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

Good afternoon, everyone, and thank you for joining us today to discuss for Purcari Wineries third quarter results for 2024. My name is Eugeniu Baltag, and I'm Investor Relations Director. Today, we will walk you through the key financial highlights, operational development and our outlook for coming months. Before we dive into the details, I would like to thank our team for their hard work and dedication and to our shareholders for their continuous support. Please bear in mind that this call may include forward-looking statements based on current expectations and assumptions, which involve risks and uncertainties that could cause actual results to differ. The financial figures, the costs are unaudited and should be read in conjunction with a full reporting package available on our website or on the site of BVB. Participants are advised to review all disclosures before making an investment decision. So I'm pleased to introduce our speakers for today, Alexandru Filip, Purcari's Group Deputy CEO; and Anatol Belibov, our CFO; as well with an extended team of senior investors and nonexecutives in this call. And together, we aim to provide a comprehensive overview of the company's results and outlook. So let's get started. Alex, the floor is yours.

Good afternoon, everyone. Excited to share our results today. Just to remind everyone what we set ourselves to do. We're working towards building a global wine making champion dedicated to preserving and promoting globally to reach wine making heritage and indigenous great varieties in Europe. And we aim to do this by inspiring people to thrive and excel through hard work, determination and collaboration. We aim to live this purpose every day, and we believe that the results that we'll share with you today are an illustration of our efforts. If we move on just to get it to the content, some of the highlights, and we try to show you the main ones, knowing that we cannot be exhaustive. Commercial updates, one of the things we aim to do this year, and you will hear more about it in the coming months as an objective for next year. We have aimed to get closer to our consumers in the core market, especially Romania. So this year, we have become the main sponsor of the prestigious Jazz in the Park festival in Cluj-Napoca. So this year, we have become the main sponsor of the prestigious jet in the Park Festival inclusion of Poca. We have also been recognized as the Best Winery in Republic of Moldova, by the National Office of Wine and vineyards in Moldova. We are also continuing to innovate. We've launched new products like Sapiens range in Moldova. We are also expanding into new territories. Just to give you an example, I think this year, it's the first time we sent a shipment to Ghana in Africa. So we continue to expand geographically and also to expand our product portfolio. I think you might have seen the announcement earlier. We have confirmed CEO succession as of January 2025. We have also been awarded the Board of the year by ENVISIA in Romania. We have added a market maker from October 1. We have now 2 market makers, which should provide additional liquidity and prior transparency to all investors. We are working now also with Intercapital. We have attended 2 events this fall, one in Bucharest, the WOOD's event and then in Zagreb, Romania Investor Day organized by Intercapital in Croatia. In terms of financial results, Group revenues have reached RON 262 million in the first 9 months of the year, a 4% increase year-on-year. Core revenues performed even better. We have grown 14% over the same period. So the difference between the 4% and the 14% comes actually from the Ecosmart discontinuation, which we informed about in the previous call. Good traction across multiple countries, Romania, Bulgaria, Czech Republic, Slovakia. Also as I alluded earlier, good acceleration in the rest of the world also coming from geographical expansion in Middle East and North Africa, also good performance in the Americas, Canada, U.S., Mexico this year. So good spread across different geographies. Premium brands are performing best, Purcari is leading the growth across all our key markets. Gross margin at 47% over the first 9 months, 6% higher than last year. Combination of volume, price and the mix improvement as well but some COGS optimization measures that we have taken. EBITDA margin at 33%, 4 percentage points higher than last year. And on the net profit, we are slightly in line with what we registered last year. But despite the EBITDA improvement, we have been affected negatively by several exogenous factors, primarily the exchange rate between the Moldovan Leu and the Europe and increased taxation. Net profit margin at 17% for the first 9 months of the year. If we move on. Just to dive a bit into the nonfinancial results. So I mentioned in terms of events, we sponsored the Jazz festival. We also sponsored one of the largest business events in Romania and Central Europe, which is Brand Minds. We also were one of the main sponsors of National Olympic Committee of Moldova for the 2024 Summer Olympics. In terms of marketing, I mentioned we launched Sapiens, which is a new range that we started distributing in Moldova, including one brand-new product, which is Orange wine made out of Rkatsiteli grapes. We also promoted our -- sorry, if we stay on the first page. So our rose range, also our Sparkling wines in addition to the award that I mentioned in Moldova, the best winery. We also continue to receive multiple medals for our wines, 61 medals this year, including Decanter, which is one of the most prestigious competitions. Plus we now lead the 17 gold medals there. If we move on. Yes. In addition to Sapiens in Moldova, we also launched a new brand in Romania, what is 5 new SKUs in the midrange price segment, Poland, additional 6 SKUs, 2 from Moldawska Dolina and 4 from Terra Vineda. Also in the Netherlands, in terms of new markets and in Ghana, we also are excited about our first deliveries of nonalcoholic red wine to Saudi Arabia. We hope there will be -- there will be many more to follow. Otherwise, we continue to promote our wines in the U.S., multiple wine tastings over there. Japan we have a new importer, which should allow us to also penetrate the retail channel more effectively. Canada, we have now exceeded EUR 200,000 in deliveries, first year and an important milestone for us. If we move on. You want to cover this one?

