Anadolu Efes Biracilik ve Malt Sanayii AS

IST:AEFES.E

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to Anadolu Efes Operations' First Quarter 2018 Financial Results Conference and Webcast.

I now hand over to our Investor Relations Manager, Asli Demirel. Madame, please go ahead.

[Asli Kiliç Demirel, executive]

Hi and welcome to Anadolu Efes Beer Operations' 2018 First Quarter Conference Call and Webcast. Before we start, I would kindly request you to refer our notes in our presentation regarding forward-looking statements.

Now I am leaving the ground to Mr. Gavin Hudson, Anadolu Efes CEO. Sir?

[John Hudson, executive]

Thank you very much. And a good afternoon and welcome to our call today.

Whilst quarter 1 represents the smallest quarter for us, the results are a mixed bag. Our consolidated sales volumes were up 7.9% during year-on-year. This strongly underpinned by the robust contribution from our soft drinks and part of our international beer operations. These results certainly reflecting the [indiscernible] growth in the last 4 years. However, overall beer volumes were under pressure, driven by Efes Russia and ongoing challenges we faced in our Turkey business.

Our consolidated sales revenues were up 14%, driven by volume, pricing and positive currency translation. Our EBITDA was also up by 19.2%, with a margin improvement to 12.7%. As mentioned, ongoing challenges in our Turkey operation continued. And as we have discussed previously, we are investing heavily in the turnaround of our core Efes brand in this market. This turnaround strategy has delivered encouraging results, with significant stabilization in volume and share loss. And we anticipate an improving trend throughout 2018. We will continue to invest our resources and our time to ensure that the required levels of success for this brand are achieved.

We have also been working hard in expanding our local and our international portfolio for Turkey. This in delivering -- this is delivering the anticipated results. And we feel we will offer a more competitive and positive portfolio that meets our consumer needs whilst delivering on our strategic intent.

Our international operations is also a tale of 2 stories. In our CIS countries, we see continued volume growth and financials in line with our expectations. In fact, Kazakhstan has delivered well ahead of plan, and we are anticipating this trend to continue for the year. Efes Russia, as mentioned earlier, was slightly behind expectations. This driven by combination of our destocking of our distributors, this in line with our business. And then low-to-negative growth in the category due to a cycling a high quarter 1 in 2017. Our Russian business did, however, continue to grow share in this quarter.

We closed the deal for combining our Russia and our Ukraine business with ABI on the [indiscernible] March 2018. We see this collaboration as a milestone for Anadolu Efes. We are now a significant #2 player in one of the largest beer markets in the world, offering a competitive portfolio brands, combining the best talent available and delivering significant cost synergies. We see this collaboration offering ongoing potential for growth in this market.

On chart, our Beer Group strategy, this remains largely unchanged, although we are -- and continue focusing heavily on renovating our core brands, an example being the Efes brand in Turkey. We continue expanding our portfolio to meet our growing consumer need [indiscernible] consumption occasions. And with a huge focus on our premium portfolio, we driving quality as a nonnegotiable into our businesses. And then, we've started a drive for enabling our digital strategy. And we see this delivering significant results over time.

We also have launched a huge focus on our organizational design and the related capabilities that will drive ongoing change into our business.

I'll hand over to Onur, our CO (sic) [ CFO ] to discuss results a bit further.

[Onur Çevikel, executive]

Well, thank you very much, Gavin. Good morning and good afternoon, ladies and gentlemen. Welcome to Anadolu Efes Quarter 1 2018 Financial Results Conference Call.

As usual, I will briefly take you through our financial results, but before I start, as announced earlier, we finalized our deal in Russia, Ukraine with ABI by the end of March 2018. Therefore, in our reported balance sheet numbers, you will be seeing the consolidated business, but its income statement numbers do include any consolidated figures due to the date of [indiscernible] of completion. For this call, for balance sheet numbers, I will also comment on organic numbers, which are the numbers just before the balance sheet consolidation for simplicity and comparability purposes.

Starting with our consolidated numbers. Our volumes on consolidated level grew by 7.9% to 18.9 million hectoliters in first quarter 2018, thanks to our soft drinks segment. Our revenues grew by a strong 14%, reaching up to TRY 2,764.1 million in the first quarter 2018. Our EBITDA BNRI reached up to TRY 352 million, with a strong growth of 19.2%. Our EBITDA BNRI margin was a 12.7%, with a 57 basis points score. Finally, our net income was at minus TRY 106.2 million, mostly being negatively impacted by the devaluation on TL.

