Anadolu Efes Biracilik ve Malt Sanayii AS

IST:AEFES.E

Earnings Call Analysis

Strong Growth in Beer Division Amidst Operational Challenges

In the first quarter of 2024, Anadolu Efes achieved robust growth in its Beer Division, with a 12.4% increase in consolidated beer volume, mainly driven by Turkey and Russia. Revenue saw an 8.1% rise to TRY 16.2 billion, despite a challenging competitive landscape in Russia. The company expanded its gross profitability margin due to effective pricing strategies and cost controls, although the EBITDA margin dipped due to higher operational expenses. Net income stood at TRY 3.1 billion, supported by deferred tax income and monetary gains. The company maintained a healthy net debt-to-EBITDA ratio of 1x, and continues to anticipate a stable outlook for the remainder of the year.

Strong Growth in Beer Group

In the first quarter of 2024, Anadolu Efes reported solid growth in its Beer Group, achieving a remarkable 12.4% increase in consolidated beer volume, driven primarily by strong performance in Turkey and Russia. Turkey's beer volume rose by 12%, while international markets saw an average growth of 12.5%. Specifically, Russia showed mid-teens volume growth, capitalizing on a market that grew in high single digits, signaling robust demand despite a challenging competitive landscape.

Financial Performance Highlights

Consolidated revenue for the Beer Group reached TRY 16.2 billion, marking an 8.1% year-on-year increase. Turkey operations outperformed this trend with an 18.3% revenue growth to TRY 3.1 billion. However, despite this growth, the Beer Group's EBITDA fell by 21.7% to TRY 1 billion due to rising transportation costs and increased expenditures, particularly in Russia where cost escalations posed challenges. The EBITDA margin contracted to 6.8%, noting a 393 basis points decline.

Market Dynamics and Competitive Landscape

Anadolu Efes is navigating a dynamic market, particularly in Russia, where recent shifts in ownership and management among competitors are prompting changes in product portfolios. Competitive pressures are evolving, yet Efes has maintained market share by adapting to consumer preferences and expanding its product offerings, including near-beer categories launched in March 2024.

Cost Management and Financial Resilience

The company reported improvements in gross profitability margins driven by effective pricing strategies and revenue growth management. Despite facing inflationary pressures, Anadolu Efes managed to keep its net debt-to-EBITDA ratio at a healthy level of 1x, within their target range. This reflects a strong financial discipline as the company navigates higher operational costs while still showing an increase in gross profit to TRY 6 billion.

Outlook and Guidance

Looking forward, Anadolu Efes provided guidance for sustained revenue growth despite the anticipated challenges from rising cost pressures. However, the company's previous revenue guidance remains unchanged, maintaining expectations for robust performance throughout 2024. The management emphasized a focus on dealing with inflation-related challenges while cautiously monitoring the competitive landscape and ensuring financial stability.

Soft Drinks Operations Performance

In the soft drinks segment, Istanbul-based Anadolu Efes witnessed more subdued results with a consolidated volume decline of 3.2% across the CIS region. Turkey did, however, manage a 5.4% growth, owing to effective marketing strategies. The overall mixed performance reflects ongoing macroeconomic challenges, particularly evident in international operations.

Earnings Call Transcript 2024-Q1

[Asli Demirel, executive]

Ladies and gentlemen, welcome to Anadolu Efes' First Quarter '24 Financial Results Conference Call and Webcast. My name is Asli Demirel. I am the Investor Relations and Management Director of Anadolu Efes. Our presenter today is Mr. Gokce Yanasmayan and our CFO. [Operator Instructions]. Following this, there will be a Q&A session where you can submit your questions using the question box on your web screen. [Operator Instructions].

As stipulated by the degree of the capital markets board. The financial statements for the first quarter have been presented in accordance with the Turkish Accounting Standard 29. Financial reporting in hyperinflationary economies and retrospective adjustments have been made for the period -- prior periods in alignment with the same standard.

In this presentation, certain financial items and metrics may be presented without inflation adjustment in order to ensure comparing versatility with previous quarters to facilitate analysis for our performance relative to our '24 guidance. It's important to note that the financials presented without the impact of Turkish Accounting Standard 29 are unaudited. Unless explicitly stated otherwise, all financial information disclosed in this presentation are presented in accordance with TAS 29.