Yes. Sure. Thank you. And it is very difficult to beat the productivity of our commercial team, but we had a quarter full of IR event as well. So firstly, we had a successful Investor Day on October 4 regarding over 200 participants both on-site Purcari Chateau and online. So during this event, we launched our ambitious 2027 strategy and aiming to double the key operation metrics by our bicentenary anniversary in 2027. While also we have emphasized our M&A strategy to expand production facilities and our presence across Europe. As Alex mentioned, on the governance front, we were honored with Board of the Year award by ENVISIA, so it was actually recognizing our leadership excellence. Additionally, we have confirmed a smooth CEO succession with Alex Filip, which is set to assume the role of CEO starting from January 1. And Mr. Victor Bostan is transitioning to CEO advisor for 1 year. We also strengthened our collaboration with Intercapital. So we already have 2 market majors' partnerships. And all these initiatives underline our commitment to deliver sustainable growth and to strengthen governance and enhance stakeholder value. Now I will hand it over back to you, Alex, and I guess you will walk us through operational effects.

Yes. Thank you very much, Eugeniu. One of the important updates that I guess those of you who will follow the company for some years know that we provided in this call this time of the year to update on the harvest this year. And as you see there, the smaller vintage in terms of volume, both for our own vineyards and also for third-party grapes, we have faced multiple challenges of different variety across our main geographies. So Moldova, Romania, Bulgaria, just to give you a sense, Moldova and Romania was primarily droughts, Bulgaria, we experienced [ haze ]. And all of these affected negatively the volumes, not only for us, but also for the large part of our supplier base. So we have focused on sourcing smaller volumes but on the right quantity. And we have implemented measures to mitigate the shorter volumes, the smaller volumes. So we are working on -- and we have actually extracted more value from grapes we processed. We are also securing bulk wines from suppliers that we know and we trust for the right quality for the right price points that we need. We are also taking advantage of the existing vintages, especially for red wines that not only we're more abundant but also a more competitive cost structure. And of course, with smaller available volume, we are also prioritizing the more premium, higher margin ranges across our portfolio. And overall, we are more focused on securing the right margin for the volumes that we can provide to the market by also increasing prices where possible and were justified. So all in all, despite the -- I think the key messages for us at the moment is that despite the lower volumes of grades that we have processed this year, we are committed to continuing growing in line with the midterm strategy. So we will secure the volumes needed to support top line growth that we planned. And we are also working to minimize the impact on the gross margin in line with the midterm expectation that we have. And it's clear for us after this year, that irrigation is a critical element. Hence, we are even stronger prioritizing the implementation of the irrigation system at Cuza, where we had roughly 700 hectares. So the big part of our vineyard would benefit from availability of water. For the context, this is part of the regional irrigation project, which is a public project meant to bring water to that area. And in parallel to that, we'll have our own infrastructure project to mitigate the vineyard. So important message, tough environmental context this year, lower production across the key markets. We know it for sure for Moldova. We have evidenced that also for some of the key markets in Europe, like France and Italy, the situation is similar, but we will secure the growth with very practical measures to ensure that midterm, we stay on track to deliver the objectives that we communicated at our Investor Day. If we move to the actual results. Commercially, as I was making the point earlier, growth across all geographies, we see Romania growing 16%. Bulgaria 38%, Czech Republic and Slovakia 25%, Rest of the world also significant growth. So we see a healthy spread of growth momentum across the different geographies, driven by different factors, and we count on this growth will continue. If we move on just to talk about brands. As I mentioned earlier, Purcari growing above the average. So Angel's also growing nicely. Domenile Cuza growing from a small base, but at an accelerated pace. Bostavan growing nicely, recovering in the third quarter. You see plus 37% growth in the third quarter, not only Czech Republic and Slovakia but also Poland. I think important to acknowledge the challenges that we face with Bardar, a good recovery in Moldova, accelerated growth in Romania, but still overall a challenging pricing environment in Moldova, which is the home core market for [indiscernible]. Yes. As Angel's, as we indicated also in the past, our commercial turnaround is continuing. We continue to grow versus the previous year, and we continue to expand the geographical coverage. Our distribution in Bulgaria is still lower compared to our peers. So we still see significant room to grow the distribution in addition to improving the portfolio quality and the marketing and advertising efforts that we will put behind this brand. On Romania, just one point, and then we move on. I mentioned the new brand Motiv, primarily for retail channel, targeting an important segment of the market, which covered the RON 25 to RON 35 price segment. And this segment in itself that accounts for 15% to 20% of the market by value. So it's an important battleground for us where we start from very small volumes. The previous brand that we had was a very small player in the segment. So we have made an important effort in developing this new brand, and we will invest in the coming years to grow and retain market share in line with our overall market share for the segment as well. If we move on. I think Anatol, do you want to cover this one?

