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

Ladies and gentlemen, it's a real privilege to have you on yet another call by Purcari Wineries today, we are reporting that financial results as of September of 30 of year, and again, we are very delighted indeed to report another strong quarter in which the team will operate in following hour. And Eugeniu can you move a bit down to Slide 4, where we have the presenting team today. So on our side, we have on call Mr. Victor Bostan, the CEO and the founder of the company, Victor Arapan, the Financial Director, CFO, and we have our great Investor Relations team led by Eugeniu Baltag and Victoria Moldovan. I, the Chair of the Board, will now pass the word to the team to take us through the presentation. Thank you, Eugeniu over to you.

Vasile, thank you for the intro. So glad to see so many participants today and our entire team appreciates your continued support and interest in Purcari. With my intention to leave us as much as possible as much time as possible for the Q&A session. But agenda for today is kept to 3 main points. Third quarter operational results, guidance, wine stock, evolution. So we have 9 months behind of an amazing rally for our lives in a highly volatile environment and 1 last quarter to go, the fourth quarter, which is seasonally the strongest by sales. As you may see on this slide, we have continued our growth, reaching at 9 months RON 252.5 million, which is a 26% increase year-on-year. As well, EBITDA reached RON 72 million, and net profit reached almost RON 44 million by growing by 19% and 24%, respectively. If you look at the third quarter alone, you may see that the third quarter contributed by RON 91 million in sales, which is 20% increase versus the same period last year. So actually, in the third quarter, we have managed to achieve of 36% of total 9-month sales. Both EBITDA and net profit in the third quarter showed an excellent evolution reaching RON 27.7 million and RON 18.2 million, respectively. In terms of margins, we see a significant improvement in the third quarter in comparison with the second quarter of 2023. EBITDA margin reaching 30%, which is 3 percentage points higher than the last quarter. So it's 30% against 27%. And net profit margin reaching 30% against 14% in the last quarter. We had a strong contribution towards the top line from both from volume increases as well. We had registered an improved mix of products sold, combined with the effect from the price increases which have been gradually passed through during 2023. So actually, this volume effect on our growth is around 45%, and value effect is the rest of 55%. Again, Romania as a market and Purcari as a brand contributed the most to the group results. Thus, sales in Romania grew by 37% in 9 months 2023, and Purcari brand alone grew by 31% year-on-year. In all sales are highly important, but profitability is what drives the long-term success of the company. So we have managed to sustain strong margins with 9 months 2023 EBITDA margin and net profit margin being high 29% and 17%. So both of them being above the guidance. We have noticed unregistered but cost pressure is easing. We have already seen the positive impact on margins from less expensive packaging as well. We registered a decrease of share, more expensive 2022 -- 2020 and 2021 bulk line in total borrowings. And here, of course, special thanks to our relentless commercial team, who work around the clock to deliver our wine to the table of a consumer. So in general, but 9 months in 2023 was a very good period for us from a stock market perspective. We are #4 best performing among companies in that index, with 56% increase in our stock price. As well, we have rewarded our shareholders and paid in August a dividend amounting RON 0.55 per share, which is -- was a 6% yield on announcement date. So as long, we have high liquidity for wine share, if to compare it to our market capitalization, then we have been maintained in FTSE Global Micro Cap Index as of August 2023 review. Another piece of good information or good news is that the European Union Commission recommended starting accession negotiations with Moldova, along with Ukraine, and this decision is to be taken by European Council on December 15. If to speak about our developments at the latest added businesses, you may see that we have ongoing improvements for EcoSmart, which contributed at the group level with RON 22 million in revenues, additional RON 2.2 million in EBITDA and almost RON 1 million in net profit. Still, we have plenty of room for profitability improvements at this segment. Angel's Estate contributed by 3% to a total group of sales. Still, it's loss-making, but we are implementing successfully the turnaround process. So we managed to finish our first phase. So we have doubled the harvest deals. We have a restructured brand portfolio, but in negotiated commercial terms, with main players on that market and managed to introduce new Purcari SKUs to the Bulgarian market. So we had an overview of our operational activity in 9 months 2023. And next half, Victor Arapan, the CFO of our group, will provide additional insights on our financial performance. Victor, the floor is yours.