Coming to our Beer Group results, and starting with Turkey. As discussed, our volumes in Turkey, localized as 1 million hectoliters, 12.3% of EBITDA in compared with the prior year. Major reasons being destocking and competitor activity as mentioned by Gavin. Our net sales revenue has recorded a growth of 5.1%, reaching to TRY 309.9 million outpacing the volume performance. Main reasons of this is mostly price increases, mixed and other optimizations.

EBITDA BNRI in Turkey was at TRY 44.9, with a relatively low growth margin of 14.5% compared with the same period of previous year. And this performance is mostly attributable to lower volume performance as well as relatively higher raw material cost.

Talking about international beer operations. Our volumes were at 3 million hectoliters in first quarter 2018, down by 3.9%. [indiscernible] most of the decline is attributable to our Russian operation whereas other operations were mostly operating in line. In Russia, as mentioned by Gavin, destocking and a very strong pace of last year will the main reasons for the decline, which was also in line. Our net sales revenue was at TRY 582.8 million, with a growth of 2.2%, mostly due to price increases as well as translation impact. Our EBITDA BNRI was recorded as TRY 35.4 million, 38.4% lower than prior year, with a 6.1% EBITDA BNRI margin. This is mostly attributable to our Russian operation, mainly volume mix as well as a very strong quarter 4 2017 performance. It is also a fact that since we had completed the deal by the end of first quarter, increased focus on integration had also some impact on the result.

Finally, on our Beer Group results. Our volumes were recorded to be at 4.1 million hectoliters, 6.1% down from the previous period, whereas our revenue recorded to be TRY 898.5 million, with a 3.3% increase. Our EBITDA BNRI was recorded to be TRY 70 million, with a 7.8% EBITDA BNRI margin. On the consolidated beer, now on the net income line, we had a loss of TRY 81.8 million, mostly due to the devaluation impacts.

It is important to mention that as of January 1, 2018, Anadolu Efes designated USD-denominated bond of USD 500 million as a hedging instrument in order to hedge its foreign currency risk arising from the translation of net assets of its subsidiary located in Netherlands EBI, that was the gains and losses on the hedging instrument arising from change in foreign currency evaluation relating to the effective portion of the hedge out, and they will be accounted on their equity in gains or loss on hedge and under other comprehensive income or loss related with the hedges of net investment in foreign operations in other comprehensive income statement.

Talking about Beer Group free cash flow. As you all are well aware, positive free cash flow generation has been a major priority for all our businesses for quite a time period of year. And I believe the value of this is better understood in the turbulent times. As usual, our free cash flow is relatively weak in the first quarters of the year, and net free cash flow generation was on the negative historical EBITDA minus TRY 203.7 million. As you will well remember, we are cycling a very strong 2017 on free cash flow and a very strong fourth quarter on the free cash flow generation. Also, EBITDA being under pressure. And CapEx for sales and marketing, ahead of the season. One-off integration costs are the main reasons, though we are still targeting a positive free cash flow in our Beer Group operation.

On the balance sheet's management, as mentioned in our press release on previous day, we finalized our deal with AB InBev for Russia and Ukraine ahead of our commitment of first half 2018. And this enabled us to consolidate the balance sheet in our first part of 2018. That's why we reported both reported numbers and organic numbers. But today, I'll be concentrating on organic numbers, which are before the deal numbers, since EBITDA for first quarter 2018 was not consolidated due to the finalization date of the transaction. For organic numbers, our net debt to EBITDA was at strong 1.5x on consolidated numbers, and also 1.5x for Beer Group, despite the weakening TL that we're all talking.

When we look at our borrowing mix and liquidity profile, we are looking at a relatively healthy picture with both Beer Group and under FX consolidated average maturities being over 3 years. And thanks to importance given to free cash flow as well as effective balance sheet management, the debt is easily manageable on the repayment schedule.

On the interest breakdowns, we see most of our debt being on fixed interest rate, which we believe to be an advantage in our

[Audio Gap]

some of our interest rates are expected to increase. Both on consolidated level and Beer Group level, our debt is mostly on fixed interest rates. On a consolidated level, free cash flow, after investing activities on a consolidated level, was recorded to be a minus TRY 168.2 million. As mentioned before, free cash flow is a major priority for our company, and we are targeting another year of positive free cash flow generation on net consolidated basis.

