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Edited Transcript of KOFOL.PR earnings conference call or presentation 13-Aug-19 7:30am GMT

Half Year 2019 Kofola CeskoSlovensko as Earnings Call

OSTRAVA Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Kofola CeskoSlovensko as earnings conference call or presentation Tuesday, August 13, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Pavel Jakubík

Kofola CeskoSlovensko a.s. - Group CFO & Director

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Conference Call Participants

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* Jakub Mician

Wood & Company Financial Services, a.s., Research Division - Equity Analyst

* Petr Bartek

Erste Group Bank AG, Research Division - Head of Equity Research of Czech Republic

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Kofola's Second Quarter 2019 Results Conference Call. And I hand over to your host, Pavel Jakubík; and Daniel Buryš.

Sir, please go ahead.

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [2]

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Thank you. Good morning, ladies and gentlemen. And welcome to Kofola First Half Year and Second Quarter 2019 Conference Call. My name is Pavel Jakubík, Kofola Group CFO. [We are looking here at] in the sales figures here in the second and third quarter of the year due to the increased consumption in the spring and summer months. Unfortunately, this May was one of the coldest and rainiest months overall [with respect] in all countries where Kofola operates. Due to the unfavorable weather in May, we lost about CZK 85 million in revenues comparing to last year in our budget, which has negative impact on our contribution and profit. The sunny weather in June was not sufficient to cover all the losses incurred in May. Despite a significant drop in revenues in May, in first half year Kofola Group reports revenues of CZK 3.032 billion, which means growth of 3.4%, while the second quarter revenue were just flat compared to second quarter 2018 at the level of CZK 1.741 billion. The growth of revenue in the first 6 months was visible in all business segments and mainly in Adriatic region. The gross profit margin of 47% remained flat in 6 months' period due to the very good first quarter results, while being 2 percentage point lower in the second quarter 2019 versus second quarter 2018. The positive effect of our sugar prices, approximately CZK 14 million, was more than offset by increased cost of integrating personnel cost interaction and high repair and maintenance.

And we move to selling and marketing, distribution costs, in 6 months, achieved CZK 1.031 billion, and they were higher by 6%. The increase was mainly driven by increased payroll costs, higher logistic costs mainly in CzechoSlovakia segment and the cost arising in LEROS, which was acquired just at the end of March 2018.

Administrative costs in the first 6 months amounted to CZK 220 million and increased by 12%. The increase is mainly attributable to the cost of LEROS, costs connected with the options scheme, higher payroll cost and higher depreciation expense for administration assets.

Then we move to EBITDA. Group EBITDA in the first 6 months achieved CZK 425 million and decreased by 7%, means CZK 33 million decrease. The main drivers of our EBITDA by loss contribution in May increased logistic costs, payroll and increased monthly [our] packaging and repair maintenance expenses.

The impact on second quarter EBITDA were very similar to those discussed earlier, also the decrease just in second quarter was higher than the first 6 months, which is a very good performance in the first quarter 2019 that partly mitigated our second quarter 2019 performance. Additionally, performance in the second quarter 2018 as a date for comparison was very good due to the warm spring months.

Let's turn to results. In first 6 months, decreased by CZK 25 million due to higher market interest rates, however, several times increased by traditional banks in the period between June 2018 and June 2019. Now our loans are based on this [libor]. And also on the foreign exchange gains that were recorded in converted periods in the first 6 months 2018, while Kofola realized foreign exchange losses in first 6 months of 2019.

As goes for income taxes, in first 6 months the group income tax amounted to CZK 70 million, and increased by CZK 22 million due to partial release of deferred tax assets related to investment incentives and decrease of additional tax assets from provisions.

Quick comment regarding our net debt position. The group consolidated net debt amounted to CZK 2.9 billion at the end of June 2019, which represents an increase of 20% compared to CZK 2.4 billion at the end of 2018. And the increase was influenced by the capitalization of leases due to the initial implementation of IFRS 16, the new standard we already discussed during previous calls, already -- and the second reason was the higher capital expenditures in the reported periods. The group consolidated net debt to adjusted 12-month EBITDA at the end of June 2018, was 2.9 compared to 2.3 at the end of the year.

