Anadolu Efes Biracilik ve Malt Sanayii AS

IST:AEFES.E

Earnings Call Transcript 2023-Q1

[Asli Demirel, executive]

Ladies and gentlemen, welcome to Anadolu Efes First Quarter 2023 Financial Results Conference Call and Webcast. My name is Asli Demirel. I'm the Investor Relations right here for Anadolu Efes. Our presenters today, Mr. Can Caka, the CEO; and Mr. Gokce Yanasmayan the CFO. [Operator Instructions]. Just a reminder, this conference call is being recorded and the link will be available online.

Before we start, I would kindly request you to refer to our notes in our presentation regarding forward-looking statements. Now I'm leaving the ground to Mr. Can Caka. Sir?

[Can Çaka, executive]

Thank you, Asli. Hi, everyone. Good afternoon. Let me also welcome you to our first quarter results call. As we discussed in our full year call, we weren't expecting 2023 to be any easier than the past few years. As a matter of fact, the first 4 months of the year proved us to be right in that front opportunity and yet difficulties came from different fronts rather than the higher noncommodity cost pressures we were talking about, which is a little bit relaxing for the time being, but unfortunately, the unfortunate earthquake that hit the southeastern part of Turkey and the ongoing conflict between Russia and Ukraine and the region, to some extent, taking inflationary environment despite it is getting easier across the board and uncertainties regarding the elections in Turkey are all adding their challenge just to the operating environment.

Therefore, we started the year with many headwinds, yes, we are very happy that we have achieved very strong results. And basically, this is the results that we are going to discuss today are better than our earlier expectations. And that demonstrates the agility and resilience of our business and the portfolio, I guess, to some extent.

Obviously, one of the key factors for the trend this success was first our timely and effective pricing and secondly, proactive revenue management initiatives. Therefore, we started the year with a strong top line growth which significantly outpaced the volume growth through the quarter.

The pricing initiatives that we have been implementing since the beginning of last year 2022, have protected our gross profitability, especially on the beer group beer segment side. While the cost of goods sold per hectoliter increase was also relatively more manageable, especially in our international operations. Therefore, these yielded an expansion in our barges and that yet we expect to see some normalization going forward that is partly related to the pass-through impact of the pricing we have taken earlier last year. And secondly, partly similar type impact of the increases on the cost side going forward.

On top of the gross profit margin expansion and gross profit growth, our EBITDA before nonrecurring items grew ahead of our revenues as well, thanks to the gross profitability performance and also that is further supported with the prudent expense management through the quarter. And we kept our leverage ratio at a very strong level of -- or a low level of 0.8x at the end of the period.

Despite the negative free cash flow generation through the quarter, which is again partly impacted with the timing factors, and we expect to see the reversal of the trend in that perspective. Going into the different pieces of the business, our Beer Group volume declined slightly below -- slightly higher than 6% in the first quarter due to obviously, the significant higher prices to consumers. And also, we had a high base of last year in the first quarter, having almost 4/5 of our Ukrainian operations in the volume -- the reported numbers side.

Yet we had a very strong start for our business in Turkey and Georgia, showing significant volume growth even limiting the decline in Russia and model operations through the quarter. Excluding the impact of Ukraine, the volume decline in the beer group was below 5%.

Turning to Russia. The Russian beer market in general declined by mid to high single-digit levels as we observe volatility in demand. And we also see from the consumer perspective, see more saving behavior more from, let's say, preference in the volume segment.

Our volume performance was slightly below the market, again, due to high year-on-year higher pricing on our side versus the industry and also the relatively lower promotion activities again versus last year that is in total overall impacting the price to consumer being higher versus last year. Yet, as we discussed at the full year results, we had a much better momentum compared to fourth quarter of last year, thanks to, again, our initiated projects, our newly initiated projects and new product launches as well.

When we look at the different parts of the portfolio, we see similar to the overall beer market, some growth in our value and core segments. So value -- some of our value brands and core brands, especially Stary Melnik, Bochonka and [indiscernible] were the best-performing brands in our portfolio, while we also capped our performance in the premium segment and was -- our performance was better than the market that is important to know.

In terms of categories, the best performance was registered and the flavored beers and the nonalcoholic beer segments versus last year, although there was a decline in general terms in the non-alcoholic beer category in the market. We also launched our energy drink and we entered into the category almost in early March at the end of the quarter by launching our new craft walls in the segment and with various flavors, we are focused maybe we have high expectations on this segment as well.

