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

Good afternoon, and thank you for joining us today to discuss Purcari Wineries 2024 Preliminary Results. My name is Eugeniu Baltag, and I'm the Investor Relations Director at Purcari. And today, we'll walk you through the key financial highlights, operational developments and our outlook for 2025. But before we dive into the details, I would like to thank you, our shareholders, for their continued support and our team for their hard work and dedication; to our agricultural team for takings care of more than 1,800 hectares of vineyards to our production team, which transformed the exceptional grapes into an amazing wine, sparkling and brandy; to our commercial and marketing teams, which make our wines available in over 40 countries over the world; and of course, to the finance team, which managed to publish the results 3 days ahead of the Bucharest Stock Exchange deadline. And the last but not least, to each of those over 800 group employees who stand behind Purcari's success story. Please consider 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 discussed are unaudited and should be read in conjunction with the full reporting package available on our website and on the website of Bucharest Stock Exchange. So participants are advised to review all disclosures before making investment decision. So I'm pleased to introduce our speakers for today, Alexandru Filip, Purcari Group's Chief Executive Officer and Anatol Belibov, the Group Chief Financial Officer. Additionally, there is an extended team of senior executives and nonexecutives on this call, and we together aim to provide a comprehensive overview of our company's results and outlook. That being said, we can get started. So Alex, the floor is yours.

