During three quarters of 2011 the Kofola Group has improved its operating profit by 9%

During three quarters of 2011 the Kofola Group has improved its operating profit by 9% and generated net profit at the last year’s level, regardless of high raw material prices and poor weather conditions during summer time.

During three quarters of 2011, one of the leading manufacturers of non-alcoholic beverages in Central Europe, the Kofola Group, regardless of the expensive raw materials, generated adjusted net profit due to the majority shareholders in the amount of PLN 27.1 million (which entails a growth by 3%, year on year basis). The improvement was achieved thanks to the cost discipline and the process optimisation introduced within the entire Group.

The Kofola Group, the manufacturer of such brands as: Kofola, Hoop Cola, Paola, Rajec, Vinea, Jupik or Semtex, despite record expensive raw materials (mainly PET bottle preforms, sugar and isoglucose) and strong competition in the beverage segment, has improved its operating profit during nine months of this year by 9% (from PLN 47.7 million during three quarters of 2010 up to PLN 52.0 million during the comparable period in 2011). Consolidated adjusted net profit due to the Kofola S.A. shareholders amounted to PLN 27.1 million – against PLN 26.4 million a year ago. Net result would have been even higher if it were not for the impact of high exchange rate of EUR, resulting in unrealised foreign exchange differences, charging the third quarter profit.

The Group revenues in the reported period have increased by 4.3% up to close to a billion PLN due to higher revenues of the Megapack Group and Hoop Polska. In the result of high raw material prices, regardless of the increase of the sales and cost-cutting efforts in production, consolidated sales margin dropped from 41.0% a year ago down to 35.4% during the first nine months of 2011.

”In response to the growing prices of the products within the entire Group we have introduced a number of cost-cutting programs in the result of which we were able to reduce selling costs by 11.7%, and general management costs by 9.3%. Savings in aggregate exceeded PLN 38 million, year on year basis. Thanks to the radical cost discipline we were able to compensate for the increase of the raw material prices and even slightly improve operating result from a year ago”, comments Jannis Samaras, President and the majority shareholder of the Kofola Group. “We realise that there is a limit to straight cost cuts, that is why already for a number of months we have been gradually increasing the prices of our products. As we have spread the process of the price increases over time, it is easier to accept by the clients that our beverages cost more on the shelf.

During the past quarter the impact of the price increases on the achieved sales margins was clear. Despite lower revenues, gross sales margin was by 1 percentage point less than during the same period a year ago. This is also the result of looking for the suppliers of cheaper raw materials and the progressing change of the packaging for lighter packaging. The Group has demonstrated the increase of revenues in the most profitable product segments, i.e. carbonated drinks and syrups. Profitability of the non-carbonated drink segment was significantly improved, still despite the decline of the revenues from this segment.

“The third quarter was a period full of events for us”, - emphasises Samaras. We completed the integration of Pinelli which was acquired in April into the Kofola Group structures: we managed to move the production lines to the Krnov plant (Kofola CZ) and assign the agreements with clients to our Czech company. In August we started our largest investment project this year, hot bottling line. It will allow us to introduce a number of novelties which have not been available on the market so far and to propose products with absolutely no preservatives. This fits our strategy of being an innovative and socially responsible company. On the cost side, in our Czech and Slovak companies, a restructuring program in the area of production and sales was carried out; because of which we incurred one-time severance costs in the aggregate amount of PLN 2.5 million. The entire amount of the one-time events which charged the results of the reported period stood at PLN 3.2 million. Additionally, since 1 September, in order to accelerate and unify decision-making processes and the management of the Czech and Slovak markets, we have achieved personal union of the management of three companies, Kofola Holding a.s. with the management of Kofola a.s. Czech and Kofola a.s. Slovakia. In this way we have eliminated one management tier. The cost effect of the changes and reductions made should be visible already starting from the fourth quarter this year,” concludes Samaras.

Thanks to the hot bottling line, Kofola has already managed to develop and market a set of Pickwick Just Tea ice teas (supplementing the portfolio by peach black tea), new Jupik smoothies or drinks with aloe vera (containing natural particles of this plant which is reach in nutrients). In addition to novelties coming from the new line, the Group launched Vinea in pink version and sugar free Hoop Cola.

Despite the two significant investments made in 2011 (the investment in hot bottling line and the acquisition of Pinelli) with the aggregate value of slightly over PLN 50 million, the Group managed to slightly reduce net debt from PLN 326.7 million at the end of December 2010 (converted using foreign exchange rate to PLN from the end of September 2011) down to PLN 311.1 million at the end of 3Q 2011. Net debt ratio to the adjusted 12-month EBITDA at the end of September was 2.6, i.e. the same level as at the end of 2010.

“Another quarter full of challenges is ahead of us,” says Jannis Samaras. Still, we will be facing expensive raw materials, this time sugar and isoglucose. We will continue to raise prices, both in the fourth quarter as well as starting from new year. Our competitors have also noticed that they were unable to absorb such expensive raw materials, in consequence of which they started to rapidly increase their prices, sometimes by a dozen or even several dozen percent. We, thanks to the process of gradual increases, spare our clients the shock therapy. In order to minimise the impact of the raw material prices on the prices of our products, we will continue the process of changing the packaging into lighter packaging and we will continue to look for possibilities of process optimisation, this time mainly in logistics where we still see the reserves.

During the entire 2011 the Kofola Group operated in very difficult market conditions. The prices of the basic raw materials, i.e. PET bottle preforms, sugar and isoglucose, were at a significantly higher level than a year ago. Because of exceptionally rainy and cold July as well as the first half of August the vacation period, which is the harvest time for the beverage manufacturers, turned out to be particularly poor in the entire operating region of the Group.