Let's move to key business segments. Start with the biggest one, most important, CzechoSlovakia segment. Despite an unfavorable weather impact in May, CzechoSlovakia segment's sales grew in the first 6 months by 1.1%. The growth was mainly driven by sales of Kofola, Rajec, Royal Crown Cola and SEMTEX. Share of Royal Crown Cola in the CzechoSlovakia segment is still growing by double-digit percentage thanks to its great popularity among customers, which is visible especially in the HoReCa channel. Nearly all brands were growing compared to the first 6 months of 2018, and those are all formats show today increase, which undergo format [with those] dynamics, on the other hand, at home format showing just the slight growth.

Now one success of our innovation acceleration from last year, the water Kláštorná. At the end of first quarter 2019, we started to sell the mineral water Kláštorná and during first few months, the water they sold to our customers over 1.5 billion bottles and our mineral water, reached 25% market share in Slovakia, which is great success. Additionally, the [fresh new] that by the mid of August, we already met our yearly target and sold more than 2 million bottles of Kláštorná. So we hope that this is significant success that will further improve our performance in water category.

In the second quarter, Kofola Group continued [meeting] the highest Kofola market shares on Czech and Slovak market. Czech market share is 26%, Slovakia 41%, which positively contributed to the interim results on this segment.

The adjusted EBITDA in CzechoSlovakia reached CZK 368 million, which unfortunately, represents a decline of 9%. The decrease is -- went mainly by increased logistics, payroll and repair and maintenance expense as well as already commented performance in May due to bad weather. The increased logistics in the CzechoSlovakia segments, there are several reasons for that. One is negative trend of increased salaries among all companies. So it was -- in our case, we -- to the competitive and increased salaries, especially in the warehousing and logistic department, increases were quite significant. And also, we paid more for external warehousing, more for transport, higher oil price has negative impact as well as the higher transfer of returnable packages from customers to the production plant.

Now I will move to Adriatic region. In the first 6 months Adriatic region continued with positive revenue growth of 7%. Negative weather effect in May, there was also visible there, was compensated by increased sales of Pepsi also Studenac and increased sales of Radenska brand in both Slovenia and Croatia mainly due its 150th anniversary for Radenska brand and rated strong marketing support.

Higher revenue was reached in both Radenska and Studenac companies, with Croatian subsidiary growing even faster than Radenska. The growth was especially visible in HoReCa market, but also at home and on-the-go formats were growing.

Due to increased revenue and well-managed costs the performance in Adriatic segment was better than in the comparative period, which led to the increased EBITDA by CZK 9 million, 18%. Despite a higher revenues and improvement in profitability in our Croatian subsidiaries, Studenac EBITDA is still slightly below our expectation. And we need additional revenue growth to get the benefit of scale that would ensure targeted EBITDA margin.

Let's move now to the [starter] business segment, Fresh & Herbs. In the first 6 months, in this segment, we achieved double-digit growth mainly as a result of our recent LEROS acquisition. The like-for-like growth was 3% after exclusion of various effects. Logistic EBITDA in the Fresh & Herbs segment decreased by CZK 6 million, which was influenced mainly by the result of LEROS, which is investing in its marketing facilities and positioning on CzechoSlovak market.

Now a few words about the [start] segment because, as you know, in this segment we report grow letters and [streaming] results. So let's start with UGO. In first 6 months and second quarter, we continued with further positive revenue growth. And there was visible improved performance mainly in [trade] bars [and water is] leading to positive EBITDA there. And productivity was growing and there was also online support franchising contact.

In July 2019, moved to the production of our packaged [Kofola] products into our new modern plant, which will help us in the improvement of the productivity and the production capacity.

And as a result, we [saw] improvement in EBITDA in this part of UGO business, which is still not performing, kind of, performing as [fresh herbs and water is].

