Purcari Wineries Public Company Limited (WINE) Earnings Call Transcript

Ladies and gentlemen, good afternoon. It's a privilege for us. You decided to attend this particular call. We know it's a very busy day for earnings call today. So thank you for making time for Purcari Wineries. I want to start by introducing a new member of our team. Alex Filip, you've seen all the announcements. He started as Deputy Chief Executive of the group. And I have to say with the risk of maybe raising the expectations to high that Alex has been something we very much were looking forward to have as part of our team. Before joining Purcari, he led as a Managing Director, at McKinsey’s office in Romania, he was also the Head of the of the digital growth platform in Central Eastern Europe. And to be frank, Alex would have had any job, but he decided to join Purcari because he saw the potential and he was somebody who was ready to roll up his sleeves and work towards the benefit of our group. So without further ado, I'm passing the word to Alex who will take you through today's presentation.

Thank you, Vasile, for the kind introduction. And I think what attracted me was both the track record and the ambition going forward. And I'm jumping on the ship in a great momentum. As you can see here, growth along all the key dimensions, revenues, EBITDA, net income, strong performance along all the indicators, and we'll go into more details later. So if we move to the next slide, on the operational highlights. So revenue is up more than 20%. The combination of higher volumes, of course, better mix of product and also selected price increases, in line, top end of the guidance. The good thing is that also not only the core revenues from wine sales grew, but also Ecosmart has contributed significantly, reflecting the turnaround that we have implemented. We have sustained growth, not only in Purcari, which has been our long-term champion, but also Crama Ceptura. We are pleased to say that we are by now #1 in Romania, combined sales of Purcari Wineries Group, #1 by value in Romania and Crama Ceptura has contributed significantly. Angel's Estate has also started to contribute. You see now 3%, but we expect further growth as we complete the turnaround starting from the operational turnaround to the commercial one that is underway now. solid traction in Romania, growing consistently. Overall market weakness in China, and you know that there is a complex environment there. We still consider it as a strategic market for us, and we continue to invest, but the environment is difficult. EBITDA going up as well, net profit on a normalized basis, showing significant growth, 20% growth EBITDA roughly, and 45% in net profit. Good margin performance despite increase in financing costs, CapEx and still expensive wine stock from previous vintages, strong investor relations agenda and strong performance. If you look at the increase year-to-date on the share price, significantly outgrowing the debt index. The stock also has a high liquidity relative to the market capitalization. And in line with our dividend policy, we paid a 6% yield last year. In terms of business, I mentioned successful turnaround at Ecosmart, significant growth, good profitability, showing strong economic stewardship from our side. We believe that given the nature of the business, there is significant growth coming from a fixed cost basis. We have the platform of additional revenues to generate higher than average marginal impact. Angel's, as we discussed, transformation underway, significant investments in line with our commitment to turn around the operations and also to expand the commercial capabilities. We are happy that we have doubled already the harvest deals on 2023 vintage. We are underway to restructure the brand portfolio and we have renegotiated the commercial terms with the key accounts. And one of the growth areas for us that we have already started exploring is to introduce Purcari SKUs in the Bulgarian market. And I think this is the highlight, we'll go later on into details. I'm passing on now back to Vasile, who, as a local can comment best on recent developments in Transnistria, which also affected our stock last week. Vasile, over to you.

