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Edited Transcript of KOFOL.PR earnings conference call or presentation 12-Nov-19 8:30am GMT

Nine Months 2019 Kofola CeskoSlovensko as Earnings Call

OSTRAVA Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Kofola CeskoSlovensko as earnings conference call or presentation Tuesday, November 12, 2019 at 8:30:00am 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

* Jan Raška

Fio Banka, a.s., Research Division - Analyst

* Pavel Ryska

J&T Banka, a.s., Research Division - 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 2019 Third Quarter Results Conference Call. I will now hand you over to Mr. Jakubík, Group CFO. 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. Generally, in soft drink business, the sales peak appears in the second and third quarter of the year due to the increased consumption in the spring and summer months, with third quarter being the most important.

Kofola Group's third quarter results were very positive and compensated for our performance from second quarter caused by very cold and rainy May. In 9 months 2019, Kofola group reports revenues of CZK 4.893 billion, which means growth of 3.6%, while third quarter revenues recorded even higher growth by 3.9%.

The growth of revenues in 9 months was visible in all business segments, mainly in Adriatic region. The gross profit margin of 48% remained stable in 9 months, while reaching even 51.4% in third quarter 2019, being higher by 1 percentage point in comparison to third quarter 2018. This positive effect of increased revenues and lower sugar price in 9 months was partly offset by increased cost of PET resin, higher repairs, maintenance and increased personnel cost in production.

Selling, marketing and distribution costs in 9 months achieved CZK 1.587 billion and were higher by 6.2%. The increase was mainly driven by increased payroll costs, higher logistic costs, mainly in CzechoSlovakia segment, and costs arising in LEROS, which was acquired in March 2018, and Espresso, acquired in July 2019.

Administrative costs in 9 months amounted to CZK 331 million and increased by CZK 37 million. The increase is mainly attributable to costs of LEROS, Espresso and higher payroll costs in other Kofola Group companies.

Group's EBITDA in 9 months 2019 achieved CZK 860 million and increased by CZK 4 million. This is a result of higher revenues and savings from lower sugar price on one side, but higher logistics, payroll, repair and maintenance and packaging costs on other side.

Most effects described for 9 months were visible also in third quarter. However, during third quarter 2019, PET resin prices even went down in comparison to third quarter 2018, which in combination with our strong position on the market and further strengthening of our market share in HoReCa, helped us to increase the EBITDA in the third quarter 2019 by CZK 37 million, means by 9.3%, CZK 436 million.

In 9 months, the net finance costs were relatively flat, which is mainly a net result of increased interest expense due to higher market interest rates and increased profit of our Russian associate, Megapack. Decrease in net finance cost in third quarter is mainly resulting from increased profit of Megapack, net foreign exchange gains in the third quarter compared to net foreign exchange losses in third quarter 2018 and higher interest expense.

In 9 months, the group's income tax amounted to CZK 114 million, an increase in comparison to 9 months 2018 by CZK 7 million. Increased effective tax rate is caused by the nonrecognition of the deferred tax asset on companies with tax losses.

Let's move to net debt. The group's consolidated net debt as at 30 September 2019 amounted to CZK 2.748 billion, which represents an increase of CZK 318 million compared to CZK 2.430 billion at the end of last year.

The increase was influenced mainly by the capitalization of leases due to initial application of new IFRS 16 standard. The group's consolidated net debt to 12 months EBITDA at the end of September 2019 reached 2.6 compared to 2.4 at the end of 2018.

If we move now to individual operating segments. In 9 months, the biggest segment, CzechoSlovakia, sales grew by 1.4%, and the growth was mainly driven by sales of Kofola, Royal Crown Cola, Kláštorná Kalcia and SEMTEX.

Share of Royal Crown Cola sales in CzechoSlovakia segment is continuously growing by double-digit percentage, thanks to its great popularity among customers, especially the HoReCa distribution channel.

Our new product, Kláštorná Kalcia, started to be more significant contributor to the CzechoSlovakia segment's revenues, and its market share is further increasing.

Nearly all our brands were growing compared to 9 months 2018. Although all formats showed the increase, with on-the-go format being the most dynamic one, on the other hand, at-home format is showing just the slight growth.

Adjusted EBITDA in the CzechoSlovakia segment for 9 months reached CZK 693 million, which represents a decline of CZK 15 million or 2%. This decrease is influenced mainly by increased logistic, payroll, packaging, repair and maintenance expenses, but also by lower revenues in May 2019 due to weather impact.