LEROS. LEROS revenue in the 6 months and second quarter were slightly above last year, but below our expectation. But it's fair to mention that currently for [herbal teas], there is out of season period and decision was [purchase] in September. So we hope that with our innovations, we will be well prepared for this, this season.

Now our performance due to our recent acquisition. In the beginning of July, Kofola announced acquisition of Czech-based company Espresso, founded in 2002. Kofola Group overtakes the whole company, including the Cafe Reserva trademark, distribution network and all employees.

The annual turnover of the company is approximately CZK 90 million and EBITDA close to CZK 10 million.

By this acquisition, we acquired all the distribution of their premium brand Dilmah teas. Entering coffee segment and further strengthening our position in the 2 business will give us a much stronger beverage proposition to sell to our customers. And additionally, due to our great synergies with our existing HoReCa portfolio and significant expansion of the existing range of soft drinks and herbal teas. Our goal is to further develop the coffee culture and provide great service to our customers.

I'll briefly summarize second quarter and 6 months' performance. It was influenced, not only by very unfavorable weather in May, but also by cost increases. The good news is that our July performance, which will be reported the quarter [September] quarter, was very good in all business segments. We exceeded our overall expectations. And together with strong marketing support for the remaining part of the year, we just considering that we are well positioned and prepared to accept the full [impact] rest of the summer season, and will achieve our original EBITDA target of CZK 1.080 billion for the year 2019.

I think it was briefly all from my side and now there is a place for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our [first] question comes from Jakub Mician from Wood & Company.

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Jakub Mician, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [2]

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First, I will start with the last comment that you have made that you are still keeping your guidance on EBITDA for the full year. And I want to ask you, what do you plan to do differently for the second half in order to meet the target? That will be my first question.

Maybe second question would be regarding the price/mix in CzechoSlovakia. During the second quarter, we have seen a 5% decrease on a year-on-year basis. If you could talk about what has changed in the second quarter comparing to the second quarter of last year? And how do you see the price/mix shaping up for the rest of the year?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [3]

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Well, thank you for your questions. Let's start with this guidance. We are still just in the middle of this season. So the unfavorable performance in May, which negatively influenced our second quarter results. There is a very high potential that in the 2 weeks in July that we will mitigate it. So that weather now, it's very positive for us. And we are growing in Adriatic region and also our position in HoReCa market in Czech and Slovak market gives us confidence that we will manage our yearly target. This third quarter is crucial for us, and I think we are well prepared. Also it's [part] to mention that our price increases were just -- especially in the Czechoslovak market, were implemented during the period. So it was not just that from the first day of 2019 there were new increased prices. So we hope they will benefit for the rest of the year as already implemented price increases while the consumption of our products will be still high.

Now there are several marketing campaigns in place, and also the Christmas time is very important for us. And we managed in the past this Christmas season that we saw very positive EBITDA results.

Second question. Regarding the price/mix in the CzechoSlovakia region, what we see on the market is that from a volume perspective the market are not growing [much] extent -- but from the value perspective, especially Czech market is performing very well and our position there is very strong. So [that will] benefit and that is the only category that was a declining category of [higher ups]. But we already implemented some price adjustments into our marketing campaigns. So are quite confident that also in this category, we will have [impact] from that in the rest -- second half of the year. For the rest, I think our product, it is performing very well, and especially the innovations. As I mentioned, there are [ground to some extent currently over question if it] is helping us.

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Jakub Mician, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [4]

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If I may one more follow-up question on the sugar costs for 2020. You commented in the first quarter that you are trying to manage or lock in the prices for 2020 sugar contract already right now. If you could comment now, how has that process developed?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [5]

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Yes. We have regular meetings with our sugar suppliers. We're in the process of negotiation the prices for that for the next year. So currently, the contracts have not been penned. What we see on the market is it was already announced by me during the previous call, that the spot prices of sugar are much higher than what we arrive in 2019. So the prices of sugar for next year could start in the level EUR 400 per ton, but we are just in the mid of negotiation process. And definitely, as I mentioned earlier, we will benefit from the current -- to certain extent, views including the current sugar prices also for 2020 and the exact volume and mechanism, how it will be realized, is still are in negotiation. But the price increase in sugar [will also] inflate [and be] visible in our segment.

