidance. At the same time, the cost of sales is affected by the stock of expensive bulk wine from the years '21, '22, which now participate actively in the bottling process as well by more expensive packaging, actually reserved at the end of the previous year, we will avoid any disruptions that could happen in the winter of 2023. Thus, the investments made in 2022 and put into operation in the previous quarter plus acquisition and pension stake in Bulgaria, generated an increase in expense and depreciation of about RON 2 million in addition to year-on-year, which led to an increase in the manufacturing cost. At the same time, the increase of the share of services provided by Ecosmart, which increased to about 9% of total sales, had its impact on gross margin as just have a net lower margin compared to our main business. All these factors led to a decrease in the gross margin from 52% to 45% in Q1, which was expected. SG&A expenses registered an increase as a share of sales to 23% compared to 20% last year. In particular, we have a significant increase in marketing and sales due to the much more intense promotion activity this year compared to last year. When Russia's invasion of Ukraine took place and when marketing expenses were slowed down against the backdrop in increased uncertainty. We believe that in a period of 6 months, there will be a stabilization of the growth compared to last year. Other income expense remains straight However, on separate items, we have significant changes, such as increase of interest expense by 50% from RON 1 million to RON 1.4 million in Q1. And at the same time, as a result of appreciation against euro, the group recorded their ForEx gain of RON 2 million, while in Q1 of '22, it recorded a ForEx loss of RON 1.4 million. EBITDA net profit has increase of 3% and 7%, respectively, compared to the previous year and the margins of both indicators are above the guidelines. On the next slide, we -- I express -- we jumped to on Slide 17, exactly on Slide 17. We have segregated the results of the quarter by business segments. The segment of waste recycling and management services, which is offered by Ecosmart in Romania is still insignificant in Q1 without impact of what we presented in the previous slide related to the entire group. But we are sure in this year, it will be brought back to a level of planned profitability as we discussed in past presentations. On next slide, I want to mention that the group continues to have a very strong financial position over the years, with a low level of indebtedness and optimal liquidity. It should be noted that the group's goal is to maintain a net debt-to-EBITDA indicator of 1.5x. So there is still a result for sustaining strong growth in the future. Now I give the floor to my colleague, Eugeniu, who will review the evolution of sales by brands and the regions.

Thank you for the detailed information and financial figures. And now let's see how we have achieved these figures by jumping to commercial slides. So on Romania, you may see we have double-digit growth for all brands here. Nocturne is performing exceptionally well. We are adding up additional locations for long-term Purcari branding contracts. We -- as well we have doubled the number of SKUs in [indiscernible]. So this is a good sign after, let's say, our continuous and long-term discussions last year with this key account. On Domeniile Cuza, we have accelerated by 9x year-on-year basis. We have to understand that this product currently is at the introduction phase, but it's performing very well. We are listed in our most important channels, and we see very positive outcome from the beginning of this listing. On Moldova, Purcari and Bardar leading the growth. This quarter was governed by strong negotiations with key accounts to push through price increases. We had came to an agreement with most of our partners. So currently, Moldova stands for 70% of our total sales and grew this quarter by 19%. Then if we speak about Poland, we have registered a very strong quarter. So we have increased by 25%. Of course, we have to consider that we are comparing to a weaker first quarter in 2022. We have to mention that the pressure in the mainstream wine market continues, but we remain firm. So we are focusing on prioritizing margins or volumes with Bostavan. And of course, we are pushing with Purcari for this premium segment. So we're expanding in HoReCa. If you speak about Asia, it was a weak year start for overall Chinese wine market. And actually, this decrease comes from a weaker Bostavan sales. But nevertheless, Purcari brand performed very well, and we have registered a 35% year-on-year growth, a bite from a smaller base. But I think the most important thing to mention is that the outlook in China is improving on possible opening. And our country manager returned to China. So after 3 years of travel ban for foreigners in this country, actually, if he has received Visa and now he's back on the ground. And this is very important for us because we'll be able to understand how are things are evolving just being present there. If you speak about Czech and Slovakia, you may see it was biggest decrease in our per countries, it's minus 35%. Of course, it's -- it was part of lower consumer confidence in that countries. But it's to be mentioned, but if consider April sales as well, we mentioned that there were certain time shift in sales. So we have to analyze 4 months in the role, we are in black. So we are not negative. We grew. But please consider April figures are still preliminary ones. Ukraine, we have registered a very strong quarter, where beating the trade war first quarter 2021 by 24%. So we continue to do what we are doing best there. So we are keeping our local team while increasing our presence in key accounts channels. We export only 100% prepayment in order to secure, let's say, our investments and our sales in that region. And one addition is like we are pushing with Bardar, so we're increasing sales geography there. So we started collaboration only for Bardar with Coca-Cola beverage in Ukraine. So now let's see how the things evolved per each brand. So what we can mention about Purcari is the following, but there is not a single market where Purcari brand didn't grow this quarter. So exceptional results in all countries for all sub-brands of Purcari. So we are capitalizing on our brand value and we are enforcing our presence in the existing markets. And of course, we're exploring new ones. Bostavan as well, very good performance this quarter. Poland has done great, and you may see, but the total figures is like -- Bostavan has grew by 22%. Of course, we had strong sales in Turkey as well. We have managed to fulfill the entire 2023 quarter just in the first quarter. We had registered good performance in Ukraine. So of course, it's a mix between volumes increase and price increases in this country. Crama Ceptura, may say it was some similarities with Bostavan, it had a very strong quarter, but in this case, not in Poland, but in Romania, which is the main market for this brand. So we grew by 28% on first quarter. We continue like to develop our portfolio of Crama Ceptura and focusing on premiumization. So we are gradually passing price increases in order to keep the pace with current inflationary context. Bardar, you may see 10 in 10. It means like 10% of our sales are from Bardar and they grew by 10% this year. So we had a very strong quarter in Moldova, Romania and Baltics. Unfortunately, no sales for China in the first quarter, but hope this will recover in the second, third and fourth quarter during this year. So one thing is to mention is like we have managed to increase double digit. Nevertheless, we had an increase in excise duties in Moldova, which I enforced from January 1 for branded products. So nevertheless, with price increases, which are coming from the excise duties, we have managed to grow firmly. And of course, Angel's Estate, our latest addition, it represents 2% of our sales. It undergoes a transformational process like covering commercial part, agricultural part and operational part. So we are solving the past efficiencies on the go. And of course, it will take some time to make it work right. So prior to jump to the Q&A session, I would like to pass the floor to Vasile Tofan to continue our presentation with our guidance for '23.

