Coca-Cola Icecek AS

IST:CCOLA.E

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to Coca-Cola Içecek First Quarter 2021 Financial Results Conference Call and Webcast. I will now hand over to your host, Ms. Çiçek Özgünes, Investor Relations and Treasury Director. Please go ahead.

[Çiçek Özgünes, executive]

Good morning, and good afternoon, ladies and gentlemen. Welcome to our First Quarter 2021 Results Webcast. I'm here with Burak Basarir, our Chief Executive Officer; and Andriy Avramenko, our Chief Financial Officer.

Following Mr. Basarir's and Mr. Avramenko's presentation, we will turn the call over for your questions.

Before we begin, please kindly be advised of our cautionary statements. The conference call may contain forward-looking management comments, including projections. These should be considered in conjunction with the cautionary language contained in our earnings release. A copy of our earnings release and financials are available on our website at www.cci.com.tr.

Now let me turn the call over to Mr. Burak Basarir. Sir?

[Burak Basarir, executive]

Well, thank you, Çiçek. Good Morning, and good afternoon, everyone. Thank you for joining us today to discuss CCI's First Quarter 2021 Results. First of all, let me start by thanking our employees for their relentless efforts and high motivation to deliver this robust and encouraging performance, which we will cover in detail on today's call. The ongoing COVID-19 pandemic continues to present a challenging operating landscape. Nevertheless, we are encouraged by our business results in the first quarter, which demonstrates the adaptability of our business, strength of our brands as well as our superior execution capabilities and relentless innovation efforts.

Leveraging our learnings, we have started 2021 with great momentum, despite cycling a pre-pandemic 2.5 months last year in the same period. Our sales volume grew by 18%, growth was broad-based, achieved with double-digit increase, both in international markets and Turkey. Restricted during the quarters and on-premise offers were ideally close or open with a low traffic. This negatively impacted the package size and the mix and number of transactions at away-from-home channel.

However, strong demand for our core brands enabled us to grow our number of transaction by 9% year-on-year. IC mix share remains lower than the pre-pandemic levels, as we are still managing through the restrictions. In the first quarter of 2021, net sales revenue grew by 43%, EBITDA almost doubled and the net income grew by more than 4-fold, reaching TRY 403 million. Let me move on to the next slide, please. The Sparkling category continues to be the best-performing category of the first quarters as it's been throughout 2020.

Within Sparkling, trademark Coca-Cola was the best performers, growing 28%. And Sprite with the growth of 24%. Although, accounting still for a small share in our portfolio energy drinks category grew by over 30% on a year-on-year basis, contributing to 15% growth of still category. Juice segments also grew by the mid-teens. As discussed before, in line with our strategy to focus on smaller and more profitable tax, water category declined by 15%. It was also impacted by the limited on-premise activity. Another remarkable performance within this category came from mineral water with low teens growth to enrich a variety of new flavors, in line with our innovation strategy. Regarding channel performance, the on-premise channel was softer than last year and declined by 6%, as we negate through the pandemic. However, softness in this channel was more than offset by the strong performance of the home channel, in particular, traditional trade and organized retailers.

Let me move on to the next slide, please. Acceleration in our quality growth is one of our primary strategic priorities. We are particularly happy to adhere to this priority despite ongoing challenges. We have driven growth within our strategic categories, core premium sparkling, NARTD and energy drinks, as I mentioned in the previous slide.

By rapidly adapting to the new trends, we followed occasion-based marketing, offset challenges in a struggling on-premise channel with focusing on the others. And while growth in volume, we have managed to increase NSR per case with timely price adjustments and price RGM by using the data analytics and paid promotion and discount management. As a result, our NSR per case grew by 21% in the first quarter, taking our NSR growth to 43% on a year-on-year basis.

Our EBITDA almost doubled in the first quarter of 2021, while increasing margin by over 500 basis points to 20.4%. Our frugal mindset in operating and expense management contributed to the bottom line. On top of the net sales, revenue per unit case growth, mix management and commodity hedging initiatives mitigated commodity price increases.

Let's move on to the next slide, please. By March, we've started seeing gradual normalization of restrictions with on-premise out there as being opened between certain hours with limited capacity in Turkey. This has naturally the positive impact, the AR sales performance in the March. Despite on-premise closures, our effective sales focus on customer and consumer campaigns impacted our sales performance positively, recorded over 20% growth range in each of the traditional unorganized trend. This performance is the testament of the adaptable of our business through changing and evolving consumer trends.