Yes, sure. So yes, moving from top line performance because Alex already mentioned our, let's say, good performance and especially in the core business. So in terms of gross profit, we reached RON 123 million, which is plus 19% year-over-year. Yes, of course it is a great achievement in terms of absolute numbers. I would like to mention that also like gross margin percentage, yes, we delivered a qualitative increase. Yes, achieving 46% or 6% increase year-over-year, for sure this is a very, very good improvement in terms of operation. Yes, if we discuss more details about what stayed behind this improvement, for sure, the main contributor is pricing and mix improvement. Yes. As we mentioned in the previous slide, we managed to deliver the growth not just by volume, but also improving the price -- net price per liter. And here behind this, it's working closely with product mix, geographical mix and also with pricing. Another important point to mention here is also reduction in COGS. We managed to moving products -- from production the more cheaper wine, I mean cost, from 2022, 2023. Also we have a successful negotiation in terms of bottles, corks, cardboard, all these together allow us to have lower COGS rate. So all this together help us to deliver improvement in terms of gross margin. Before to move to selling and distribution cost and also overall about OpEx, I would like to mention that Ecosmart waste cycle business had a significant lower OpEx percentage in revenue. So compared to core wine business, therefore, by discontinuation of Ecosmart wine business, for sure, percentage-wise, OpEx increase in total revenue. So like-for-like, we need to consider this impact. Therefore, marketing and selling expense grew up by 25% year-on-year or plus RON 7.3 million, driven by, first of all, more investment in trade and marketing, we focus to maintain our brand awareness. We are supporting promotion activity, investing in key initiative for -- to support our growth. Payroll costs for marketing increased 90%, mostly driven by inflation on salary and also expansion of the team. Logistic costs slightly increased, also driven by inflation. Here, it's important to mention that the start from current year, with implementation of [indiscernible] in Romania, we have new costs in selling and distribution, which is accounting for 23% increase year-on-year. If you speak about G&A, you can see here that year-over-year, it's an increase of 5%, but specific for third quarter you can see that it is mostly flat. So we are looking to manage very carefully our spend in order to improve profitability. Next one is about other income and expense. And I would like to stress your attention in this part because this has the most -- the biggest impact on our net profit variance quarter-over-quarter. As you can see that third quarter 2024, other income and other expense, yes, it close to RON 0.1 million versus RON 4 million prior year. And the question is why we have this situation? So I will mention the main point, which, let's say, impact this variance year-over-year. So first one is fair value of, let's say, the evaluation of fair value of grapes already, Alex mentioned that the current year is very challenging, and that's why Purcari Group overall, as a result from the evaluation of own grapes recorded a loss of RON 0.65 million. And if we compare to prior year, it was a registered a gain of RON 2.7 million. So here, just understand that like-for-like, it's more than RON 3 million decrease. Another impact in the prior year in Q3 2023, we registered some one-off gains, meaning write-off of payables, yes, some surplus identified during stock count, yes, and also significant gain from selling tangible assets as part of just state modernization project. So all in one, you can see that just RON 4 million, we are losing here in terms of net profit. But moving to the next slide, EBITDA wise, yes, you can see that we achieved -- in the previous slide, we managed to achieve close to RON 86 million, which is in line with gross margin plus 19%. But moving to EBITDA to net profit. you can observe that there is a, let's say, in this balance in different picture. For sure, there is impact -- strong impact coming from ForEx in prior year due to Moldovan Leu appreciation, we registered a gain close to RON 3 million and now it's a loss. Also, it's net interest, for sure, we are increasing our investment and interest, it's going up also and phasing in taxation. So altogether, you can see that from 19% EBITDA growth, we are mostly flat in terms of net profit. But it's important to mention that both EBITDA and net profit currently is exceeding the guidance for this KPI. Moving to the next slide. Yes. So Purcari Group is continuing to maintain a strong financial position. For sure, we're trying to achieve the optimal balance between cash and overdraft in order to minimize the interest cost. So you can see that cash position is in line with phasing. Increase in net debt it's in line with our strategy to drive strong growth. Yes, you can see that it's higher. But for sure, our strategy communicated prior month is to drive profitable growth. Cash ratio aligned with seasonality. Yes, for sure, there is no big risk in terms of liquidity to meet short-term obligation. Net debt increased due to more loans required to sustain our investment in CapEx, but also important to mention that we are buying now more expensive grapes. And for sure, this has an impact on our loans, debt. And all this together, for sure, net debt-to-EBITDA 1.7x, which is in line with our maximum 2x net debt-to-EBITDA. So altogether, we have strong balance sheet and prudent liquidity management. Thank you.