Finally, on our financial priorities, as you'll be seeing, we haven't changed our financial priorities much. We're just sustaining the consolidated cash flow to this deleveraging efficiency improvement, managing impact of FX volatility on operations and being committed to Investment Grade Ratings.

So this concludes my presentation. I will be handing over to Gavin.

[John Hudson, executive]

Thanks, Onur. I think it's worthwhile just to mention at this point in time, just to remind the audience around the rationale for combining our ABI and our Efes businesses in Russia, which is now called AB InBev Efes for Russia and Ukraine. Obviously, I mean, what's important for us was to increase our geographical diversification, in line with our strategy; to create a strong #2 in Russia, which is the world's sixth largest beer market and [indiscernible] market globally, but certainly for us. And then, obviously, to unlock the potential growth that exists in the Russia and Ukraine market. We both have a very strong portfolio brands, and our opportunity to put these brands together and to continue to grow the market is very important for us. And then there are certainly synergies on the table, which we are now able to capture once we combine these businesses. And obviously, with the ABI being a key partner of Anadolu Efes, this relationship in Russia would further enhance our relationship back in Russia and, obviously, globally.

If you look at our long-term priorities, these remain largely unchanged. In our beer business, we continue to focus on our strong and growing portfolio at driving excellence in execution that opens the points of sale. And we continue in enabling that through our digital strategy, focusing on quality market share and in continuing, as Onur mentioned, generating strong free cash flow. In our soft drinks business, we're focusing on accelerating revenue and margin growth and expansion, and then equally winning at all points of sales through enhancing our sales force effectiveness. Considering that the first quarter's contribution to the year is relatively low, we are currently keeping our guidance for 2018 as we present in any of the year.

Thank you very much. That's all from our side.

[Operator]

Would you like to go ahead with the Q&A?

[John Hudson, executive]

Yes. I think we can continue with Q&A now. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from Mete Ozbek from Unlu [ Dasqarf ].

[Mete Ozbek, analyst]

I've got 3 questions, if I

[Audio Gap]

First of all, I would like to have more color on the beer-pricing environment in Turkey. We've seen that you successfully increased your retail prices by 20% year-over-year, which is a very solid achievement in my view. But I'm more interested about if the other players [indiscernible] are following you in price increases or they are lagging behind your price increases? What is the situation in Turkey with respect to the prices? This is my first question.

[John Hudson, executive]

Okay. We can go ahead and answer that question quickly for you, Mete. Thank you very much for your questions. Beer pricing is largely driven by excise and, obviously, our input cost increases that we have during the year. And a simple answer is, yes, [indiscernible] do follow. And currently, we have a similar pricing in the market with respect to our -- the varying portfolio that we have in terms of [indiscernible] use.

[Mete Ozbek, analyst]

Okay. My other question is also about Turkey. Owners told us that there is -- the contraction in Turkey is partially due to the raw material pressure, but we see that the gross profit growth is in line with the revenue growth, so eventually, there is no gross margin pressure. The -- all the pressure is coming from actually the OpEx line, where we see a TRY 25 million increase in domestic beer operations OpEx, which corresponds to a 17% year-over-year increase, which happens to be a -- it's quite a significant increase, which is not likely to be actually explained by lower volumes in my view. Would you please provide a more color on this?

[Onur Çevikel, executive]

Let me answer this question. First of all, the volume pressure that is in Turkey business is, in fact, affecting our Turkey business in both on the cost of goods and having higher per liter -- also hectoliters higher costs on the cost side, depending on the fixed cost as well as our OpEx, even if you may be keeping your OpEx on the same level, even managing the inflation impact. Since the volumes are being under pressure, it also plays an important role on the profitability being affected because if you take into consideration also the investments and the -- investments that we are doing on our brands as well as on our coolers, that's one of the reasons why our profitability is suffering on the top of the raw material pressures that we are facing. So -- but on the first, as you are well aware, we are quite keen on optimizing and quite keen on being aggressive on costs and making sure that the relevant costs are not excessive, so -- as well as the expenses. So that's why, in the future, you'll be also seeing us being more cost-cautious given the economical environment as well.