Thank you, Eugeniu. Hello, everybody. As Eugeniu told the group record a strong performance during this 9 months of the year with sales and financial performance above the top end of guidance range. So now I will go into a few details. So you can find the figures I will mention also you know of interim financial report, which is published on stock exchange in our website. So the group sales in Q3 continued to grow double digits. As a result, a great increase in revenue by 26% year-on-year for the reported period. Gross profit increased by 15% year-on-year, reaching RON 104 million. Gross margin is at 21%, slightly decreasing compared to previous year as cost of production increased on use of stocks of expensive bulk lines of 2021 vintages as well as due to more expensive packaging reserves made at the end of the previous year in order to avoid disruptions that could happen in the first half of 2023. Cost of sales is under pressure also because of high depreciation expenses, which increased plus 51% year-on-year or RON 6.5 million, which led to an increase in the manufacturing cost. We also should not ignore the increase of second business segment recycling services provided by our subsidiary Ecosmart, which increased to a share of 9% of total sales in the reported period compared to 6.5% last year, but which has a much lower margin compared to the main segment of the business. So we will see the details later on the next slide. So you can go back to previous years. So all these factors led to a decrease in the gross margin from 45% to 41%. SG&A expenses registered an increase as a share of sales to 22% compared to 21% for the same period of last year. In particular, we have a significant decrease in marketing and selling, which is plus 46% year-on-year transition because last year, the trade and marketing activities were shifted to Q4 due to uncertainties relating to the war in Ukraine. So last year, 56% of annual trade and marketing expenses were made in Q4 so we believe at the early level, the increase in marketing and selling would be equivalent to sales increase. Other income and other expenses show different evolution year-on-year during the reported period. That's why I will go into more details here. Other operating income experienced a significant decrease, mainly due to double of release amount of deferred income from RON 0.8 million to RON 1.6 million. This happened because last year, the group significantly increased the deferred income from business acquisition and started to release this income this year. And also because the group continues to receive significant amount of grants for capital expenditure. As operating income also includes some one-off gains that you should consider for. I speak about RON 260,000 from write-off of trade payables due to expiration of prescription period and RON 450,000, it's [ surpasses ] auxiliary materials and the chemicals as a result of [indiscernible]. So this will not be repeated in next quarter. Other operating expenses had a positive impact actually during this period representing plus or having with an impact of plus RON 2.5 million positive impact on company's performance were plus RON 2.2 million year-on-year. Where does this come from? So RON 1.5 million is adjustment to fair value of harvest grapes. Even this is an accounting adjustment required by international accounting standards. It reflects increased operating efficiency of agricultural division of the company, responsible for operating around 1,500 hectares of vineyards. So I would not consider this as one-off gain or loss as it directly impacts further the cost of the production. RON 1.3 million is one-off gain from disposal of tangible assets. Regarding net finance cost, it decreased from RON 5.5 million in 2022 to RON 0.7 million for 9-month period of this year. But putting for separate items, picture looks like tax. Interest expenses increased by 57% from RON 3.3 million to RON 5.1 million as our borrowings increased by 35% as at 30 September 2023 compared to 30 September '22 and also because we have increased Euribor rate. As a result of the more dollar level appreciation versus euro, the group recorded a net ForEx gain of RON 4.1 million, while in the same period of 2022, it recorded a net ForEx loss of [ RON 2 million. Here, it is important to mention that the appreciation of [indiscernible] versus euro generated this ForEx gain. But on the other hand, this had a negative impact on revenue and gross margin for all exported goods. So if the exchange rates would not fluctuate during this period, the reported period of time loss. Our revenue and gross margin on export markets would be higher by plus 6%. So EBITDA, net profit registered an increase of plus 19% and plus 25% -- 24%, respectively, compared to the previous year. And the margin of both indicators are above the top range of the guidelines we have provided earlier. Even in case we exclude the one-offs I mentioned above, the EBITDA and net profit margin would stay in the top or over the top of the guidelines range. Eugeniu, next slide, please. So in this slide, we can see the financial results and operational performance by business segment. More than 90% of the group business is represented by the sale of beverages, and the performance of this segment is almost representing performance of the whole business. I have just described and you saw on the previous slide. So I will mainly stay on the second segment. A segment of waste recycling management services, which is opened by EcoSmart in Romania is still a significant deposit period. Without a significant impact on what we have presented in the previous slide related to the entire rule. The gross margin of EcoSmart business is significantly lower year-on-year. You can see it's 17% compared to 20%, 25%. This is mainly because of increase in cost of recycling as national targets for recycling of the waste and package increased in average by 8%. The cost of sales is also impacted by increased depreciation and amortization charges resulted from valuation of the subsidiary at the acquisition date. The sales prices were adjusted later, beginning in June. But this is not enough to bring the gross margin to last year figures as the company made a turnaround and now needs to regain customers. So we expect annual gross margin for this segment of the business to be improved by plus 2 percentage points. However, it will be lower than in 2022. Regarding G&A expenses of this subsidiary, we note a small increase in pace with inflation. And we consider that we have a full control over the expenses after the successful legal and financial turnaround of the company. Next slide, please Eugeniu. And here, you can see -- and it can assess the group continues to have a very strong financial position. Over the years, the increase in business leads to an increase of net working capital with some pressure was liquidity. However, the company managed to maintain an optimal level of indebtedness and sufficient liquidity. We target a net debt indicator within the range of 1.52x. So there is room to sustain continuous growth. So that being said, I give the floor to my colleague Eugeniu for the short overview of sales evolution by markets and by brands.