Okay. Thank you, Anatol. Just to wrap up the financial part if we stay on the guidance. So where are we? Just to remind everyone, we are ahead of the most important quarter of the year for our business. Q4 accounts for anything between 1/3 and 40% of the revenues that we generate in a year, okay, with quite an important swing factor, both in terms of growth and profitability. And to take it from the top, revenues, total revenues, the guidance that we provided was between 5% and 10%. You see we're at 4%. We are fighting hard, and we have expectations that -- or let's say, we have a lot of efforts in flight to deliver within the guidance range that we provided. Similarly for revenues and the combination of revenues or, let's say, the mix of products that we will sell, will also determine not only the revenue growth, but also the margin that we will achieve because premium products like Purcari range or Bardar, which normally have a good Q4 given the seasonality relevance of these ranges for Christmas shopping should help both the revenue growth and the EBITDA margin. We have also implemented some price increases in Romania, and we are now awaiting to see the pickup in sales for the retail channel. And basically, expectations, we work hard, the entire team works hard to deliver the guidance that we have provided on the sales side and similarly on the margin side. You might wonder for the profitability, why we maintain the guidance as it is. We do it because there -- on the EBITDA side, there are many elements that relate to the seasonality of sales, also the intensity of the promotional activities that we are running plus the seasonality that we experienced historically in spending in expenses for Q4. A lot of it has to do with advertising. We increased the advertising intensity. Others have to do with year-end bonuses that we pay to the different channels depending on the targets that they achieve. So quite a few things could still dent currently above expectation margin for EBITDA. And then there is, as Anatol just illustrated, there is also for the net income margin, there is also an exogenous element that needs to be accounted for. But key message is we maintain the guidance, and we work hard to deliver on all 4 elements on the page. If we move on, just to remind everyone on the strategy that we communicated beginning of October for our Investor Day, our ambition is to deliver a doubling of the key financial metrics by 2027. So we're working towards RON 200 million EBITDA with a 50% plus gross margin on revenues of roughly RON 630 million, and we aim to double also the dividend per share. We have put in place a comprehensive transformation plan across all areas of the organization. We are now ramping up also the required resources for extending offers for people to join and support the transformation across different areas. We're also planning to invest significantly in digitization already from this year, but with more relevant initiatives next year. And in addition to this, we remain committed also to extending our geographical footprint, primarily through M&A in a couple of other new Europe markets. So we have -- we're running an active M&A agenda across multiple geographies. We will report on this progress as we make and we reach meaningful milestones that we can share with you. That being said, I think we can move on. I don't know, Eugeniu.