Yes. So just to comment briefly on the guidance. As you know, we have the practice of issuing the guidance for the year -- at the beginning of the year. So I think the numbers speak for themselves is a very strong bet on the guidance in terms of the results of the first quarter. We decided to keep the guidance for the year unchanged. No in line with our long-term principle of managing our promises and focusing more on a delivery side. Again, I don't want to comment more on this one. We're very pleased with the first quarter. We're seeing a good evolution in the second quarter, too. At the same time, we decided to stay prudent in line with our previous experience and see the guidance for the year unchanged.

That means, I think we can -- and ladies, we can move to the Q&A part. So please free to raise all the questions you have, and we are here like executive team, Board of Directors to answer your questions straight.

This is Iuliana Ciopraga from Wood & Company. So on the sales, indeed, growth was extremely high in the first quarter, and you're still keeping guidance for the full year. Can you provide an inkling of what go wrong? I mean where -- why are you cautious on the sales side? Indeed, first quarter of last year was very low. I mean, it was a low base basically. What do you expect to see for the portfolio in quarters?

Yes, Iuliana, first of all, thank you for your regular write-ups. We read them always careful at Wood. So thank you for keeping the investors up to date. We also read your yesterday's supply -- yesterday's write-up. So I'll allow myself to maybe say very slightly contradict you, I wouldn't say that the base of last year was a low one. So if you look at the last year results, we actually grew 13% year-on-year, which was actually a decent growth against 2021. So it was not one of those very weak quarters. And I think this even the -- this brings home the point even more how strong the first quarter was. At the same time, that being said, I will make 2 comments. The second one, a reputation of what I said before. First is that the first quarter is still seasonally not the strongest one. You know we have a very high dependence for the fourth quarter, which is seasonally strong. The fourth quarter typically brings in about 35% of sales for the year, give or take. So the first quarter is on contrary, one of the, say, lower seasonally, so at the distance from the [ fourth ] quarter. So that's why we think it's prudent to wait for the year to progress more and then potentially revise the guidance. But the second, the main comment is, again, with the risk of repeating myself, we have, I think, a good tradition of keeping the prudent on the guidance, but then over delivering on it. And again, I don't say that we will deliver this year. I'm just referring to the past track record we have.

I mean I didn't mean to say necessarily the first quarter last year was weak. It was weaker. If you look at the growth in the following quarters, right? I mean year-on-year growth in the following quarters was considerably higher compared with what we've seen in the first quarter. So just to conclude, you think that what you've seen in the first quarter would be sustainable going forward in terms of growth rate?