Thank you for the detailed information on financial figures. And now let's see how we have achieved those figures by jumping to commercial slides. So we had an excellent performance in Romania. And this performance comes from 3 quarters increase in volumes and about 1/4 from better mix and price increases. Again, Purcari, it is an outstanding performer. We have strong dynamics for our sparkling, for our limited collections for Nocturne and of course, for our [ 18.7 ] series. Crama Ceptura brand maintained a rapid growth by 31% in the third quarter alone, totaling a 26% growth year-on-year. So we continue to add new SKUs, to add new regions, to add new partnerships in Romania for our brands. To speak about Moldova, the consumer confidence moderates, especially for mainstream brands. Nevertheless, Purcari continue to grow, whereas few aspects which brought, let's say, our growth in Moldova to only 3% year-on-year basis. So these are mainly to changes in the duty-free channel as tax facilities being canceled, but there were increases in excise duties, which were enforced from January 1 for branded products, but affecting our Bardar performance. And the 1 gas station network suspended its operations in Moldova has reducing points of sales in the fragmented trade channel. If you speak about Poland, the high pressure in the mainstream wines market continues including the entire Moldova wine segment. Consumer confidence moderates and there is high sensitivity towards price increases. But we continue to bet on premiumization because we clearly believe that all premiumization will help us to achieve good results here in Poland. Again, double-digit growth for Purcari in this country. If you speak about Czech and Slovakia, there are similar trades in consumer behavior as in Poland. To be mentioned additionally, but we've had a good performance with Bostavan brands in Tesco channel, and Purcari gained double-digit growth. With Asia, which is mainly China, four our first signs of economic recovery in China in the third quarter, still not reflected in the economic trade hope Xi Jin Ping visit to U.S. will bring positive effect in the near future. So overall, the wine market in China is quite difficult and it's weak. We believe in this market because it's huge and continue to invest and build brand awareness and local presence. Regarding Ukraine, the situation is difficult, but stable. We have a very good result, so almost double the sales year-on-year, and we are marginally behind pre war 9-month 2021 figures. In rest, we continue the same strategy. We are maintaining the local team and increased our distribution in key accounts channels. Now let's look to the same distribution but brands. On [ Purcari ], our affordable luxury formula proved workable once again, and premiumization strategy continues to deliver excellent results. With Bostavan got some challenging conditions for our mainstream brands, but nevertheless, we prioritize margins over volumes and we are seeking for new opportunities. Of course, we are working on the -- [ if anything ] but brands on the Bostavan umbrella. If -- with Ceptura, the value for money is exceptional. We have strong demand from the consumers. So we have managed to increase our sales by 23% at 9 months 2023 year-on-year. Of course, there are still opportunities from portfolio development and premiumization. With Bardar I already mentioned in the previous slide, some specifics of Moldovan market and what happened this year. But with Bardar, we are speaking mainly about grapes, oak and patience and patience is what we currently need in Moldova right now, which is our main market for Bardar. We managed to push through certain price increases. Nevertheless, we have registered some lower volumes, especially for 5 years of the branding. But again, we are optimistic here, and this will allow us in future to sell more of higher profitable older vintages. So by 5 years old brandy, which was not sold, let's say, yesterday, will be sold in 2 years as being 70 years old. So with Bardar, we have strong growth in Romania, which is our second market by size, and we are expanding through channels. With Angel's Estate, as I mentioned previously, it contributes by 3% to a total group of sales. So we are still working to make it profitable. But again, repeating myself, we have successfully implemented the first phase of a turning around plan. We have doubled the harvest deals, we restructured brand portfolio, renegotiated commercial terms and of course, introduced new Purcari used to this Bulgarian market. Okay. We touch commercial part and of interest, of course, will be from harvest -- informational harvest. We have registered strong results and good harvest. We harvested almost 15,000 tons of own grapes. So the irrigation system at Purcari proved its efficiency. We have high-quality grapes and good volumes especially if you consider what the overall harvest in the bulk of Moldova is expected to be 10% lower year-on-year. Again, we have supplemented the stock requirements for future growth from third-party grapes so actually benefiting of good pricing environment. But in total, we have processed 37,600 tonnes, which is 10% more than last year. Of course, if you look worldwide, there are expectations that the worldwide production will be the smallest in the last 60 years. So very weak harvest of Spain, minus 14% year-on-year. Italy, minus 12% and versus previous year. So actually, these 2 countries are registering very poor harvest for the second year in a row. And of course, a real drama occurred for wine industry in Greece. Their harvest decreased by 45% year-on-year. For us, the success comes from the fact that we are diversified. We have vineyards in Moldova, we have vineyards in Romania and Bulgaria. For example, Romania this year is the leader by harvest in the northern hemisphere, the harvest grew by 15% in Bulgaria as well, the harvest increased by 7%. And I already mentioned that we have managed to double the yields at the end of the [ state ], thanks to our professions in agriculture. So the fundamentals for lower COGS in the future have been settled, so I will move quickly to some marketing slides. We know the quality of wine is the cornerstone of success in 1 business, and we strongly believe in this. On the current slide, you may see this reflected in numerous titles and awards, which we have received in 2023 at Mundus Vini at Decanter and other competitions. Of course, we are hungry and eager to get Purcari to new levels of success and to open new markets and channels for it. On this slide, you may see just a few of our activities in 2023 in Japan, in Baltics, even in Brazil. So our team has been in business missions on 5 out of 7 continents this year, except Australia and Antartica. Next, I would like to pass the floor to Vasile Tofan to continue our presentation with the guidance for 2023.