Just to remind you, this conference call is being recorded. Link will be available online. Before we start, I would request you to refer to our notes in our presentation regarding forward-looking statements. Now I'm leaving the ground to Mr. Gokce Yanasmayan, Anadolu Efes CFO. Sir?

[Gökçe Yanasmayan, executive]

Thank you, Asli. Good morning, and good afternoon, everyone, and welcome to Anadolu Efes 2024 First Quarter Operational and Financial Results Conference Call. Let me start saying that at this point of time, our CEO, Onur is in Russia, is experiencing connectivity problems. So I will cover his part for today's call.

Well, we are very pleased to report another quarter of robust growth achieving a double-digit increase in our Beer Group. This impressive growth is complemented by a slight rise in Anadolu Efes' consolidated volume as well. Our top line -- solid top line growth has exceeded the volume increase, demonstrating the effectiveness of our pricing strategy and revenue growth management initiatives.

Through diligent management of our top line, we have successfully expanded our gross profitability margin, improving our efficiency and cost control, including hedging initiatives and revenue management. Although we reported a dilution in our EBITDA margin, as we stated earlier in our guidance, it's in line with our initial expansions. It mainly comes from Russian operation in Beer Group due to cycling a very high base of last 2 years. Furthermore, our financial discipline is evident in our consolidated net debt-to-EBITDA ratio, which was recorded at a healthy level of 1x as of March 31, within our target leverage ratio range.

In the first quarter of 2024, our consolidated beer volume increased by 12.4%, driven by strong performances in Turkey and Russia. Turkey beer volume rose by 12%, while our international beer volume saw a strong growth of 12.5%. Russia demonstrated particularly strong on growth, with volumes up in the mid-teens. CIS countries recorded a moderate decline with volumes down by mid-single digits on the average. Ukraine had a successful quarter, increasing by low 30s, mainly due to the last year's low base together with the business recovery strategy, particularly in commercial drivers within all channels.

In the first quarter of 2024, we experienced a growth in the Russian beer market. The market as a whole grew by high single digits but our performance outpaced this resulting in a mid-teens increase in our total volume. The growth was despite the challenging and changing competitive landscape.

We have successfully capitalize on dynamic operating environment and changing consumer preferences. Therefore, we have gained both value and volume market share. Additionally, we expanded our product offerings with new extensions in the near beer categories largely in March 2024.

Again, in the first quarter of 2024, the CIS region experienced a decline in volume, which -- and a mid-single-digit increase on average. Moldova and Georgia registered growth while a softer performance observed in Kazakhstan, where the market itself also saw a decline. This decline can be attributed to various factors, including the impact of Ramadan and negative impact related to unfavorable weather conditions as well as flows.

In Turkey, our company demonstrates the strong billing performance with a significant increase of 12%, surpassing the growth of the beer market. While [indiscernible] has showed a softer volume following the price increase taking as usual, yet we have observed an acceleration in performance throughout February and March. Despite the impact from [indiscernible] managed to achieve robust growth in the first quarter, especially in our key brands, Efes and Efes Malt.

Let's touch upon briefly on our soft drinks operation. In the first quarter of the year, CIS consolidated volumes declined by 3.2% due to lower volumes in international operations. Turkey achieved volume growth of 5.4%, driven by effective consumer marketing activations and trade promotions. This growth is particularly significant as it cycles a low base of last year due to the impact of earthquake.

In our international soft drink operations, volume decreased by 7.2%. In Pakistan, we faced significant macroeconomic and political headwinds together with a high base from last year, leading to a decline in volume. Kazakhstan reached 10.98% decline with foreign consumers moving back to their countries and high base of first quarter of 2023. On a positive side, Uzbekistan saw a remarkable 22.5% increase in volume, driven by improved market penetration.

We delivered solid results in our top line figures as well as bottom line in the first quarter. Anadolu Efes revenues marked a 5.1% year-on-year increase thanks to successful growth management initiatives, price adjustments as well as favorable mix addressing value generation. Despite a fluctuation, fluctuating and challenging cost escalation environment, the gross margins expanded in the period, yet EBITDA margin diluted due to operational expenses increasing ahead of revenues, which was already anticipated.