Alex, Anatol, thank you, indeed, we have arrived -- gradually arrived now to the most dynamic part of our presentation of our call. So the Q&A part. [Operator Instructions] I think we have the first question in the chart from [ Micaela ]. Thank you for the presentation. What were the volumes sold in the 3 new markets?

Okay. Should we take more questions or?

Yes, we received one more from [ Xavier ] But I think we can take one by one.

Okay. Anatol, for the first question. So Ghana, Northern Cyprus, and I don't recall that we were talking about those [ familiar ] as in the Netherlands or...

Yes, I think I will check, and I will come back in the chat, Alex?

Okay. Okay. I mean I think approximate we're looking at order of magnitude. Okay. Let's move to the next question, and then we'll come back to the [ Xavier's ] question. What was [ Xavier's ] question?

Yes, sure. The question from [ Xavier ]. How confident are you of still reaching guidance?

As I mentioned, we are confident that we can reach it. Otherwise, we would have changed the guidance. We believe that it's hard fight to be fought. Also if we aim to protect the brand reputation and price perception of the different ranges. So of course, we couldn't have total certainty, if we wanted to run very aggressive price promotions or push volumes in the market, but we do not want to hire our midterm prospective earlier. So we are confident, we are not necessarily certain about. Let's move on.

My other questions in the chat. So yes, you have an option to unmute yourself and there is a question directly, because sometimes it takes you much longer to write it in the chart.

It's Adrian [indiscernible] Capital Partners. I have some questions for you. First, I want to give congratulations for the results, especially as regards to operating profitability. And this is the first question. I saw that the harvest for 2022 and 2023 were quite good. And as I know it were for a lower cost. So can we expect a gross margin above 50% for FY '25, FY '26? I know it's quite early to say, but it would help.

Okay. Do you want to shoot more questions, Adrian? And then...

Sure. The next question is regarding the net financial expense. I saw that it's around RON 4 million. Can we expect the same trend in the fourth quarter? I don't know, around 4%? Or do you expect the decrease on a quarter-on-quarter basis?

Okay. Any other questions?

It was quite clear and this is I want to congratulate -- it was a quite detailed presentation, and it helped me as an analyst. So thank you.

Super. Let me try to keep it up with the answer to the first question. And the story is a bit the following. You need to understand that every year, what we sell is a mix of different vintages. So in 2025, we will sell primarily wines and roses from this year's vintage and reds from previous year's vintages, okay, which is the same thing to say that this year's red vintage will affect positively or negatively 2026 margin, okay? So this is the first point. Every year, there is a blend of vintages in the sale portfolio, point one. Point two, every year, we aim -- we have a guidance for each product as to in each range, what should be the midterm margin that we want to have. Of course, the prices cannot fluctuate every year depending on how much -- how generous the vintage is. So we try to keep a balance and try not to confuse consumers with different price swings that are not sustainable midterm. But we also aim to optimize margins where needed and where there is scarcity of volume versus the margins that we have taken. Lastly, and everything what I'm saying is to tell you that we are working and we're confident to maintain the margin in line with the midterm guidance that we provide. But I cannot tell you what the number will be next year because one of the other things that we aim to do, and we also indicated this, we aim to launch new product ranges, new brands, which initially require investments in establishing them on the market, okay? So although for a new brand or a new range, we have a midterm profitability guidance, a target that we want to reach. For sure, initially, the margin will be lower, okay? Now how successful those new brands are in the total portfolio and total sales mix will also determine the average margin. So bottom line, Adrian, we are not particularly concerned about margin erosion midterm. We are proactively managing this, but we cannot give you a clear indication as to whether the number will be just like this year slightly higher than last year or slightly lower than last year, okay? But you should acknowledge that we're handling quite a big swing in vintage costs this year and volumes. Anatol, do you -- I think I've bought you enough time to answer the second question.