Thank you very much, Eugeniu. And the team, indeed, as you know, every year at the beginning of the year, we announced a certain guidance so this year, we focused on 4 parameters we have been guiding on. That's total revenue growth. That's wine revenue growth declined as the core wine business without Ecosmart [indiscernible]. EBITDA margin and net income margin. As you can see on this slide, we vastly outperformed the announced guidance based on the 3 quarters of this year. And I think the philosophy on our side has always been to be very prudent with the guidance and rather under promise and over deliver. However, given where we are in the year, we still decided to update like our guidance by saying that we expect the full year to end at the top of the announced guidance range at the beginning of the year or slightly above it. We don't want to be more specific than that. And again, to explain why, as Eugeniu just said at the beginning, Q4 is still the most important quarter. Typically, it correspond to about 35% of annual sales or even a little bit more. So depending on how the Q4 ultimately will go. I think these can have an important impact on the numbers. That's why we would like not to be more specific than this, then saying that we have updating our guidance to the top-range of previously announced one, we're slightly above it. But again, our solution has always been to be prudent and rather under promise and over deliver. That's on guidance. And with that, I'm passing the word back to the team.

Thank you, Vasile. So prior to jump to the Q&A session, a few words on stock performance. I will repeat myself. But we are very glad that the wine stock performance is 56% year-to-date ahead BET index. Again, we are #4 best performing among companies in BET index. We -- more than 7 million shares have been traded in 2023. So we are registering high liquidity. So that being said, I think we can start the Q&A session. So please feel free to address your question directly by turning your microphone and camera on or just type your question in the chat and the entire management team here will be glad to answer to your questions.