Our consolidated net income was recorded at TRY 3.1 billion despite higher financial expenses. Increased bottom line was also supported by deferred tax income and monetary gains recorded resulting from Turkish Accounting Standards 29. As anticipated, the seasonality of our business led to a negative free cash flow in the first quarter of 2024. However, we expect this trend to normalize throughout the rest of the year. Consequently, our consolidated net debt-to-EBITDA ratio stands at 1x, reflecting our strong indebtedness.

Now looking at the financials of Efes Beer Group, let me elaborate in more detail Efes Beer Group financials. Beer Group's consolidated revenue at the end of the first quarter of 2024 was TRY 16.2 billion, a rise of 8.1% from the year before. International beer operations saw a 6.1% increase in revenue to TRY 13 billion. While sales revenue from Turkey operations saw an impressive 18.3% growth to TRY 3.1 billion.

The Beer Group's margin improved by 92 basis points to 40.7%, while its gross profit climbed by 10.6% to TRY 6 billion. Due to pricing and strong growth volume in Turkey, beer shown impressive gross profitability. Nevertheless, the gross margin of international beer declined slightly, and this was primarily driven by Russia as in line with our expectations of the year.

In the next slide, I will show you the EBITDA bridge of the Beer Group and free cash flow. Beer Group's EBITDA decreased by 21.7% to TRY 1 billion and its margin contracted by 393 basis points to 6.8%. Overall, beer group margin declined as a result of decline in gross profit margin and increased spending primarily due to transportation costs in international beer operations, specifically in Russia.

Beer operations usually have negative free cash flow in the first quarter, as I said, mostly as a result of higher working capital requirements. The impact of increased borrowing cost in Turkey as well resulted in greater interest expense. On the other hand, in the first quarter, capital expenditures significantly decreased compared to the prior year.

And in the next slide, I want to also give a flavor about financials without the impact of TAS 29. But again, let me repeat the disclaimer here. All our financial statements are prepared in accordance with Turkish Accounting Standards 29, which is a standard for financial reporting in high inflationary economies. So as a result, all information disclosed on this call and in our earnings release are in full conformance with Turkish Accounting Standard 29.

However, financial information presented on this slide excludes the impact of Turkish Accounting Standard 29, and is presented solely for analysis purposes. Please note that these figures won't be aligned with Anadolu Efes financials and have not undergone any independent projects.

So having said so, excluding the impact of the Turkish Accounting Standard 29, Beer Group revenues was TRY 16.4 billion with a growth of 82% at the end of first quarter. Again, excluding the impact of Turkish standard, EBITDA increased by -- would increase by 49% to TRY 1.9 billion. And excluding the impact of Turkish Accounting Standard 29, Beer Group net income was reported as TRY 693 million.

About cash and debt management. At the end of a quarter, we had 64% of our cash in hard currency denominated in Beer Group and 67% in consolidated Anadolu Efes in line with our practices. And our net debt ratio is quite low. This is a onetime for Anadolu Efes and 0.6x for the Beer Group. As I stated this is within the ratio, leverage ratio of our company.

And following slides on the risk management, just to present key hedge figures, we have around 74% coverage in aluminum mix [ future ] of Turkey and CIS countries for this year. And FX exposure actually pretty much covered here 100% in Russia and 94% for Turkey. So that would and our presentation for today. So if there are any questions, we are ready to take them.

[Asli Demirel, executive]

And there are a couple of questions already. Let me start with the first one. Please provide more color on the competitive environment in Russia.

[Gökçe Yanasmayan, executive]

Okay. As we discussed competitive environment, all we see in Russia is changing at the moment. We are seeing that there are new -- first of all, exciting account and [indiscernible] cost work. We have new management and new shareholders. There are new owners there. So there is a change in the market. Then we are seeing that competition is redesigning their product portfolios for the time being. And we are yet to observe how their portfolios will be looking like in the future and trying to understand their behaviors.

[Asli Demirel, executive]

Any update on Russian JV deal?

[Gökçe Yanasmayan, executive]

But it's in the progress. Actually, we had announced in December that we have applied for legal clearances. And this process is continuing. If any developments, we will obviously publicly announce that.

[Asli Demirel, executive]

Why there is a large discrepancy between EBITDA margin decline in beer and much better EBITDA net income performance?

[Gökçe Yanasmayan, executive]

I'm trying to understand the question. The margin decline in beer. That net income performance in changing inflationary accounting because of monetary items, monetary and numbers that item adjustment actually. That's the reason of the discrepant we've seen without inflation and inflation naturally.