Super. Thank you, Eugeniu. One housekeeping comment. Please shoot questions in the chat as they come through. We will have a Q&A session at the end of the presentation. You can keep the questions for then, but you can also send them in advance and the different colleagues can start preparing the answers. Just to remind ourselves what we're set out to do as communicated last October in our Investor Day, we are set out to build a global wine-making champion focusing on indigenous grape varieties in what we call New Europe, which is fundamentally Central and Eastern Europe. We are building the foundation of such a champion. So everything that we do has a dual perspective, delivering short-term results in line with expectations, but also building the foundation for a bigger and more solid company going forward. And this is an important point to make because many of the investments that we make, given the specific of our industry are long-term investments, be it in our vineyards or in our wine-making capabilities. These are long-term investments that we make every year with the ambition to build a global wine-making champion. That being said, if we focus on recent results and short-term priorities, just a few highlights, and many of you might have listened into the previous call when we presented the quarterly results. So this might sound familiar, many of the points. Commercially, we continue to develop new products and to expand into new markets. And this is an ongoing effort that we're doing while also deepening our presence in some of our core markets like Romania, where we're very proud to have now as ambassador, Mircea Lucescu which is the country's most distinguished football coach and currently the coach of Romanian National Football team, a legend in the field. He's been coaching for more than 50 years now, and he hopefully might be the oldest coach qualified to the World Cup at the end of this year. So fingers crossed for Romania and for Mr. Mircea Lucescu. In terms of operational performance, financial results for the full year. EBITDA reached RON 107 million (sic) [ RON 107.4 million ]. Net profit, RON 57.4 million, 28% EBITDA margin, 15% net profit margin. Net profit performance affected by several one-off elements that we will explain in detail when we get there. So I will not insist too much here. Just mentioning one of them that you should know if you followed the previous calls, which is the deconsolidation of Ecosmart, a waste recycling company. Now it's complete. In terms of development, strategic acquisitions, both in Moldova and in Romania. We've added 200 hectares of prime vineyards, both in Purcari and in Dealu Mare. So Timbrus located in Purcari and Dealu Mare, our core wine-making region in Romania. We've expanded there. It's an ongoing process there. We will continue to look for additional opportunities to expand, again, with a mindset on building a future platform for growth, expanding our production capabilities. Ecosmart mentioned, we have the recent January 28, 2025, decision for insolvency and as a consequence, deconsolidation from the group. Corporate affairs, you -- again, if you follow the company, you might have known, we have completed the succession from Mr. Bostan, the founder, to myself in the CEO role. Mr. Bostan is actively engaged supporting myself and especially the wine-making team throughout this year. He's actually currently here at Purcari with the wine-making team tasting our 2024 vintage that we're about to bottle soon. Maintained the indexes presence, paid a dividend. And we've also added 1 market maker Intercapital as of October 1, 2024. Now if we dive deeper into the commercial results. So, as I mentioned, presence in our core markets in Romania, wine events, also music festivals. We had a first sponsorship in Jazz in the Park Festival in Cluj. We will continue to be there also this year, and we will soon communicate 2 other leading blockbuster festivals that we will sponsor this year. Marketing campaigns, I mentioned Mircea Lucescu. We also launched a new collection of wine Sapiens, multiple awards for Purcari. We continue to win medals, and we also communicate about them. We will have a new campaign for Easter in Romania at the end of March. Otherwise, in terms of recognition of our quality, we've been -- we were nominated the Best Winery in Moldova in 2024. If not mistaken, this is the second time in the last 3 years. I think we were previously awarded the same award in 2022. So you can see there a consistency in the production excellence. And also, it's a recognition for our ability to sell internationally our wines. Multiple awards. We singled out Decanter because it's a leading competition, but also several others. If we move on. Yes, an important priority for us, launching of new products and expanding the markets. Good presence in Israel. We launched -- in addition to the standard retail brands, we also launched Nocturne, which is our HoReCa dedicated brand. First entry into the UAE market, both with alcoholic and nonalcoholic wine. We see a big opportunity for nonalcoholic wines in the Middle East, and we will expand there. Cote D'Ivoire, we launched Nuit des Anges, both still in the -- in sparkling wines and also a new range in the Netherlands, a blend range called Dos Familias. Otherwise, new markets, Nigeria, Slovakia, Canada, just some examples. We also communicated, I think, at the end of first 9 months, first exports to Cyprus, Northern Cyprus. I think in Q4, we even had to the Greek part of the island, the first export, multiple events in the U.S., Latvia, Serbia. So basically, the 40 countries that Eugeniu mentioned. Strong activity throughout the key markets. If we move on, I would say, yes, numbers. Core markets remain the same, Romania, Moldova, Poland, Bulgaria. You see there fundamentally a growth across the board, different speeds, also reflecting our approach to managing profitability and long-term profitable growth in these markets, especially the ones where we have, let's say, a lower growth rate. There, we're also either investing in developing the market or managing the profitability of the existing ranges to ensure that long term, we have the profitability that we need and we expect across the board. I think good news, Romania, it's not just Purcari supporting the growth, but also Bardar. Moldova, it's a very competitive market with many, many local producers. There, we have both Purcari and Cuza supporting the growth. There is -- there was a disruption in the market last year. Fundamentally, the challenges to the duty-free channel, which is an important export, if you want, channel for Moldvians and foreign nationals leaving Moldova. Poland, it's a very tough market with competitive and very price-sensitive consumers. And there, we're focusing on improving our profitability and growing the more profitable ranges within our portfolio. We're very happy to see that Purcari is growing faster than the overall market, and we'll continue to prioritize that. Bulgaria, the wider distribution is showing the results. We are also investing more in ensuring the visibility not only for Angels Estate, but also for Purcari. Purcari, especially in the HoReCa channel. So we're very happy with the evolution of Purcari. We also started developing specific products out of our Bostavan winery for Moldova -- for Bulgaria. So that's why we have the first delivery in Q4. The other markets, Czech Republic, Slovakia, solid growth. Asia, very good momentum in Q4. Rest of the world, these are more, let's say, midterm bets where we expect that volumes will pick up throughout the next years. We started first deliveries in some of these markets, and we expect pickup -- renewed orders with high volumes. In terms of brands, our flagship brand, Purcari growing very nicely, Angels Estate in Bulgaria, also growing nicely. Domeniile Cuza growing both in Romania and Moldova. Bardar with the challenges that we indicated in the past, relatively low growth in Moldova in a very challenging pricing environment with multiple competitors getting into promotion wars, where we try to avoid getting into such competition because we want to preserve the premiumness of the brand. And there, for us, the priority is also to develop additional export markets such as Romania, but also Nigeria, for example, where we can export profitably our production. For Bardar, in particular, given the specifics of the category, there is no short-term pressure in, let's say, getting rid of volumes because actually brandy ages very well, and it increases value with time. So there, we have more maneuver space to ensure we have the right commercial opportunities for our brands. If we move on, I think into the details. Anatol, if you want to take over from here.