In the third quarter itself, CzechoSlovakia segment sales grew by 1.9%, which is very satisfactory considering the fact that CzechoSlovakia is well-saturated market and third quarter 2018 was already at high base due to very hot summer.

In third quarter, Kofola continued keeping the highest HoReCa market shares on Czech and Slovakia market. Those have positively contributed to the increased revenues in the [CzechoSlovakia] segment.

Third quarter adjusted EBITDA in CzechoSlovakia segment reached CZK 325 million, which represents an increase of CZK 22 million and 7.1% increase. Improved operating profitability is a result of increased sales, good sales mix, lower sugar and PET resin price, which was partly offset by increased personnel costs and logistics.

Let's move now to our Adriatic segment. In 9 months, Adriatic region continued with a positive revenue growth of 8.2% and reached CZK 1.009 billion.

Sales realized by the Adriatic segment grew basically in all main brands, other increase of sales from the distribution of Pepsi and also sales of Studena and ORA orange. Increased sales of Radenska brand were visible in both Slovenia and Croatia, mainly due to its 150th anniversary and related strong marketing support. Higher revenue was reached in both Radenska and Studenac, with Croatian subsidiary growing even faster than Radenska. Growth was especially visible in HoReCa market, but also at-home and on-the-go formats were growing.

Due to increased revenues and well-managed costs, the performance in Adriatic segment in 9 months was better than in the comparative period, and EBITDA reached CZK 176 million, which accounts for CZK 35 million, 25.1% increase. In the third quarter itself, Adriatic segment sales even accelerated its growth to 9.7%, which was very positive result and together with well-managed operating expenses, was the main driver for reaching EBITDA in third quarter of CZK 115 million, represents an increase of CZK 26 million and 29%.

Let's move now to last, but also important operating segment, Fresh & Herbs. Fresh & Herbs segment achieved in 9 months 2019 revenue growth of 9.8%, mainly thanks to the acquisition of LEROS, acquisition of Espresso and organic growth in UGO, which was offset by the decrease in Premium Rosa's revenues on Polish market. Without mention the acquisition effects, the revenues have been flat.

In 9 months 2019, the adjusted EBITDA of Fresh & Herbs segment decreased by CZK 16.4 million, which was influenced mainly by the results of LEROS, which has been investing in its marketing activities and positioning on Czech and Slovak markets.

In UGO, another part of this segment, the 9 months and third quarter continued with a further positive revenue growth. There was visible improved performance, mainly in salateries, leading to positive EBITDA in this part of the business. The productivity was growing. There was also well-managed support of franchising concept. Transfer of production of our packaged salad products into a new modern plant was successfully completed in July and shall bring in next quarter's further production efficiencies, together with ongoing portfolio management and standardization of [receipts].

Current EBITDA margin in packaged salad and PET is still behind our expectation. In LEROS, the third -- 9-month revenues were 9% above last year. The main season in tea business generally starts in September and results will be visible mainly in the fourth quarter. In Premium Rosa, the last part of this Fresh & Herbs segment, we noticed decrease in revenues due to fluctuations in the demand of selected customers, mainly in Poland, but also in export.

To summarize, third quarter results are very positive in all our major business segments, showing increase both in revenues and profitability. The good performance has continued also in October. We are well prepared for the important part of our season, which is Christmas time. Our strong brands would be further supported by marketing campaigns and innovations, and we are well positioned to successfully manage our quarter. We keep our original EBITDA target CZK 1.080 billion for the year 2019.

Now it is time for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from Mr. Jakub Mician.

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

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I wanted to ask you on the sugar cost outlook for 2020. How do you see the prices? And with that, how you do you see the gross margin evolution next year? And my second question would be with regards to the Adriatic region, where we have seen relatively strong pickup in the EBITDA margin in the third quarter. If you can elaborate on that, what has been the driver? And if you think that this sort of trend or at least this level of the margin should remain unchanged in the near term?

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

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Okay. Let's start with the first part of your question, the sugar prices. As I have already informed during previous call, we have been working hard to negotiate and we succeeded that half of our yearly sugar volumes in 2020 will be hedged with current low sugar price. It will be rolling out mainly for CzechoSlovakia segment, and we will utilize volumes not consumed during 2019 mainly due to Hoop sale, our Polish subsidiary, in March.