[Mete Ozbek, analyst]

All right. Again, about the activities about the total beer operations. We are seeing a substantial increase in your working capital requirement in the first quarter of 2018 versus the first quarter of last year. So was there a structural change that drives this TRY 123 million additional working capital requirement that we should consider in making perhaps a longer-term estimate?

[John Hudson, executive]

No. There's certainly no change to that. And I think a lot of it's coming through in-phasing. In order for us to get our cooler CapEx in line -- purchased for our summer season across all our marketers, for June, July and August, it's important to have our coolers in the marketplace and working for us.

[Onur Çevikel, executive]

On the top of that, let's also express that our working capital performance throughout 2017 has been extremely strong. And we are cycling a very strong year-end balance sheet, which enabled us to generate a significant amount of free cash flow, which is also having another phasing impact on the top of what Gavin is mentioning. But it's needless to say, and you have been hearing this in all our calls, that we are doing that working capital as well as free cash flow remains to be our priority. And it's one of the main priority, and the financial discipline is going to be going forward our major priority. We were able to decrease our net working capital as measured as a percentage of net revenue, and it will be targeting -- reducing it further, very applicable. So...

[Mete Ozbek, analyst]

Okay. And finally, one more question about the one-off expense that you recorded in your international beer operations. As far as I understand, there is a TRY 37 million of one-off expense, which shows between the reported EBITDA and EBITDA BNRI for the international beer operations. What was this TRY 37 million expense related with? I'd like to hear more details, if it is possible.

[Onur Çevikel, executive]

Yes. This is, basically, mostly related with the integrations that we have been incurring in our Russian and Ukrainian operations due to the deals that we were dealing with AB InBev. This is mostly attributable to the integration costs.

[Mete Ozbek, analyst]

Should we expect further integration costs in the coming quarters?

[Onur Çevikel, executive]

In the due course, we're going to be talking about those as well. I mean, obviously, there will be a cost or one-off cost to get in the -- to get the synergies in the coming months, but we're going to be talking about those in the due course. As you can imagine, we have been working very heavily to make sure that the deal happens before the end of first quarter, so that the integration can go faster. And as the time goes, and there is the operations that they are installing, it's just there, it was -- April was their first month of the operations. We're going to be talking more on the -- both the synergies and, of course, their cash flow.

[Operator]

Our next question is from Robert Bonte-Friedheim from BlueCrest Capital.

[Robert Bonte-Friedheim, analyst]

Just wanted to -- a quick one again. I'm wondering on the Russia side, if you can give us any more refined outlook, one on the World Cup and two on the synergies. On the World Cup, I noticed today that Bud is making big advertisement. What do they call it? They call it, "Have a big with Russia" or something. The big launch of the new brand or "Watch the World Cup and drink a beer" or something. And if you just give color on those 2 issues.

[John Hudson, executive]

Robert, yes, thanks for the question. I think, obviously, the World Cup is a huge amount of excitement. At this point in time, ABI are keeping that the total campaign for the world of the World Cup under x. So whilst we've seen elements of it, we certainly haven't been exposed to the whole World Cup plan. And they don't want to share that with you and spoil all the fun. But there is a fair amount of activity as you can imagine from the hosts and with their brand, Budweiser. Going to a second...

[Robert Bonte-Friedheim, analyst]

Which in Russia is your brand, right? That's you.

[John Hudson, executive]

Yes. So I'm just saying, in terms of ABI, in terms of Budweiser, the lead brand, there's a lot of activity behind that brand. And what I'm saying...

[Robert Bonte-Friedheim, analyst]

But in Russia, the sales are your sales, right?

[John Hudson, executive]

They're absolutely our sales. But in combination, we do the campaigns together. So that's why I'm saying, I don't want to really share all the fun and excitement in terms of all the plans that are being put in place for the

[Audio Gap]

[Onur Çevikel, executive]

[Audio Gap]

good question. As you well know, we have declared that we are going to be targeting around $80 to $100 million of synergies on a full year basis, where that will be fully captured in time period. And as you can imagine, in the capturing of synergies and in being successful in the -- in these sort of integrations, time really matters. That's why we will

[Audio Gap]

be on the right track with the synergies. Well, when looking at the buckets of synergies, you can imagine that in these type of deals, there are a couple of bucket of synergies that the integration teams has been working on, which are starting from procurement to

[Audio Gap]

our expectation is to make sure that we benefit them fully. So this is basically what I can talk about the synergies.