I would maybe hate to be misleading here. So I have to choose my words carefully. I think -- at the same time, I think growing every quarter by 31% is a little bit too ambitious and assumption. So that's why I think looking at our guidance makes more sense. At the same time, please note that year after year after year, we're exceeding our guidance.

And if I may, something regarding margins, margins are -- have improved from levels of second to fourth quarter of last year. Is that sustainable? Gross margin, I mean.

I'll defer to Victor Arapan, our CFO, here to elaborate in greater detail margin. Victor over to you.

Yes. Thank you. We anticipate that our margin should -- are sustainable. And now we will have more wine -- bulk wine from last year harvest 2022, that we'll participate in the production process, which is cheaper than previous stocks. So we see that packaging -- the price packaging for bottles or label and boxes is going down. So we think that our margin is very sustainable.

So you'd rather see reasons for margins to increase, not decrease, basically right now from what you're seeing?

It depends a lot if you see compared to Q1, we have to mention it in Q1. This year, we have a mix with strong quarter of Purcari, which is the high-margin brand. So if it will maintain the same quarter for the rest of period, of course, our margin will increase. But as we are planning to develop all our brands, so to develop a more mix with both Bostavan, Angel's and Crama Ceptura we expect like to maintain at least this level of for gross margin.

If I -- I'll ask my questions later if there are any other questions coming from the other participants.

First of all, congratulation for the Q1 performance. And moving to my questions. Can you please comment the erosion of financial revenue and operational expenditure. I do notice that a very significant for financial revenue year-on-year.

So Victor, I think it's a question to you, if you can take it. I understand it's about foreign exchange gain probably if I got the question right, but maybe you can elaborate in greater detail.

Yes. As I mentioned during my presentation that the interest expense increased [ 50% ] year-on-year. This is mainly because compared to Q1 last year, our loan portfolio increased and as well interest rates increased significantly on all markets, both in Romania and in Moldova, where we have more loans from banks. At the same time, as I mentioned, we have gain on actual foreign exchange. And this is, as I mentioned, due to the fact that Moldova appreciate against euro. And we have our balance sheet in euro has a short position or we have more on euro than account receivables in euro. And this type led to gain from the appreciation of Moldova. You can see about this in our report on '20, we'll have -- you'll see detail breakdown of by finance income and finance costs.

So what I was going to ask next was about Angel's Estate. And first, how is it going? And secondly, are you going to launch Purcari or Crama Ceptura. So what are the plans in Bulgaria?

Maybe I'll start on this one, and I invite my colleagues to add to this. Eugeniu and -- Eugeniu you can comment on? So a quick update on this one. First, I would reiterate, we believe it's a very accretive purchase which showed in the game with bargain and project, we have to recognize that in the previous quarter. We believe it has a very strong potential within our group. And indeed, as you -- first thing we did in this project, we appointed a very strong GM, one of our rising stars. [indiscernible] Head of Romania Deputy right hand in Romania, moved to Bulgaria, and that's also a step-up for him on opportunity to grow professionally. So he's very hungry, very excited. He's playing a GM role now. And that is, I think, a very, very strong move we did. We've also dispatch quite a significant team of winemakers from our group Bulgaria to introduce the best practices that we see. I mean the very strong impact on the yields there. But one of the issues with Bulgaria was that they were having lower yields because of some -- we believe problematic practices of managing the vineyard. And so we're already looking at a very significant boost in yields this year by running the vineyards aligned with our group's best practices. And for this lower COGS before increase the EBITDA margin. In terms of your question, how do we plan to -- what do we plan on the sales side, indeed, we plan to use the platform of [indiscernible] in Bulgaria to introduce our brands. So Bulgarian, for example, to give an example for Bulgaria resorts are very popular for Romanian tourists and Romania and Moldova for that matter. So already, we have a very significant tourist volume that are familiar with our brand. So you immediately have a base of consumers there, but we also introduce wines to the broad that we get in public. And at the same time, we want to use our sales platform [indiscernible] Angel's Estate. I'll give you just for example for Poland, the very big market for Bulgarian wines traditionally, some of the leading wine brands in the country or Bulgaria. For Poland is a natural launch market for Angel's Estate. And of course, we also want to use our pan-European e-commerce partnerships we have, for example, our participation in 8wines to introduce and of the sale portfolio who will gradually be introducing that will state across our sales network.