Thank you, Alex. So good afternoon. Yes, for sure, apart from a strong, let's say, growing core business line, total revenue increased by 3% year-on-year. And for sure, it's important to mention that, yes, the decision to deconsolidate or discontinue Ecosmart activities have impact on total year revenue growth, 3%, or in 2023, Ecosmart account for RON 30 million revenue or it's more than 8% in 2023. That's why this have impact on growth for 2024. Also, this decision impact the gross margin. You can see that in 2023, Ecosmart represent half of the group profitability. That's why after deconsolidation, this helped us to improve average in 2024 approx 1 percentage point our gross margin. If we speak about core wine business, yes, you can see that in 2024, we managed to increase by 4, 5 percentage points our margin. And here it is important to mention, let's say, 2 main contributors. First, it's about pricing and mix improvement as it was mentioned in the previous slide about product performance and country performance. We managed to play with healthy mix. We managed to change our price in order to increase average price per bottle. And this helped us to improve profitability. In the meantime, we observed reduction in COGS rate apart from shifting production of less expensive wine from 2022, 2023. Also, our team managed well to negotiate with our customers and have cheaper price for bottle, for cork. And also, we managed to improve production efficiency. So altogether helped us to improve profitability in terms of gross profitability. Now moving to sales and general admin expense for sure. Here is a lot of question, and I will be here to explain. But overall, total SG&A or OpEx reached [ RON 107 million ] registering 31% increase year-on-year. Specific for marketing and selling, here, the biggest contribution of increase is coming from trade marketing. Investment, which increased 27% year-on-year. For sure, our team was focused to improve and maintain our brand awareness to support our promotional activities. We focus in trade execution, and all these, let's say, marketing initiatives have impact on total marketing spend. Salary costs, increased 29% year-on-year for sure. Next slide we'll give more, let's say, details. But give first the impact of salary inflation, team expansion and implementation of Management Incentive Plan 2024, 2027, which was approved by general shareholder meeting. Logistic costs also increased, and this is in line with our strategy and vision to grow in export market. And one important point here is the implementation of RetuRO, which have an impact of RON 2.4 million. And this is part also of marketing and sales expense. General and administrative costs also increased by 31% and now account close to 30% in total revenue. Let's say, here, the contribution of the increase is coming from salary-related costs and half of this cost is driven by implementation of this Management Incentive Plan. And in the next slide, I will show more details, but it's important now to mention that we have Management Incentive Plan in terms of share awards and stock option. And this stock option is one-off costs, like Alex already mentioned, and we have all these costs in current year driven this increase in general and admin cost. Moving to other income, yes, here 1 second, -- moving to other income, we registered RON 8 million, which is mainly accounted for rebates from our customer, which is include also income from, let's say, sales of different fixed assets and also adjustment of prior year provisions. For sure, before to move to EBITDA, I think it's important to mention that our operational result, as it stated in financial statement, represent close to RON 83 million, and this is 12% increase versus 2023. So our operational profit or result increased in line with, let's say, a rate of increase for core business. Now about EBITDA. So currently, EBITDA stayed at RON 107 million (sic) [ RON 107.4 million ] or 28% and net profit at RON 57.4 million. In the next slide, I will show more details for sure why it is lower versus prior year, minus 10%. In the meantime, Ecosmart deconsolidation or at 31 of December 2024, the group made the assessment based on IFRS 10 and concluded that there is no control over Ecosmart. That's why we deconsolidate from the financial statement, and this had an impact of RON 4.6 million loss. If we, let's say, recalculate EBITDA and net profit, we can see that our normalized EBITDA is RON 112 million or 29%, and our normalized profit is close to 62%. Now I think it's also important to have a look on the next slide, once again to -- let's say, to state that our gross margin is improving over the last 8 quarters. And for sure, our operational decision are here to continue this trend of improvement with focus on the right growth equation, meaning pricing and mix, and also taking care about costs, especially now in the current environment when costs became more, let's say, fluctuating. And the next slide, which will, let's say, explain in more details how our profitability, let's say, evolved during the year. So in 2023, we finished with RON 64 million profit. In 2024, we account for additional close to 30% in gross margin, and we already mentioned about this. We became more efficient and we have also other income, close to RON 8.8 million. If we exclude, let's say, increase in OpEx, which is close to RON 19 million (sic) [ RON 19.2 million ] we have also very strong negative impact coming from agriculture. We already mentioned in previous call that the current situation in 2024, it was not the best. So we have lower, let's say, quantity of grapes. That's why we registered a loss close to RON 7.2 million. Also, versus prior year, we have several one-off costs, which we have just in 2024. This first its taxes. So you can observe in our financial statement that in tax increase versus last year, more than 80%. This is because in prior year, we have a one-off adjustment of profit. In our interim financial statement for 2023, we put close to RON 12 million. After some revision, it was reduced to RON 7 million. That's why this made an impact close to RON 6 million year-on-year variance. Discontinuation of Ecosmart, which is one-off impact of RON 4.6 million and also implementation of Management Incentive Plan, specific stock option plan impact, which is RON 4 million. So like-for-like, for sure, you can observe that our net profit with this -- without this one-off, it was -- it should be higher than prior year, and also ForEx and other costs, which impact, let's say, decrease in our net profit result. So once again, a very important slide to mention that current year, it was highly impacted by this one-off cost. And about balance sheet performance, here you can see that still, we have a very good strong position. And we are able to finance our investment strategy. The current cash ratio it's similar like prior year. We are planning to have enough liquidity, but also to cover -- we are looking to, let's say, not pay too much for the credit. In terms of net debt, it's increasing. And for sure, this is in line with our strategy to -- CapEx strategy and invest in our production capacity. Net debt also increased, but it's still in the range of the market. And EBITDA at rate of 1.72x, slightly increased because of increase in our debt exposure.