The remaining not fixed sugar contracts will be bought on spot or hedged later during the year, sugar price will go down. Additionally, we have been able to negotiate very favorable prices for isoglucose for next year. And this also has important impact on our cost side and the price of isoglucose will be slightly cheaper in 2020 than in 2019.

If it goes for other regions, I can confirm that in Adriatic, we are on a good track. Croatian business is growing even faster. We still need more volumes, but we have been able to move some part of production from Slovenia to Croatia, where feasible and utilized production capacities in Croatia. Then the goal is for next year to increase further our market shares in HoReCa to go more onto seaside and islands. It should help us to get positive results.

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

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With regards to the Adriatic region, if I understand it correctly, do you have a lower sugar price in the region compared to CzechoSlovakia? Or is there a smaller pressure on the payroll and logistics costs compared to your core markets?

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

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We are now talking about 2019 or 2020?

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Jakub Mician, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [6]

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2019. And I mean if there any material change compared to 2020, you can also -- I mean it will be helpful if you could elaborate on 2020 as well?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [7]

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In 2019, the sugar price in CzechoSlovakia region was a little bit lower than in Adriatic region, mainly due to transport cost and others, but the differences were not significant.

In 2020, I mentioned that for CzechoSlovakia segment, we have been able to -- we will be able to utilize a part of not consumed volumes, while for Adriatic region, it seems that full price increase will be incurred by our Slovenian and Croatian business. So the prices of sugar will be higher, and the delta will be also higher in 2020 comparing to 2019.

The payroll pressure was visible in all our segments, it means in CzechoSlovakia and also in Adriatic countries. But from taking into account the size of the business, definitely the impact on CzechoSlovakia in 2019 was more visible. But percentage-wise, the increases were also visible in Adriatic countries.

Logistics was mainly -- logistics cost increase was mainly related to CzechoSlovakia business due to using of external warehouses, due to pressure on rise of transport and several reasons, which were not so visible in Adriatic region.

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Operator [8]

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The next question is from Mr. Pavel Ryska.

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Pavel Ryska, J&T Banka, a.s., Research Division - Analyst [9]

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Congrats on the good results for the third quarter. I just wanted to ask one more question as a follow-up to the previous one. So if I get it right, the sugar prices for next year overall are expected to decrease compared to 2019? Or is that not clear yet, given that you hedge part of it and you expect to buy the rest on the spot?

And the second question that I have with regard to dividend, so, so far this year, given the net profit for the 9 months, do you think you will be able to keep the dividend that was paid out this year? Or do you expect any changes or, let's say, tangible changes to the dividend per share paid out?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [10]

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Thank you for the questions. I'll start with the second one. Dividends are paid from the net profit of the parent company, Kofola CeskoSlovensko. What we see is the consolidated results. From the base for dividend, we are comfortable that there will be space for keeping the same -- similar dividend level for 2020, as it was in 2019, because Kofola CeskoSlovensko parent company is able to collect dividends from subsidiaries and has sufficient cash and base for dividend.

And the first question, for next year, on spot, we see significant increase in sugar prices and the prices are above EUR 400 per ton for sugar. What I mentioned is that for CzechoSlovakia segment, we will use, for roughly half of our yearly volumes, the price from 2019, so the low price. So for that, let's say, second part of the year, the price will be also much higher. And for Adriatic, it seems that overall 2020 volumes will be bought by higher prices.

But it's important also to mention that isoglucose, which is also relevant for our production, isoglucose price negotiated for 2020 would be a little bit cheaper comparing to 2019. In total, we are now in the budget preparation for 2020, and I will not disclose the full [effects]. So I just mentioning the trends, but in total, the, say, sugar price for the whole group will be higher, but the impacts will not be so negative and crucial for us as it seemed maybe a few months ago.

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Operator [11]

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Our next question comes from Petr Bartek.

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Petr Bartek, Erste Group Bank AG, Research Division - Head of Equity Research of Czech Republic [12]

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Two questions from my side, the first is the Adriatic region in Q3 was quite high. So I just wonder what would be the impact of weather when compared to last year and what is the impact of market share? And second, regarding the PET resin prices. If they stay at current levels, what would be approximately the impact for the next year compared to this year on the cost side?

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

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Thank you for questions. I'll again start with the second one, PET resin prices. As compared to the sugar prices, in PET resin, we are not able to hedge prices for the full year. Generally, the prices are for the quarter. We see some, let's say, trends, try to understand the markets, communicate regularly with suppliers, but cannot confirm that the prices that we will have in our budget will be, let's say, fixed for next year. What we see and how we understand the market of PET resin is that, that currently in third quarter, there was visible slight decrease in PET resin prices.