Thank you. So we wanted to bring this issue in the most transparent way to bring it forward. It was an issue that I think has dominated the news last week, affected our stock price, too, to be honest, we're surprised about the reaction. So the stock was down over 8%. So we thought it's helpful to share company's perspective on this one. As I'm sharing this, I'm speaking from Kyiv -- actually Kyiv, Ukraine where our fund is based. So I can tell you that here, things are as much business as usual [Indiscernible] in terms of the business operating. And of course, maybe that adds some extra comfort to me in talking about this -- so called Transnistria trend issue. So first effect for those who missed the event of last week, the very obscure low-level politician in Transnistria has declared to a local press outlets that -- at the upcoming congress of deputes of all levels. Issue will be an agenda -- on agenda, that Transnistria will asked to be united with Russia on February 28. And then the speculation was on February 29, the Russian President in his address to the nation will actually give chorus to that solicitation. So this is what has created the speculation and this is what has created the selloff. Now I have to be fully -- full transplant here, of course, we don't know what's in the mind of those people in Transnistria and more so in the Putin's mind, but we can tell you some of the facts that give us comfort that this entire story is in the words of high ranking diplomat in Chisinau is nothing burger. So first, as expected, nothing happened. So on February 28 Transnistrian congress has not solved any indication with Russia and Putin in his address yesterday has not mentioned Transnistria, has not mentioned even Moldova at all. So that's -- which confirms again that our anticipation that this is a wild speculation and part of the hybrid work of this information was indeed, as the said bureaucrat said was nothing burger. But more importantly than that because the fact that nothing happened was not a surprise for us. More important than that, I think it's important for you to understand some of the important aspects of the Transnistrian daily life. First, not a single shot was fired in this territory for over 30 years. So this has been a frozen conflict, and we believe it's somewhat similar to the conflict in Northern Cyprus. Second, economically, Transnistria is very much integrated into EU, even more so than Moldova as a percentage of their trade, over 2/3 of their trade go to EU markets. The single percentage from Moldova is around 60%. So they are more integrated in EU than right bank Moldova. Third important aspect is that usually all people living in Transnistria are Moldovan citizens, right? For example, [Indiscernible] in the frozen regions of Georgia, the 2 banks are daily integrated. So people live in Transnistria, but work in Moldova, travel on a daily basis. So the 2 regions are very much integrated. So at the personal level, there's -- we cannot talk of conflict, more over about 40% of the people in that region are Romanian speakers, and still the largest -- the largest ethnic group in that diverse region. Several more aspects that may be surprising to you is that the local elites -- business elites in Transnistria are extremely, extremely careful in their messaging, simply because they accept the reality on the ground. So Ukraine is fully controlling the border. Transnistria is fully landlocked. They know that the chance of Russian insurgents are extremely, extremely low simply because there are 6 major water barriers between the closest Russian troops on the left bank of Dnipro River in Kherson and the Transnistrian regions. And Russia itself does not have any troops in Transnistria. There are so-called peacekeeping troops about 1,500 people, but because since 2014, no rotation of those troops were possible, they -- those troops kept leaving to Russia and were replaced by the local Transnistrian citizens who were given Russian passports. So they are only nominally Russian. So this may sound that may be overly assertive on my side, of course, to give you -- in my attempt to try to give you some mental comfort around the Transnistrian region. But what's important to maybe retain from all these details I shared is that Transnistria is even more integrated in EU commerce-wise, than Moldova. The business leads there, they have a very strong vested interest in avoiding any possible conflict. The region is completely landlocked and with very, very, say -- with a huge, huge uphill battle for any Russian troops to ever make it to that region. And all the speculations that you can see and you may keep maybe seeing in the weeks and months to come are part of disinformation work. And as we expected, they have been all -- in fact they all turn meritless and ground less as the events of February 28 and February 29 have demonstrated. I'd be happy to address any questions you have on this topic in the Q&A part. But for now, again, I really like this phase by the high ranking -- let's call it, foreign embassy -- Western embassy diplomat, it has been a nothing burger and stays a nothing burger. Maybe we'll leave the question and answer for later part. And here, we'll go back to, say, our business of -- the core business of wine, and I will kindly ask Victor Arapan, our CFO, to take you through the numbers.