Okay. Thank you, Anatol. Just to comment on how we fared versus the guidance that we had given. It's fair to admit that we failed to deliver on the revenue growth ambition. You see there, fundamentally, the difference comes from the growth in wine revenues. We were planning to end between 15% and 20% at the end of the year, we ended up with 13%. And this has driven also the overall revenue growth accordingly. We were counting fundamentally on several export transactions to come through at the end of the year. This didn't happen and also the growth in the core market was slightly below what we planned. EBITDA, and I think this is -- has been an important focus for us. The profitability has been towards the higher end of the range for us. So profitability has been a core element of our strategy and focus on our delivery. And we're happy to reflect that we have delivered on this. And I think for us, profitability, as mentioned, is a core element of sustainability of our growth and will continue to be so. Now if we move to the guidance for 2025. We have -- now that Ecosmart is no longer part of our activity, we're only looking at total revenues, which are fundamentally revenues from wine and ancillary activities. Our ambition is to achieve a growth between 12% and 17%. You see the range is driven fundamentally by the uncertainty of the markets that we operate in and the world that we live in and many things that can impact that. And hence, we are taking a cautious stance, but the growth should come from growing the core markets. And there, we have clear plans to expand our product portfolio and improve the distribution and the turnover of our core products. We are looking fundamentally to launch new products, especially with above-average margin, so improve the overall profitability of the portfolio, while investing in developing new markets to constantly diversify and strengthen the revenue base. So we have a diversified footprint. The latter point, it's something that takes time and can short term have an impact on both our operating costs and our margins. And to give you an example, one of the things that we've done at the end -- as of, let's say, beginning of this year, we have expanded our international sales team with local representatives in Poland and Central Europe on one hand, North America on the other hand. This is an investment that we're making in growing significantly faster midterm than we have been able to do so. Thanks to the local presence and professional network that our sales colleagues should build. The cost, of course, comes first, and then we will reap the results. Similarly, we're investing into market launches with new distributors in markets such as the ones I mentioned before. Of course, there is initially an investment in paid marketing communication in those markets to support the takeoff of the volumes in those markets. And overall, we will manage the profitability of the portfolio, taking into account these different factors. You see that we are consistent in our profitability estimates and ambition despite what we have communicated already to be a more expensive 2024 vintage. We believe we have the instruments to manage the impact on the cost, both through the mix with previous cheaper vintages, but also with both cost management and revenue management actions. We have already started passing on some of the cost increases to our clients at the end of last year and also underway for the first half of this year. So we expect to see the impact of that in the remaining of the year. We are looking also at operational efficiency. We have started digitizing our operations, and this is an ongoing process, both in terms of the scale of the processes that we digitize, but also the rollout of the new processes to the different entities and operations that we have across the different markets. So we remain positive. We remain optimistic that we will achieve our ambition, and we are very mindful of the midterm commitments that we made when we presented our 2027 strategy. We continue to invest, and we are confident that the -- both the commercial investments that we'll make now, but also the investments in capacity will show results midterm. And we will also -- one of the things that is very important for us is how we transfer the additional added value that we create through additional sales into net profit for the shareholders as we reap more scale effects from bigger sales. As -- I mentioned several times, investments are not linear, you need to make them in jumps. So we're expanding the production capacity. We're investing in vineyards. These are not linear investments, but rather taking us to a different scale, and we expect to also see the impact of this increased scale in the next couple of years, in line with the midterm target that we communicate. I think now it's a good time to open up the floor for questions. I don't know, Eugeniu, if you already received some questions or people have indicated their interest.