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Operator [6]

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Our next question comes from Petr Bartek from Erste Group.

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Petr Bartek, Erste Group Bank AG, Research Division - Head of Equity Research of Czech Republic [7]

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I'd like to ask you about the impact of the weather in May, maybe you commented on that in the beginning of the call, but I connected to it a bit later.

Second, you have quite a high CapEx in the Q2. What new production line was that related to -- was the reason? And if you can confirm the CapEx guidance for the full year?

Also, if you could comment on the reaction of our customers to price increases in the Czech Republic and in Slovakia, what you see in the market, if they absorb it or is there any resistance?

And last question is regarding the prices of raw materials for the bottles? If you already see some decline or should we expect negative impact again in next quarters?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [8]

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Pavel, I will start with the first one. Negative effect of rainy and cold May, I already mentioned that we lost in revenues about CZK 85 million, which impacts our, the lost contribution and EBITDA margin in a [big amount]. And I can say, significant hit and it was not easy to, let's say compensate it by [the better] weather in June.

So the growth for the CapEx, here, we finalized the new production line in [our corporate in] Slovakia. So it was the key CapEx for 2019 in the second quarter and also [happening] in third quarter some advances face also with production line, it will further help us to increase our productivity. But it was in line with our budget. So I mean in spite of very high cost [base] in first 6 months, we still keep our CapEx guidance for 2019, that will be in the range of CZK 450 million to CZK 500 million.

Your next question regarding that price increases. Well, they have been [absorbed] by the market, I think as compared to the previous years, where you were just maybe the first ones and sometimes even the only one, increasing their prices for the year. The [other competitors are also] increasing the stock prices, again, year-on-year. So we were stock [this full] and this price increases had the negative impact on loss of revenues they [happened before the bond went out].

Last question, if I noted well, I was estimating in the first 6 months, I think there was negative impact from our gross profit margin because [juices were higher] compared to 2018, but their prices now are stable since we expect to that for the rest of the year, we should be more or less in the same prices that we are at the moment.

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Operator [9]

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(Operator Instructions) The next question is from [Mr. Sukico].

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Unidentified Analyst, [10]

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Quick question on the EBITDA, in order to be on track for 2018, do you consider some potential cost-cutting exercise or some cost adjustments? That's first question.

And second, could you maybe elaborate briefly on the EBITDA for next year?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [11]

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Well, I'll start with the second part of the question. We comment our EBITDA target for next year, just -- or during the publication of our annual results, that was our strategy in the past and so far there is no reason to change it. So we will introduce it during that call, commenting that our full year results somewhere the end of March. As it goes for EBITDA for this year, well, just because of 1 full month, there was so far no reason to significantly look at that cost-cutting definitely. Yes, we are monitoring our costs and where feasible, especially in some, let's say, areas that are not supporting the further business growth, we already implemented some cost-cutting. But it was not in that, maybe scale that you are asking for, so we are monitoring our key cost drivers every month until we -- majority of them were reflected in our budget, [I mean] salary increase, logistic cost increase [with others]. So by introduced price increase of our products in all these segments, we to a significant extent cover those increased costs.

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Operator [12]

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(Operator Instructions) We have no further questions. Please, speakers, back to you for the conclusion.

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [13]

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Thank you for the questions, for participating in this call. In spite of this not -- EBITDA not exceeding the last year results, we strongly believe that our business is well positioned. And I hope that when commenting the third quarter results, I will be able to introduce you more positive figures, and we will keep our EBITDA target. Thank you and see you later. Bye.

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Operator [14]

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This concludes today's conference call. Thank you all for your participation. You may now disconnect.