Thank you, Vasile. As mentioned earlier by my colleagues, the group recorded a strong performance during the first quarter. And for the whole year, with sales and financial performance above the top of the guidance range. So the group sales in Q4 continued to grow double digits. And as a result, the group recorded a great increase in revenue by plus 22% year-on-year for the reported period. Gross profit increased by 12% year-on-year, reaching RON 149 million. Gross margin is at 40%, increasing compared to previous year with 4 percentage points. And the main factors negatively impacted the gross margin, next. First, additional depreciation from CapEx and newly consolidated Angel's Estate amounting to RON 3 million, which yields plus 37% compared to last year. Second, increasing wages on inflationary pressure as well as impact from implementing management incentive plan has increased in share price, generated additional expense of RON 1.5 million in stock options offered to employees. [indiscernible] the second business segment of waste recycling management services increased its share to 8% of total revenue, or plus 1 percentage point, but generated a 22% gross margin compared to 42% generated by the core wine business. And another factor is the inventories consumption as main part of manufacturing costs increased from RON 8.3 per liter to RON 9.66 per liter, meaning plus 16% year-on-year. SG&A expenses registered RON 85 million and remained flat at 23% share in sales compared to last year. General and administrative expenses grew by 25% or RON 7.7 million, out of which the most significant part plays on employee benefits amounting to plus RON 4.4 million and taxes and fees with RON 1.2 million compared to 2022. Marketing and selling expenses increased by 17% year on year, which is coherent with sales increase. Other income expenses -- other income and other expenses stayed flat year-on-year, but with absolutely different drivers in '23 compared to 2022. So I will give here more details. Other operating income experienced a significant increase from RON 2.8 million to RON 4.4 million, mainly due to increase in released amount of deferred income from RON 1.9 million to RON 2.7 million. This is the effect of business acquisition, I mean, Angel's Estate, and significant capital expenditures for which the group received a significant amount of state subsidies. There are also some one-off gains like RON 260,000 comes from write-off trade payables due to expiration of prescription period and RON 450,000 come from surpluses of auxiliary materials and chemicals as a result of stock accounting. Other operating expenses had a positive impact of plus RON 4.3 million on the company's performance during the reported period compared to negative impact of minus RON 1.5 million in 2022. This comes from RON 2.9 million adjustment to fair value of harvested grapes, which is an accounting adjustment required by international accounting standards and reflects increase in operating efficiency of agricultural division of the company. But this is not a one-off gain or loss as it directly impacts further cost of production. RON 1.1 million is a one-off gain from disposal of tangible assets. Regarding the net finance cost, we have an absolutely different situation in 2023 compared to 2022. While recording the net finance cost of RON 10 million last year. The group now record a net finance income of RON 0.4 million. The answer to explain such an evolution is found if we look into separate items. So interest expenses increased by 64% year-on-year from RON 4.6 million and to RON 7.5 million, mainly due to the increased cost of lending. At the same time, due to Moldovan Leu appreciation against Euro, as the group recorded net Forex gain of RON 5.3 million while during the same period of last year, it recorded a net Forex loss of RON 6.1 million. So it's important to mention that the appreciation of Moldovan Leu versus the Euro generated this Forex gain from revaluation of balance sheet items. But on the other hand, this had a negative impact on revenues and gross margin for goods sold on export markets. Another positive impact has -- it improved the finance income is gained from changing fair value of the -- of the group's 10% stake held in 8 wines, a Czech-based company specialized in advanced e-commerce with wine. So as a result, normalized EBITDA and net profit registered increased by plus 19, plus 45%, respectively, compared to the previous year and the margins of both indicators are on the top of guidelines range. So next slide, no, no, no, previous one. On this slide, you can see financial results from performance by business segment. Almost 90% of the group business is represented by the sale of beverages and the performance of this segment almost represents performance of the whole business, as I just described in the previous slide. So I will mainly comment on the second segment. The segment of waste recycling management services offered by Ecosmart in Romania. This is still insignificant in the reported period with RON 30 million revenue, which represents around 8% share in total group sales, and 4% share in group's net profit. The gross margin for Ecosmart business declined by 2 percentage points year-on-year, mainly because of the increase in cost of recycling as the national target recycling of the waste and packages increased in average by 8%. As the cost of sales is also impacted by increased depreciation and amortization charges resulting from valuation of the subsidiary at the acquisition date. Regarding G&A expenses of Ecosmart, we note a 16% decrease compared to last year. And due to the fact that after a successful legal and financial turnaround of the company, which allowed us to almost reduce the impairment on trade and other receivables that we registered at the acquisition date. And on the next slide, you can assess that the group continues to have a very strong financial position over the years. The increase in business leads to an increase in net working capital with some pressure on liquidity. However, the company managed to maintain an optimal level of indebtedness and sufficient liquidity. We target -- net debt EBITDA indicator was in the range of [1.5x]. So there is room to sustain the continuous growth of our business. So this being said, I give the floor to my colleague, Alex, for a short overview of sales evolution by markets and by brand.