And I would say our value share was almost at around 30% year-to-date, which is a strong value share in the market as we have the focus on the share of the share of value in the market. Going into other CIS countries, Kazakhstan, our volumes in Kazakhstan declined slightly, again, similar to Russia, mainly driven by higher pricing to consumers and especially on pricing initiatives against competition.

But let's say, I would like to say also note that value and volume shares were higher than last year -- slightly higher than last year. So that's promising as well in that perspective. Moldova market was one of the most impacted one in the region due to higher prices to consumer and also impacted with the supply disruptions throughout the year and so long and higher inflation. And basically, we are more or less in that our volumes were impacted with more or less in line with the market and continue to be under pressure.

And looking into Georgia, we have also benefited in Georgia with a higher number of residents and our volumes grew more than almost 40%, and that is on both segments, beer and soft drinks categories. So when we look at its overall CIS volumes, we see the volumes growing by mid-single digits on average.

[indiscernible] market continued its strong momentum for us with the increased number of residents from Russia and Ukraine similar to Georgia in that perspective. As you would recall, we started the year strongly in January. And then obviously, following the restating earthquakes, which -- I mean, needless to say, we have seen some slowdown in February and which -- but the good news is we have seen the volumes getting normalized after the earthquake despite the early start of the Ramadan throughout March. So we continue our strong volume momentum that we have seen in starting from the second half of the last year. And as a result, our order beer volumes increased significantly around 10% for the first quarter of the year in [ Turkiye ].

As usual, a few words on CCI, especially for who didn't follow CCI yesterday somehow. CCI consolidated sales volume increased by 6%, mainly driven by double-digit volume growth in Pakistan and Central Asia. The volumes in Turkey was soft, the main impact would be impact of the earthquakes.

Again, on the softdrink side, we see gradual recovery, especially in the last 2 weeks of March that's important to know. While we see when we look at the different categories, sparkling and still categories declined by 9% and an energy drink extended the momentum and grew by more than 10% to the quarter. Internationally, soft drink operations, we call it 15% growth and the driver of the growth was CCI through the period. And in Pakistan, one of the most important contributor. The growth was around 13%, and as Kazakhstan continued its solid momentum which registered more than 20% growth to the first quarter and also Kazakhstan in the 26% growth, driven by double-digit platforms on premise channel.

A few words before leaving the ground to Gokce for much more details on the financial side. Revenues on a consolidated basis grew more than 78% to almost TRY 25 billion range and the growth was mainly coming from the higher prices, as I discussed on the beer side versus a year ago and also our successful revenue growth management initiatives also contributed strongly.

We also benefited from the channel mix in soft drink operations together with the higher FX translation impact of the international operations on both business lines. However, even on an FX-neutral basis, we see a strong almost 50% growth on an FX-neutral basis.

EBITDA growth was ahead of the top line growth and realized at around 87% with a margin of 71%, and we have recorded a margin expansion at 80 basis points stronger room by the period group, I would say. And that was also -- I mean, the performance that was supporting the overall margin expansion on the beer side was driven by the international part of the operation. Yet there has been some shifts between the quarters in terms of operational expenses.

As I mentioned, we were very, very prudent throughout the quarter that helped margin expansion for the Beer Group through the quarter. Soft drink margin was impacted by the softer margin in Turkey operations due to the lower volumes, obviously. And our net income turned positive compared to the same quarter last year, and we realized an income more than TRY 100 million.

The significant rise in the bottom line was driven by the strong operational performance on EBITDA growth despite the fact that the financial expenses and tax expenses were higher versus last year that has a limiting factor on the bottom line, but still the growth was a strong one. Due to the seasonality of our business and the first quarter is the smallest quarter for our business. And free cash flow was negative and -- but we expect this trend to be normalizing throughout the year as we had some of the CapEx programs earlier. We had higher inventories to ensure that we are -- we keep the business safe from any supply disruption and benefiting from lower cost base at the beginning of the year.

Despite the negative cash flow, our consolidated net-to-EBITDA ratio was 0.8x. So Goyce your turn for further details. Thank you.

[Gökçe Yanasmayan, executive]

Thank you, Can. Good morning. Good afternoon, everyone. Welcome to our conference call. So Can presented Anadolu Efes results. Therefore, let me talk about results of Beer Group.

Actually, we are quite happy to have reported another quarter with very strong results. Beer Group sales revenue rose up by 77% to TRY 9 billion in first quarter, and this represents also a very strong 28% in a fixed national basis, growth in our revenues. International beer operations sales revenue grew by 69% to TRY 7.3 billion. And here also, we see a very strong revenue per activity increase around 83%.