[Operator]

[Operator Instructions]

[Audio Gap]

[Onur Çevikel, executive]

[Audio Gap]

since the days of the new organization. And obviously, we then -- we are announcing to our markets. We are obviously announcing the realistic numbers that we think are achievable but they're also, in a way, that it makes sense during these type of deals. So -- I mean my comment on that is, we have worked on quite an extensive plan to make sure that this deal is going to be value-generative, obviously, for Anadolu Efes as well as our partners. So -- and by time, we're going to be seeing that this synergy is coming in.

Obviously, as any management, our aim is to make sure that the more we deliver, the more value that we can add on both on the cost synergies as well as on the growth opportunities that we will have in Russia and Ukraine. And our teams in Russia are doing their best to make sure that this is going to be realized. So we are going to be talking about this more on when we see the operations running, and we are going to be seeing, in the next quarters, more color on that.

[Robert Bonte-Friedheim, analyst]

Got you. And in terms of just for own modeling purposes, I think we understood that early on that in the merger there would probably be just overlapping brands or maybe a tail of small brands and volume that we should take out of our numbers. Are you able to quantify the range what we should look for ballpark?

[John Hudson, executive]

Yes. I think it is early. We've done a whole bunch of modeling, Robert. And as mentioned previously, we have a significant portfolio, and whilst we think there are some overlaps, when you look at the overall Russia, the detailed work that's going in now is an actual fact to look at by geography and granular geography, where each of the portfolio plays and what opportunities that portfolio has right across the 4 corners of Russia. We're having a follow-up evaluation of the business plan in the next couple of weeks with the integration team. And I think we will certainly get a lot more color in terms of what the opportunities are, I think, the upside. And certainly, where we need to look at optimizing, both in portfolio and in our route to market, et cetera.

[Robert Bonte-Friedheim, analyst]

Would you share those with us as maybe a devoted conference call -- devoted to the

[Audio Gap]

[John Hudson, executive]

I think we've always committed that we would share freely as much as we think is relevant. So I'll ask to check to look at a follow-up call once we have a bit more detail on the business plans. And then, obviously, share with you what we think is relevant in its history.

[Robert Bonte-Friedheim, analyst]

Okay. Cool. That would be a huge help. Can I ask another question? Or is there someone else in the queue?

[John Hudson, executive]

Yes, go ahead while you're on the line, why not.

[Robert Bonte-Friedheim, analyst]

Okay. The other question is, can we just -- I want to continue back on Russia, the slowdown. Could you give us a bit of color? Like in the first question I would always ask is, what do you estimate is the weather impact? Or how does the industry look at the weather in the -- for the year, in Russia, what estimated impact that was? And then again, a bit -- if -- was it because other people came into the refillable PET segment? Or what you think drove the year-on-year decline specifically?

[John Hudson, executive]

I think if you look at -- I mean, I think everyone's mentioning that we are cycling a big quarter 1 from 2017. But the other side of it, I think there is a bit of noise in the numbers. We're getting different growth numbers. If you look at Nielsen, we get one number, if we look at our shipment pool, which is the tax numbers coming from the Big 5 producers. We're getting a different growth number for Russia. So -- and that's really because the financial year-ends of companies have been -- in the same bend is often a push to end of December, which fills the pipeline. In some instances, there has been -- as we mentioned -- I really look at the stockholding of the dealers and the route-to-market partners that we have.

So I think quarter 1 is really difficult, Robert. And I wouldn't get -- spend too much time on quarter 1 because, I mean, the numbers are vastly different, depending which angle you look at it. Essentially, if we look at the way the now is looking promising. We -- and I know you are not very keen on looking at comparative to last year. We do see better reserve versus last year. We certainly believe that the World Cup will bring some upside to consumption in Russia. To what extent this will drive the overall growth of the category is still difficult to actually evaluate. And the first point in time, from our perspective, we're focusing on pulling those businesses together. And our ambition is to ride out the market trend, certainly in the short term. And then we will look at what happens overall.

[Robert Bonte-Friedheim, analyst]

And in terms of anyone else coming into the refillable PET segment at all, was that just -- or did your market share stay stable?