Thank you, Victor. I mean some of the points I already mentioned, strong performance in Romania, Bulgaria, now you'll see Ukraine, although from a small base, reflecting also the point that Vasile made that despite the where a large part of the country is business as usual, and it's also business as usual for us in Ukraine. But going from the largest market for us, Romania, as I mentioned, 59% of sales, accumulated sales of all our brands, put us as #1 winery in Romania, significant growth in both Purcari and Crama Ceptura, but also where we are growing nicely with Bardar, we're introducing Bardar in Romania and also some of the Bostavan brand. Nocturne, our HORECA dedicated range is performing very nicely. Also relating to the point of the product mix, we are promoting and pushing quite nicely the sales of Sparkling Wine Cuvee, Sparkling performing very nicely. And of course, our well-known 1827 series is performing very strongly. Moldova slightly more moderated sale, but a strong recovery in the fourth quarter. This after a weaker performance in the previous quarter. Purcari also performing very nicely in Moldova. For Bostavan, we are prioritizing margin in a very competitive market. Same thing for Bardar, where we have pushed through some price increases that have reflected in slower growth. Duty-free regime cancellation is actually quite a big factor impacting negatively our Bardar sales. In Poland, we covered nicely in the fourth quarter after 2 weaker quarters. Again, we are growing cautiously. We want to make sure that we have also sustainable profitability with our Bostavan product ranges for Poland, growing nicely with Purcari. We're trying to grow and create the segment that Purcari represents. A smaller base, but reflecting on our Romanian experience, we're trying to develop and kind of own this price in the quality segment in the Polish market. Bulgaria, I already mentioned expanding the commercial team, collaboration with local partners, trying to trim the portfolio and focus on the highest margin products and channels, growing sales or you see the weight of fourth quarter sales much bigger than in the overall group, 40%, reflecting the acceleration of sales in the market. Czech Republic and Slovakia ongoing recovery. Again, we're trying to prioritize the margins, investing in premiumization, Purcari is also growing very nicely. China, we mentioned difficult macro environment affecting the overall appetite for wine, which is a premium product beverage -- alcoholic beverage in the country. Turkey growing nicely. We have established a local entity to help us accelerate the commercial activity. First, deliveries to new countries within Middle East and Africa happening on the back of promotions in the previous year. If we move on also to give you the perspective by brand, [Indiscernible] okay? So the point that I was making earlier, we have 2 engines right now, Purcari and Crama Ceptura growing nicely, both of them. For Bostavan, we are prioritizing margins over volumes and both in Moldova and in the export market. Bardar, weak fourth quarter in Moldova, reflecting continuing consumer behavior in the country. On the back also increase in excise duties that makes especially the lower end of the product range less accessible to consumers. We are growing nicely, as we said, in Romania, which is by now already the second largest market for Bardar. In Angel's, I won't repeat what I mentioned for Bulgaria because it's 95% the same story with the difference of Purcari. If we move on, given the time of the year, I guess you are also interested in how our harvest has been. We are happy to report not only a good yield, but also high quality despite unfavorable weather conditions, low levels or moderate levels of rain, heat waves just before harvest, which complicated our operations, but our teams performed superbly. We -- as always, we fulfill the required stocks from reliable third-party purchases, good environment with overall over production in the country allowed us to have a good position in negotiating the price, which should be reflected in the price -- in the margins of our sales going forward. It was the first year that we could use fully throughout the year, the irrigation system at Purcari, which helped us sustain volumes and quality. And we are working on launching and rolling out a similar irrigation system at [Indiscernible] vineyard in Bostavan, in Etulia. It's going to be a multiyear program. We start this year given the surface when we will continue next year. Overall, the global wine market, the global wine production has gone down significantly. It's recorded to be the smallest in the last 60 years. Sharp decreases in some of the traditional export markets like Spain and Italy, Romania and Bulgaria growing significantly the local production. So I think we have a good prospect for export sales for us in this context, which would allow us to have good profitability on these sales. If we move on, bringing it all on -- we delivered on the guidance that we issued this time last year. Strong revenue overall in the core business. Wine -- over delivering on the guidance for wine, over delivering on -- slightly on the EBITDA margin and on the net income, consistency also in the quarterly results. So net income margin reached every quarter. We managed to steer the business effectively despite all the challenges that we had. Some of the underlying factors, inflation is still high, but it's easing packaging materials acquired and the costliest wine stock, we have been able to push through to a large extent. We still have, of course, due to the nature of the business, especially for the red range, some earlier vintages in stock, but it's moving on. Net income has managed to cope despite the higher financing costs and depreciation mentioned before. So we can move on to probably the slide that interest many of you the most. What is the guidance for 2024. We remain to my earlier point, we remain ambitious. We remain confident that we can deliver growth going forward. So 16% to 20% revenue growth, 20% to 24% in the core business. EBITDA margin, building on the underlying trends, good harvest decrease in inflation of the raw materials. So also going higher versus what we delivered and the net income as well. We believe that we are well positioned with our affordable luxury position to deliver in the current environment, despite all the uncertainty and the challenges. One reason for caution, I would say, is the turnover development for our waste recycling division in Romania for Ecosmart, which we expect to be affected by the newly implemented legislation on warranty return system in Romania, which was implemented at the -- as of December 1, 2023. One of the anomalies of the system versus other markets where this was introduced is that it covers also wine bottles, not just soft drinks and beer. There is, I'm saying caution because there is quite some uncertainty as to whether the scheme will remain in force as implemented initially. There is a low amendment being discussed and should be approved by the parliament to actually remove wine bottles from the system which is a big part of what we generated in 2023. So depending on whether this happens and when it happens and how manufacturers adjust to this, our revenue, our turnover in the customer pool will be affected. We're, of course, working to expand the customer base with also other type of customers who are not in the beverages industry affected by the warranty return system, and our ability to do this will be reflecting in the results. On the profitability indicators, we expect further this inflation on the back of the negotiations that we have had for packaging and energy. We have -- as we discussed earlier, passed on most of the more expensive wine vintages from the past. And we expect further easing on the financing cost on the back of a reduction in interest rates in the second half of the year. On the other side, we need to account also for the additional depreciation that would come from CapEx that we executed last year, both in Angel's and in the other entities in Moldova and Romania. I think this is what we wanted to share before we go into a Q&A session. So I think now we can open the floor?