And here, we need -- we have to note that this is mainly also linked to very high price increases that we had implemented in the second quarter of last year. So first quarter of this year still enjoys this pricing carryover, while in the following quarters, actually, this should get normalized.

[indiscernible] sales revenue also grows by 120% to TRY 1.7 billion and the revenue per hectoliter growth in Turkey also, we see a strong result, 100% growth. And this is thanks to basically price increases implemented together with effective discount management. Beer Group gross profit also grows very successfully by 102% and it's TRY 3.9 billion at the end of first quarter. And the growth we see in gross profit is actually ahead of our revenue growth. This obviously means that we had a margin expansion of 540 bps in first quarter, and that's thanks to international beer operations mainly.

As I noted, actually, while explaining the revenue per hectoliter growth here as well, we had to note that a positive carryover impact from pricing, which is supporting this expansion in the first quarter. So we should again expect the spread between margins to get closer in the following quarters in gross profitability.

So in the following slides, let me talk about EBITDA and free cash flow. So you see on EBITDA graph on the left that gross profit minus expansions that we talked about. Actually, revenues are increasing by 28%, while the costs are increasing only by 19% on a constant rate basis. And OpEx is slightly increasing slightly higher than our revenue growth. But consequently, still, we have a very significant growth actually in our EBITDA to TRY 1.3 billion with a margin of 14.5%, and this means that actually we keep our expansion here to buy 559 bps.

So the cash flow, Can also talked about it a bit, due to our nature of our business in the first quarter, we are generally looking at negative cash flows despite very positive contribution from positive this year, the situation is similar, actually. And typically, again, as you see on the graph, this is linked to increased working capital needs and accelerated CapEx spending before the season. And this is the case for 2020 as well. But we can also say here that we expect this to get normalized in the following quarters again.

So moving to the cash and debt management. With regard to our prudent approach and policy, we are holding our cash -- majority of our cash, at least in hard currency denominated currencies. So by the end of first quarter, 58% of our cash in Beer Group and 63% of our cash Anadolu Efes was in hard currency. And we are actually at a very comfortable zone and a very healthy zone when it comes to net debt to EBITDA, it's 0.8x for Anadolu Efes and only onetime for Beer Group.

And risk management. Basically, from the commodities, we can hedge -- we are hedging aluminum and beer range to 88% of hedging for our exposure of 2023 in aluminum, and we have hedged 100% of our bonding exposure. In FX exposure for 2020, actually, we had fixed this before so no change here. But just an update. In Russia, we are fully hedged in Turkey, we are hedging more than 90% of our exposure this year. So we feel quite protected in that line, too.

So actually, this concludes my part. So I'm giving it back to Can. Thank you.

[Can Çaka, executive]

Thank you, Gokce. Thank you for the full year guidance. But it's one of these very difficult things to explain. I mean, basically, we are reiterating and keeping our guidance for the year. Obviously, first of all, first quarter is one of the smallest quarters. And given lots of uncertainties, we keep it for the time being, but let's accept the reality, let's be very straight. The current trend encourages us for the -- going forward for the rest of the year. The current trend is stronger than our brands for first of all. And as we discussed in our full year call as well, one of the areas where we were and that sure was about the tourism as we see the initial hints and the initial, let's say, trends, it would be -- it could be another strong year for Turkey especially. So all this encounter for the season as well.

So if you ask me right now, I would expect more potential for positive surprises rather than any negative surprise going forward. But again, we keep our guidance. And as we promised, we will only update it at the end of first half. So we are very happy to have your questions if you have any. And this is -- otherwise, this would be the end.

[Asli Demirel, executive]

Yes. This concludes our presentation. [Operator Instructions]. For the time being, we see no questions on our screen. One anonymous question. Can you provide an update on your Russian JV acquisition. Can you also provide an update on your dividend from Russia? Have you received it?

[Can Çaka, executive]

I'll leave it to Gokce to [indiscernible].

[Gökçe Yanasmayan, executive]

Actually, the answer to the questions are quite similar to our answer in the last year. Basically, we are still in talk with our partners when it comes to JV acquisition. So this is an ongoing and active process, which we are still talking about and trying to finalize. And about the dividend as well, this is a procedure basically that we are already into it, and we are trying to also finalize that as quick as possible.

[Asli Demirel, executive]

There are 2 more questions but to say so I'm not reading them away.

[Gökçe Yanasmayan, executive]

So it's again related to [indiscernible].

[Asli Demirel, executive]

Yes, yes.

[Can Çaka, executive]

Perfect. That's good news, it seems we were able to explain the dynamics very well. Thank you for your interest. Hope to see you in August for the half year results. Thank you all.