Let's have -- let's check the chat. Indeed, we have received one question. So are we going to launch a sparkling wine product? Or will we make acquisitions?

Okay. I guess we're referring to acquisitions of sparkling wine production. So first of all, just to clarify a few things. We are already producing our own sparkling wines at Purcari, the classic method sparkling wine. And there -- I think we launched it, Eugeniu correct me, in 2019. I don't know when we had the first production. We've been growing our sales, and we're now looking at expanding the production capacity in line with the demand. And sparkling wines for us at Purcari remain a priority because they are complementary to our core still wine offering and also offer higher-than-average margins. So we will continue to develop that both commercially and from a production perspective. At the same time, for other brands in the group, we are already selling what is called Charmat method, slightly cheaper sparkling wines that we currently produce with third-party producers, and we sell under our own brands. And the plan for us is that as volumes consolidate and we have sufficient volumes that we can already produce ourselves, we will gradually make the switch and invest in our own production capacity. We're assessing the business case for this and figuring out what is the volume and the moment where it makes sense, mindful that we need to optimize the CapEx in line with the different priorities that the group has. So at the moment, we are very happy and focused to develop the brands, and we have, let's say, the consumers behind our brands. And midterm, we will consider the opportunity to switch to our own production. But we believe that it's more important to have the customers at the moment than the production capacity. And if there are other questions.

Thank you for the answer. So dear participants, you can address more questions. [Operator Instructions] We have additional questions from [indiscernible]. Do you expect higher negative impact cost from the warranty return system in Romania or it's not meaningful?

Anatol, do you want to comment. I think it's also, to a certain extent, public information what is happening with the warranty system. Go ahead.