[Operator Instructions]

This is Iuliana Ciopraga from Wood & Company. If you -- if you could tell us a bit about the gross margin evolution that you expect for 2024. I mean, you did comment slightly on this, but if you could provide a bit more color. To be honest, I was a bit surprised about the fourth quarter, we -- I thought that the improvement would be somewhat faster, but it's not really what we're seeing in the fourth quarter results. So what would be the main triggers from positive evolution here. And actually, I'm not really seeing it in the guidance either. I mean, there is not such a strong improvement in EBITDA margin, if I'm -- maybe I'm mistaken, let me double check. Yes, even in the guidance, I don't think you're really expecting a strong improvement in gross margins, right? EBITDA margin, 26%, 28% versus 27% delivered for this year, there's not really a strong improvement. So what should we expect to guiding gross margins?

Okay. So the question is what we expect going forward? Or you want also more details on the Q4.

Both.

Okay. So Victor, do you want to comment on the Q4, just bring back the argument, and I can comment on the forward looking.

Okay. I explained in my speech -- what may impacted the gross margin for the Q4. And I'll repeat again as the company is making a lot of CapEx in order to sustain its growth is growth plan. So we increased -- we have a significant increase in additional depreciation from this and also from newly consolidated Angel's Estate. So this is impacting significantly as a cost of sales. So our margin get lower. And of course, we have to take in considerations, a lot of the big impact of the management incentive plan in place, mainly option stock for employees, which could impact and impacted in Q4, but also could impact for next year, if the price of the share will increase significantly. This will have a direct impact as a company's P&L. So what I have to mention also is that inventory consumption was still impacted by inflation. Even this year, inflation got down, the effect of increasing prices from suppliers continues a little bit later. So salaries -- request for higher salaries, and so require our suppliers to increase some prices. And of course, we used in this year, a big part of wine or bulk wine that was produced in [2002 to 2021], with high cost as you remember from our other calls, we mentioned that the year was with high cost of production for grapes due to met conditions we had in Moldova and in Romania. So this is on my side for Q4.