Perhaps you might have mentioned this during the presentation, but can you provide a bit of color on the -- what will be the sales outlook for 2024 and also, actually, if you could provide some color on the fourth quarter because I see you maintain the guidance, when you look at sales, but actually, sales growth in the first 9 months was very high. It was much above guidance when we look at wine sales. And so I was just wondering if you could provide some color here.

Indeed, Iuliana. So first of all very good to see on the call today. It's a busy day for calls. So we have you on time for our humble call. So as we mentioned, Iuliana, we do update the guidance by mentioning that we expect to end the year at the very top range across all 4 parameters or slightly above it. And as I mentioned, we typically try to be prudent with our promises and rather we will deliver what we guide for.

But you don't expect any sort of slowdown in the fourth quarter. I mean, there was a bit of a slowdown, but not in Romania in the other countries, and I was wondering how do you see Romania developing? Because right now, Romania is basically the engine for the group sales. So I was wondering how you see Romania in the fourth quarter.

At the moment, we do not have indications of any materials holder.

Okay. And any color on the outlook? Are you still...

For 2024, you mean?

Yes. Yes.

We typically announce the guidance for the year, when we report the annual results. So we'll do this, this year too. But maybe to give you some qualitative observations, some of them were shared by Eugeniu. Again, as we mentioned for now, we're not seeing a slowdown in sales yet, at least for Romania, core market the wine you emphasized and second, we've had a very good harvest. I think this puts us in a good position on margins. And in contrast, the world and the key markets in Europe had a daily weak harvest, actually the weakest on records for at least 50 years, if I have it right, and were 1 of the weakest. And we do expect that these may cause some of the key players to raise prices which again, I think may have a positive impact on us as it would put us in a good competitive position. So we are, say, cautiously optimistic about 2024.

Hello. This is [ Kaisa ] congrats for the results. Again, an exceptional quarter. I was wondering if you could say a few words about the quality of the harvest of this year, with sugar content, et cetera, how did it perform on such a large volume in terms of quality? And also, if you have any comment on the French harvest.

Let's start from the end on French harvest, we have a good harvest this year. I think we have single-digit growth, I guess last year, which was very poor for them. But French for the first time in the last 10 years, I think, they are #1 by total amount of harvested grapes. So they exceeded Spain in this term. So of course, France is a different kind of country, they have a lot of internal programs from the government, which allows them to maintain and to reduce the out production. So if in case it's overproduction, so we are doing the distillates and so on. But this year, I think their harvest is quite decent in terms of volumes. Would you be so kind and repeat first part of the question, please?

Yes. I was wondering about the quality of the harvest of 2023, considering that the volumes are so high in terms of sugar content and everything.

The quality is expected to be very good. Our, let's say, our analogist and technical people right now are working with wine, so we're expecting to have another good vintage for this year and 2. Look, do we have other questions?

I see there's a question in the chat. And the question is what percentage are the production capacity still right now? And the short answer to that and we always say the same thing is that in wine making it's difficult to put a number on capacity utilization simply because there's some multiple stages of production. For example, on the bottling side, we have ample room for growth. On the storage side, we typically add capacities year-by-year, not to have unused capacities because this is a better use of capital. But as a rule, we always say that for us, the bottleneck is primarily on the sales side. So we always catch up on the production side to meet the demands of sales. So we are in the, say, good position to always be able to fulfill the demand we have. Yes. Thank you, [indiscernible]. If no more questions, then again, thank you very much for finding the time and join our call in this busy day for earnings calls. And on our side, we are very privileged to have you as investors. As you can see, we continue working very hard to deliver and hopefully over-deliver on the results despite difficult circumstances. I think we keep emphasizing we believe wine is at least our portfolio, we feel it's a crisis resistant, we're especially seeing strong traction in our premium wines. So in that sense, the lipstick effect that the economies talk about, I think, applies for products. And we don't take it. We always say that we are very far from being self-complacent and self sufficient. So yes, I think we have good results. But at the same time, we have the right level of paranoia and hunger to keep this kind of constant sense so we need to work harder and harder and do more and deliver more. And please rest assure that, that sense will remain on our side. Again, thank you for your presence, and we look forward to the next opportunities to be in touch with you and the very immediate tax plan, I think, will be at the WOOD conference in Prague, we hope to see as many as possible of you there. Thank you very much.