[John Hudson, executive]

Yes. I think the refillable PET, they have people -- as I mentioned before, there are probably 900 to 1,000, what we call, small brewers. They're not cross brewers, they are microbrewers. And generally, all of those are operating in this PET segment of the market. So when you say any other players coming in or out, this is a revolving door. Are the big players considering doing anything significant? Not to our knowledge, no. I don't see any significant moves in terms of the Big 5 players at this point in time. But certainly, there's an ongoing movement within the smaller players.

[Robert Bonte-Friedheim, analyst]

Okay. I've one last question, if I may, sorry but only if there's no one else on the line.

[John Hudson, executive]

Yes. We've got 2 other on the line, so if it's quick, Robert, I'm sure we can accommodate you.

[Robert Bonte-Friedheim, analyst]

Okay. Very quickly. Just on Turkey again, the brand relaunch. Again, it's early phase. It is the slow quarter of the year, but are you concerned about the brand relaunch? Or how should -- how do you think about this versus your expectations on a share basis and adjusting for weather or tourists or what have you? Are you happy with the brand relaunch?

[John Hudson, executive]

Yes. Certainly, we are happy with the brand relaunch. And I think we had some very reputable consultants working with us before the brand relaunch. And effectively, we put the brand relaunch into 3 phases, which was renovate the family, the Efes -- the family of brands. The second phase which included the tech design and change. The second phase is around the storytelling about the Efes Pilsen and the relaunch of that brand. And into the third phase, which obviously is a more difficult phase, is building an emotional bond into the future with the consumer. And we have been working on that and we continue working on that.

As I've mentioned before, relaunches of the FMCG brand are never a quick fix. These are impressions that are being left over many years. So we think we're moving in a -- well, we are moving in the right direction. The speed at which we do that is really what we are busy working on at the moment. We are fortunate that we have a significant portfolio of brands in Turkey. And we are working extremely hard with that portfolio to mitigate some of the losses that we have experienced with the Efes brand. And we see that coming into its own in 2018. And in actual fact, picking up some of that slack. And I think in the future, our business in Turkey will be a far -- will have a far more balanced portfolio, which will appeal to all the sort of needs of various consumers in the different consumption occasions that we have.

[Operator]

Our next question is from [ Jamaal Demidkash ] from [ Asa Invest ].

[Unknown Analyst]

My question is related to the outlook in second quarter. After -- where the quarter involves Turkey and international markets, how do you see the outlook so far in April and for the rest of the quarter? And do you think if you continue to lose maybe market share or volume, will you think that you have some structural problems?

[John Hudson, executive]

Yes. Thank you for the question. Yes. I think, well, as I mentioned previously, our guidance remains unchanged at this point in time. The quarter 1 is a relatively a low-impact quarter for us in the year. And there have been various reasons as we've mentioned on the call, which are substantiating, I think, the performance in quarter 1. Now we don't see significant challenges going ahead in the Turkey business. And as I mentioned on the previous question, we're working extremely hard around the Efes core brand and mitigating any potential impact with the portfolio brands that we have. We do have some additional launches planned for the year going into summer in Turkey. And we believe that these launches will continue exciting the consumer and driving volume and opportunity into the market.

[Unknown Analyst]

How about international side, on the international side?

[John Hudson, executive]

Well, no. I think the [indiscernible] business -- well, our guidance remains, as I mentioned previously, unchanged. As I mentioned, the CIS countries have performed relatively well in quarter 1. And I think we've spoken about Russia in a bit more detail. Any additional item is our export business, which is relatively small, but certainly is growing at significant rate, so we're very happy with that.

[Operator]

[Operator Instructions]

We have a question from Anjali Doshi from TIAA.

P id="A06" name="Anjali Doshi" type="A" />

Just had a question on FX hedging activities. I think, I may have misheard this, but I just wanted to confirm, are you now on hedging the debt that you've taken out as well on FX side? Can you confirm that? And maybe just sort of -- just maybe -- just recap about what your FX hedging activities are with regard to OpEx and CapEx as well?

[Onur Çevikel, executive]

Anjali, thank you very much. Well, let's divide hedges into 2: one of which is the operational side and the other side is the balance sheet side. So on operational side, as you know, in Turkey, we have been hedging around 60% to 70% of our total operational hedges throughout last 2 or 3 years, which is in still place. So we're still on the operational side, hedge there on 70% on our hard currency starts.