Okay. Now for 2024, I think, Iuliana, if you follow our company and our guidance, you know that we like to be ambitious and optimistic, but we also want to be conservative so that we don't disappoint investors [Indiscernible]. So this behavior remains. And we are -- what we put on people, we are confident that we can deliver. And as you know, also we strive to over deliver constantly. We have a strategic priority for us to maintain and improve profitability as we grow volumes. And you know from other businesses that this is not an easy task for us. You can also understand that what comes out at the end is a combination of multiple brands present in multiple geographies that are affected by different dynamics. So that's why while we remain confident, we want to be also conservative.

I guess my question referred more on -- referred more to the impact on 2020 harvest, and then we had high inflation. And now that these seem to normalize and the 2020 vintage impact seems to go away. I think I was kind of expecting margins to improve. And that's the point that I was trying to get more color.

I mean, we are working on that. And without going into details, I can tell you that we are selectively trying to -- first of all, inflation is easing, but inflation is still there. It's higher than what we used to have overall, and we are working selectively with different distribution partners to pass on those increases so that we protect profitability. But this is not something that happens overnight. And it's something that we -- it takes it's time and that's why while the direction is clearly towards improving this. We are just a bit cautious on how much we can achieve on -- if you think about it, a 20% increase in volumes. So we're trying to find the right balance between growth and profitability.

But I thought that would be impacted in the SG&A not necessarily in gross margin.

Which part, sorry?

The geographic sales, basically, the expansion of sales.

Yes. Of course, if you're working -- looking at the sales team or -- sales support, yes. But if you're looking at what are the marketing activities, be it brand and there are some trade marketing investments that are needed to drive the 20% growth. You can imagine that, especially if you're opening new markets, you first need to invest -- and this might have an impact on the initial profitability. We're now reaping benefits of the investments that we've done over the years in some of these markets, but we also need to make more investments in new markets.

Regarding this impact on CapEx, can you comment a bit here? I mean CapEx, I guess, was all through 2023, right? I mean you acquired Angel's Estate [Indiscernible] impact on CapEx should have already been from there. It's not something necessarily related to the fourth quarter? Or is it?

Well, if you think about it, there is -- there are 2 elements. There is the base and there's the addition. So base or additional -- the assets that we brought on the balance sheet already at the beginning of 2023, but the reflection of the significant investment that we made throughout Q2 and Q3 in Angel's as we expanded and improved the production facilities in the Angel's. And this, of course comes in Q4.

And if you could comment just briefly on the Moldovan Leu appreciation and what you expect going forward? I mean we are seeing the appreciation. I was wondering more -- what you expect going forward on this point, especially with these discussions about the [indiscernible] I was wondering what we should expect.

Okay. Victor, do you want to comment on this one. Bring out the crystal ball.

It's a little bit not fair to comment on such things that should the National Bank comment or rather official bodies. But we expect that Moldovan Leu would stay quite stable without any -- there are no signs for its nice depreciation or appreciation. So we -- I suppose it will stay around here now.

Yes. Alex, we have a few questions on the chat. I think Vasile was answering the background questions. And I think we are giving the floor to Daniela. Daniela, I propose you to address the question directly. It will be more smoothly to answer that.

Can you please confirm, if you hear me?

If you speak a bit louder? If possible. If not, we'll read the questions.

So do you hear me now better, I hope.

Yes, slightly better. Thank you.

So my first question is if you can provide an outlook for Angel's Estate, especially in terms of proportion of sales that you are targeting there in short and long term? And how much CapEx will be a direction to Angel's Estate given the turnaround process?

Okay. So we believe that we are at the beginning of our commercial transformation in Angel's Estate. So we expect significant growth going forward. Now mid- to long term, we aim to have a similar position as the one in EMEA. So top 3, top 5, wineries in the country. That's our ambition. The CapEx that will be required is in line with the volume projections and also in line with the commitments that we made when we signed the transaction. And this is -- we don't expect further investment and what we committed.