Fourth quarter seems to be also, let's say, a similar trend, positive for us. But regarding the estimation for 2020, on average, we see that the prices will be more or less at the level of 2019, so maybe little bit higher than currently after the drop in third quarter. But on average, [do this] for your financial models, take resin -- average PET resin prices in 2019.

And Adriatic, third quarter, definitely very successful for us. We are growing, as I mentioned, in our categories in Slovenia and Croatia. Also, export to Italy, Austria, Kosovo and other countries has been growing. There are several reasons. One is good weather in the third quarter. In May -- sorry, in year-to-date results, May was also very rainy and cold in Croatia, but the third quarter itself was, from a weather point of view, successful.

We were successful in logistics. In previous year, maybe you remember, I commented that there were some difficulties in service delivery, and it was quite difficult to manage several customers during 2 months. But this year, we have been able to learn from mistakes from out there and logistics was managed. Otherwise, cheaper sugar compared to last year, strong marketing promotions regarding Radenska due to celebration of 150th anniversary, and also, the base, the last year third quarter 2018 was not considered by us as successful due to not cooperating with Mercator and other reasons. So the base was not so high as, for example, in CzechoSlovakia segment.

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Operator [14]

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(Operator Instructions) Next question is from Mr. Jan Raška.

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Jan Raška, Fio Banka, a.s., Research Division - Analyst [15]

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This is Jan Raška from Fio Bank. I would like to ask you on Adriatic region, especially on Croatia. You made -- in the third quarter, you made EBITDA in Adriatic CZK 115 million and what part of this EBITDA was made in Croatia, if I can ask you?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [16]

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We don't comment separate countries. But definitely, the trend is positive in Croatia. The third quarter itself in Croatia was positive, above last year and in line with our budget. What is still for us a kind of challenge is that in Croatia, really this season, last 3 months and for the rest of the year, it's very difficult to utilize production capacities, manage employee costs and the staff. So we need to work hard to, let's say, utilize more of the factory in Croatia and to produce and sell more also in out of the season.

So in the third quarter, to summarize, Croatia positive EBITDA, in line with our expectation, much better than last year. From a full year perspective, it will be still close to 0. So the main contributor to the yearly -- or 9-month results in Adriatic region is still Radenska.

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Operator [17]

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We have next question from Mr. Jakub Mician.

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Jakub Mician, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [18]

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One follow-up from my side on the sugar cost and isoglucose that you've mentioned to the previous caller. Can you elaborate a little bit on how -- what proportion of your overall sugar cost does isoglucose make?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [19]

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I'm not sure I understood your question correctly. May I ask for repeat it once again, please?

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Jakub Mician, Wood & Company Financial Services, a.s., Research Division - Equity Analyst [20]

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Well, I mean you have mentioned that isoglucose you have been able to contract a price at a lower level for 2020 compared to 2019. I'm just trying to understand how big of an impact does it [does] going to have on your cost of goods sold in 2020? If you could elaborate what proportion of your overall sugar cost that you have on [cost utilization] does isoglucose cost make up, if you can share that information?

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [21]

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I will start with a more overall picture. If I take material costs, the sweeteners, it means sugar and isoglucose accounts for roughly 22%. So the proportion of packaging costs means PET resin, caps, labels and this kind of stuff, cans, is much higher. If we go for sweeteners, we don't publish the split of sugar, isoglucose, but I can indicate that the weight of isoglucose is marginal, and it's significant, it's not the major part, but it's significant for us.

So the savings in isoglucose should significantly expand, compensate for spot price sugar increase, and it depends really product by products, country-by-country. So it's a difficult question to answer precisely. I hope that it will help you, at least to some extent.

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Operator [22]

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(Operator Instructions) There are no more questions. I would like to ask Mr. Jakubík to conclude this conference call. Please go ahead.

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Pavel Jakubík, Kofola CeskoSlovensko a.s. - Group CFO & Director [23]

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Ladies and gentlemen, thank you for your questions and attention. I'm looking forward to speak to you during our annual 2019 results presentation. I hope to bring the promised target, CZK 1.080 billion. Thank you. Bye.

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Operator [24]

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This concludes today's conference call. Thank you all for your participation. A recording of today's call will be available on our web page. You may now disconnect.