Yes. Yes. So we have already received official communication that starting from 2025, the cost increase in average by 10% for sure, this was not expected for us. That's why we update our budget. And we will take some corrective measures -- in terms of, let's say, as Alex mentioned, to take some correction in terms of pricing, which will be transferred to the market, but also to find other opportunity for savings. So, yes, it's already plus 10% higher, let's say, fee in terms of [indiscernible]. But once again, the cost, we will try to minimize the impact in our margin to take some action.

Any other questions? From Mark Gordon James. Could you provide more granular explanation for your revenue growth target for 2025? How will it break down by brands, international markets?

So I think this is -- I'll try to give a satisfactory answer. I think for us, the story is as follows. If you think of absolute and relative terms, we expect new brands, new markets to grow faster or smaller markets to grow faster than our core markets. That being said, contribution in absolute terms at the end of the year given the way that both, let's say, Romania, Moldova, Purcari, Bardar [ carry ] will come in absolute terms from these, let's say, 3, 4 markets that we indicated before. So Romania, Moldova, Bulgaria, Poland and then Purcari, Ceptura, Bardar. It's just mathematics. Over time, we plan to reduce the weight of these markets and these brands short term. And we plan that for this year, export will grow much faster. So the rest of the world, the weight of the rest of the world should be bigger at the end of next year. That being said, contribution in absolute terms will still come from the core markets. How do you see Asian and North American markets in 2025? We -- so I'll take a very simple answer. We see them quite differently. We see Asian, which is fundamentally driven by China on a more challenging dynamic. And I think we were looking at the numbers, 2024 volumes are below 2019 for China. So significant decrease in the market. That being said, we're relatively small in that market. So we're not necessarily put off by the overall market dynamic. We still have our plans to grow, but it's a more challenging environment. North America, it's actually a bit of the opposite. We see good momentum. For example, we exported for the first time a significant batch into Mexico. And we're now very hopeful and excited to see the impact in the market because the product only got there in November. So we're now trying to see what is the market reaction and how the follow-up orders will be. So North America, and that's why we also invested in having local presence in Canada and the U.S. It's actually a market where we see significant opportunity. We are already present both in Canada and the U.S. in addition to Mexico, and we are hopeful that we can grow there, and that's the ambition. I think I see the question. So there's a question for Purcari in the core markets to which extent growth will come from volume and from price. I think there is a third element, and we are also counting on that. It's also the mix of products. So we are passing on some of the cost increases throughout the portfolio. We are -- and it's a balance between volume and price, but we're also investing significantly in promoting more expensive products, and that's a focus for us. And I mentioned sparkling before. We're focusing on investing further in communicating our spark and pushing our sparkling. We're also investing more in our HoReCa channels where we have our specific offering with high margin. So that's the element. And one of the things that we're doing, we're also monitoring what we call the price index versus our competitors. And we believe that we are moving -- if we're looking historically at what the index has been. We're still operating within what the standard price index has been. So we're making sure that we do not become too expensive for our consumers versus competitors. There is a question on Ecosmart from [ Adrian ] New services products. I think we don't -- just to make it explain, we're not expanding into new lines of services, new products and so on. We're sticking to winemaking and brandy for core products, and we are -- the only services, if you want, are our hospitality services in Purcari and [indiscernible] We might develop -- we have a plan. I don't know if it's going to happen this year. We might develop also hospitality services in our other wineries, first and foremost, Angels Estate, also Ceptura. But this is, from our point of view, sticking to what we know.

It seems that we had a very detailed presentation because we received only a few questions so far. Yes, in case there are no other questions, we can say thank you for attending our conference call.

I mean, I think as always, we're available for follow-up questions if there are any. Eugeniu and Victoria, we will also be attending several events throughout the next months. So hopefully, we'll meet some of you there. And, yes, happy to connect on specific points at any time. Thank you very much for attending the call and for following our company. Thank you.

Thank you.

Bye-bye.