Yes, yes. So about finance cost, yes, for sure, it's important to mention that interest, yes, is growing, part of finance cost. So interest will grow close to 20% year-over-year, yes, in line with increasing loans portfolio. If we speak about ForEx, so for sure, prior year, it was one-off for the last 4 years. So it was EUR 4 million gain, which slightly decreased to EUR 2.5 million end of 2023. Current year, our projection is that we will be close to 0 impact coming from ForEx. And the reason behind is that now we have more stable, let's say, National Bank of Moldova, let's say, acting in the ForEx market. So Moldovan Leu is more stable to breaking maximum 5% during the month. So current year, we expect 0 impact. But for sure, this EUR 4 million from prior year will stay with us when we make the assessment of variance year-over-year.

Another question in the chat. It's from [ T Berrick ]. How much grapes was bought this year from your subcontractors and how much was obtained from harvest? Is this data publicly available? So yes, it is available. We have this data on -- in our presentation. It's both published on Bucharest Stock Exchange, and you can find it on our corporate site. Just to give you some figures, we have processed this year almost 24 million kilograms of grapes. We usually use third-party providers in order to counterbalance our needs. And usually, we are -- we can purchase between 50% and let's say, and 60% of total needs we can buy from third-party grapes. So this year, we had ensured our grape requirements like 40% from our own grapes and 60% from third-party grapes. To give an example, last year, we have secured 42% from our own grapes and 58% from external sources. So at this moment, we have sufficient stocks like bulk wine and for next year in order to secure double-digit growth. Yes. Anatol, I think you can voice over your comment, which you have put.

So I will put -- I get some information from commercial team. So yes, for new market, yes, will deliver close to 5,000 to 15,000 bottles in these new markets. So for sure, this is just a start, already, let's say, the biggest volume expect to -- for each. So we are from 5 to 15 key bottles is by each market. And for sure, this is just beginning, we are starting the new business, and we expect significant growth in 2025.

It's Adrian again. I have the last question. It's regards to Poland. I saw that in the third quarter, it registered a significant increase year-on-year. The market started to open up after some weaker quarters. So what is the thing in Poland?

Yes. I mean, first of all, I think you might have noticed we indicated there that we launched 4 new SKUs of Terra Vineda, which we actually started selling in a new key account network, plus the expansion of the Moldawska Dolia which is our best-selling product in Moldova -- sorry, in Poland. So it's primarily expansion of distribution in Poland that is driving this increase. Any other questions?

We have received a big one in our chat. Give me a second to read it. Okay. So welcome from Bulgaria. Bulgaria seems on track of becoming a key market for the group, evident in your midterm strategy. What share of revenue do you target for 2027 for the Bulgarian market and on one product mix as the current sales structure is skewed to the Angel's brand, I assume?

Okay. So I mean, it's very difficult to talk about a share of the portfolio when the other parts of the portfolio are also moving. I think for us, the more important thing is to relate to what we plan for the market. And our ambition midterm is to become a top 5 winery in Bulgaria. So this is a bit how we look at it, which should be roughly, I think, 10% to 15% market share should give us there, probably the right number for top 5 will be 10%. We would imagine a mix that would still be dominated by local brands, given that local consumers across Central Europe, we have this evidence are fundamentally loyal to local -- to domestic producers. So from this perspective, we would still expect Angel's Estate local brands to dominate the sales. But we also plan to grow Purcari in the premium segment, primarily for HoReCa, specialized wine shops, but also premium retail shops. So it's hard to give you a hard number, but it would be probably a large part, Angel's and the rest Purcari. I hope this addresses the question? Let me know if not so?

Yes, it was informative.

I think the presentation was so comprehensive but we received not very -- only a few questions. So Alex, I think we can pursue with ending.

Okay. Thank you, everyone, for joining. It's always a pleasure to connect with you and share our updates and also get your challenges. As always, if any questions pop up, do let Eugeniu and Victoria know, who will try to address them. Also look at us for the next investor events. I think Eugeniu we will be in Prague in December for the WOOD. I don't know how it is called, it is a funky name.

WOOD was our land on...

Okay. December 4 we'll be there. Also happy to connect separately on other occasions if needed. We look forward to the next update. Thank you very much, and we wish everyone a great week.

Thank you.

Bye-bye.

Thank you. Bye-bye.

Bye.