On the balance sheet hedges, we haven't entered into any hedge deals with the banks. All we have done is, we have been seeing in our balance sheet a debt of $500 million, which is now linked to our international businesses as a net investment hedge So you're going to be seeing the -- a FX fluctuations, and its FX losses of incomes affecting our balance sheet on the equity side rather than seeing it on the income statement side because we basically say that this becomes a net investment hedge. I'm again saying that this is not a transaction that we have been going towards the banks, but this is a transaction that we have changed our accounting policy and used this $500 million as a hedging instrument throughout our Efes Breweries International net assets.

[Anjali Doshi, analyst]

Okay. And then just a question on CapEx. Can you just sort of review what drove the stronger year-over-year increase in first quarters that more due to sort of an additional spend this year or more like sort of a low base last year? And I see that you've kept us same guidance in terms of high single-digit CapEx as a percentage of sales. Maybe if you can kind of talk about what will be sort of the key focus areas for the CapEx? Is it just maintenance? Or is there anything else that we should be expecting for this year?

[Onur Çevikel, executive]

Well, on the CapEx side, I mean we have been talking about the CapEx that we have in the recent years taking into the fluctuations in the marketplace and taking into consideration the needs of the businesses. We have been cautious with our other expenditures as well as on in other balance sheet item. And we will keep on being cautious on the CapEx, making sure that we evaluate our CapEx very heavily and make sure that we get the right returns. Most of our CapEx, especially on the beer side, goes to the sales and marketing issues and investments, which we think is the most important CapEx that we should be doing. And it partially goes into the maintenance as well as -- as you well said.

So certainly, we're keeping our guidance on our CapEx. And they're going to be cautious in making CapEx going further as well. And as we've said during the call, we're going to be also -- if there are going to be any changes, both on the CapEx as well as on in other issues on the guidance, including the newly deal that we're having, we certainly are going to be sharing it in the next quarters, but our CapEx approach remains unchanged.

[Anjali Doshi, analyst]

Okay. Great. And then just one last question. In the Turkish business, given the upcoming early elections and the recent announcement of news for fiscal outlay, do you expect any changes on excise taxes or any other sort of taxation? And I guess, how is that figured into your pricing strategy for the rest of the year?

[John Hudson, executive]

Well, we generally have 2 excise increases a year, in the beginning of the year, January and then June, July. But at this point in time, we don't expect significant changes. We -- obviously, the election's coming up in June. We can't foresee any impact due to the election. So at this point in time now, I think our answer is, we don't foresee any major impact.

[Operator]

Our next question is from Robert Bonte-Friedheim from BlueCrest Capital.

[Robert Bonte-Friedheim, analyst]

Very quickly, just the last question from me in terms of a -- you told us in the presentation that Kazakhstan and Georgia is very strong. Can you give us a sense -- and Kazakhstan used to be a very big market. It's now probably up 20% and more. And Onur, can you tell us how the non -- can you tell us specifically what the gross rate was in Russia in the quarter?

[John Hudson, executive]

Yes. I think a couple of questions there. I'm not sure I understand the question on Kazakhstan. I mean certainly, Kazakhstan, as I mentioned, their performance continues to be good. In our guidance, our guidance stays -- we keep our guidance as I've mentioned a few times. But our growth is high teens in Kazakhstan. Does that answer your question, Robert?

[Robert Bonte-Friedheim, analyst]

Yes. That answers the Kazakhstan question. And in Russia, what was the year-on-year growth in Russia specifically?

[John Hudson, executive]

At this point in time, we're not divulging the specifics in Russia, just because we've conclude -- just concluded the deal. So at this point in time, we won't divulge specifics in Russia.

[Operator]

We have a follow-up question from [ Jamaal Demidkash ] from [ Asa Invest ].

[Unknown Analyst]

My question is already answered. Thank you.

[Operator]

[Operator Instructions] We have no further questions. Mr. Gavin Hudson, back to you for the conclusion.

[John Hudson, executive]

Yes, thank you. I'd like to thank you everyone for the participation today and the questions. And as mentioned, we will be discussing in more detail around AB InBev Efes, a combination in Russia in due course and once we have more information. Thank you. Enjoy the rest of the week.

[Onur Çevikel, executive]

Thank you very much.

[Operator]

Ladies and gentlemen, this concludes our conference call. You may now disconnect.