[Asli Demirel, executive]

And what is the reason for higher transportation costs in Russia? Will we expect normalization in this year?

[Gökçe Yanasmayan, executive]

Well, I mean I won't go into the details, but briefly, I can say that shortage in [ railway ] is what we faced that changes the mix of the transportation to [indiscernible], which is at a high cost level.

[Asli Demirel, executive]

We already answered the Russian beer market and the competitive market there. What is the reason behind pricing ability challenges? Are competitors following destructive competition strategy? The deal question already answered. Can you quantify reason behind the decline in beer operations that you gain margin in terms of normalization and hedging? Any adverse impact from difficulties in Kazakhstan?

[Gökçe Yanasmayan, executive]

While pricing challenges in the Russian market, I would say this is actually market as usual, this year around -- the issue is that we have high cost base increases. We are having certain price increases, but they may not be enough to cover the cost inflation that we face in a single year time. That's I think the main challenge that we are having.

And the Kazakhstan actually, I don't think that we are expecting by [ ideal ] and impact -- adverse impact on our financials. The markets volume are under pressure, but financially, we expect to have an okay year.

[Asli Demirel, executive]

Could you clarify how much cash Beer Group -- of Beer Group is in Russia?

[Gökçe Yanasmayan, executive]

Well as of end of first quarter, I think at around 70% of our cash is in Russia.

[Asli Demirel, executive]

And maybe to give a ...

[Gökçe Yanasmayan, executive]

I think it wasn't asked, but let me say it myself. So -- and around 70% of this cash in Russia is also in higher currency [ that don't ] get.

[Asli Demirel, executive]

Is your guidance for '24 unchanged?

[Gökçe Yanasmayan, executive]

Well, we have previously provided a guidance with no impact of Turkish Accounting Standards to 29. Currently, there is no change to that. You will have to see the results of second quarter.

[Asli Demirel, executive]

If you have questions, you can submit your questions in the question box on your web screen. Currently there are no more but let's wait a few seconds. It's breaking down. Could you please elaborate the factors that had impacted Beer EBITDA margins this March?

[Gökçe Yanasmayan, executive]

Well, I mean, as we have been trying to emphasize this year, the main factor of why we see the decline is Russian EBITDA margin. And there, et cetera, actually, I can say that all of our other operations are either flat or increasing their EBITDA margin. But in Russia we knew that the cost escalation was too much for this year, and we would have certain dilutions in our EBITDA. So this is perfectly in line with our previous expectations.

[Asli Demirel, executive]

Please give some color on capital expenditure plans for '24.

[Gökçe Yanasmayan, executive]

Well, I think nothing changes here. Actually we have hedged to normally sticking to a high single-digit CapEx spending of the average. So this is where it should be looking at.

[Asli Demirel, executive]

The cash repatriation from Russia.

[Gökçe Yanasmayan, executive]

Regarding the cash repatriation, our first priority is to be able to finalize the deal approval in Russia. And then once this deal is -- will be approved, the cash repatriation will be in our focus.

[Asli Demirel, executive]

What was your [ Efes ] neutral sales growth in first quarter? Maybe to skip this and then we'll come back to it. Cash thing outside Russia. How has that evolved? Do you see any risk of that servicing at Beer Group level due to cash balance reducing outside Russia?

[Gökçe Yanasmayan, executive]

Well, looking at our leverage ratio, we are still at a very comfortable leverage ratios. Therefore, we don't see any risk of debt services of Beer Group debts.

[Asli Demirel, executive]

The recent statements about Turkey's actions against Russia sanctions. Will that complicate Russian deal?

[Gökçe Yanasmayan, executive]

Well, those are very early recent deal of months. I cannot for the time being comment on that. Currently now that we are not in [indiscernible] when it comes to sections.

[Asli Demirel, executive]

Regarding the previous question about the fixed neutral sales growth.

[Gökçe Yanasmayan, executive]

Well, it's around, I think, 4% -- 42%, sorry.

[Asli Demirel, executive]

It seems that we are -- we came to the end of the questions. So we would like to thank everyone who participated and see you in the next quarter.

[Gökçe Yanasmayan, executive]

Thank you.

[Asli Demirel, executive]

Thank you.