Whatever the conditions remain favorable in the majority of the quarter. We have seen consumer confidence increase as well. These 2 factors had a positive impact on 12% sales volume growth in the quarter, demonstrating the strength of our core portfolio, trademark Coca-Cola grew by 27% in the first quarter of 2021 taking total sparkling growth to 20%. Energy, juice, NARTD key categories were also very strong, growing by double digits. Water category declined by 14%, in line with our value focus. NSR per case -- unit case grew by 19%. This was assisted by improving price/mix and higher share of sparkling beverages. Offsetting the negative impact of IC packages, lower share. Our disciplined OpEx management contributed to 50% growth of EBITDA, excluding other items, along with margin expansion of others over 100 basis points. Let me move to next slide and talk about the international business. Once again, our international operations performed very well in the first quarter of the year, growing sales volume by 23%, NSR by 51%, EBITDA by over 100% with resale of 106%. Pakistan, the largest international operation, was the main driver of the volume growth, along with a very strong performance in Jordan.

I will discuss major international markets in more detail in the following slides. In the international segment, the real volume growth was achieved in the traditional trend. Although, discounters grew by 30%. Their share in total is negligible in international segment. IC share was lower than last year due to restrictions around on-premise outlets.

Looking at key categories. Sparkling grew by 28% on the back of 28% growth of trademark Coca-Cola and almost equally strong Fanta and Sprite. IC grew by high teens and juice category by mid-single digits.

In line with our value approach, contraction in water category continues, declining by 16% in the first quarter of the year. Contraction in water category was mostly visible in Iraq.

And let me move on to the next slide and talk about Pakistan, which is accounting 29% of our total volume, grew by 41% in the first quarter despite cycling 7% growth a year ago. This stable performance came as a result of the successful restructuring of our Pakistan water market since 2019. As we discussed before, we increased efficiency in production and warehousing as well as our agility route-to-market system in Pakistan. Over the years, we have decreased the tendency on wholesalers and increase the share of sales through distributors substantially and enabling us to penetrate markets more effectively. All in all, we have conducted successful consumers, customer and shopping initiatives, followed a customized and regional marketing strategies and continue to grow ahead of the industry growth. We also worked very closely with the successful players in the e-commerce industry to ensure our visibility in digital platforms and availability with correct price.

We took some price increases in IC packs and include efficiency of discount management and focus on short list of clear prioritized SKUs. As a result of our NSR in Pakistan grew ahead of sales, volume and EBITDA margin expanded substantially, delivering in line with our quality growth algorithm in this competitive markets.

Let me move on to the next slide. As you might remember, last year's first quarter was very strong in Kazakhstan, result in a high base cycle. Despite this, and despite the continued pandemic-related restrictions, Kazakhstan sales volume grew by 4% on a year-on-year basis. Sparkling grew by 2% and stills by 22%, driven by a very strong IC performance.

In Iraq, we have taken around 15% price increase after the devaluation at the end of December 2020. This was the first price adjustment we have taken in Iraq for a long time. This first action, along with the positive category mix helped us expand profitability in Iraq significantly. We are deliberately deemphasizing the large packs of water in Iraq, as they are not profitable enough. This strategy is naturally having negative impact on our sales volume, while improving profitability in line with our quality growth algorithm. In this respect, in first quarter of 2021, our total sales volume in Iraq grew by 4%, although, sparkling was up by 17%, water declining by 48%. The 16% growth in trademark Coca-Cola was particularly encouraging considering the price increases that we have took. I will now leave the floor to Andriy to go over the financial results. Andriy, please?

[Andriy Avramenko, executive]

Thank you, Burak. We made a strong start to the year, seeing steady sequential monthly improvement. In the first quarter, our net sales revenue grew by 43%, driven by strong volume growth in all markets, higher share of sparkling, timely price adjustments and revenue growth management initiatives. The positive impact of currency translation also helped however, excluding the FX impact, the net revenue growth was still very solid at 33%. Gross profit grew ahead of net sales revenue, reaching TRY 1.3 billion. While gross profit margin expanded by 247 basis points to 33.8%. This expansion was mainly attributable to international markets, where, in addition to net sales revenue per unit case grows. Lower procurement prices in some commodities help to control costs.

As disciplined OpEx management continues to be our norm, our OpEx to sales ratio continued to decrease, leading to 757 basis points of EBIT margin expansion in the first quarter 2021. As encouraging as this result is, we have to keep in mind, there can be some seasonality and different timing of certain expenses. Therefore, this expansion in EBIT margin should not be indicative over the coming quarters. Our full year guidance remains as flat EBITDA margin for 2020, a year when we delivered the highest margins in our history. Net income grew by 4-fold to TRY 403 million. On top of strong operational profitability, our prudent financial risk management enables net FX gain, therefore, assisting the growth in the bottom line.

Next slide, please. The net revenue per unit case growth is the real backbone of our solid results. Timing price adjustments and lean SKU management through continuous portfolio rationalization are integral parts of our strategy to realize sustainable growth in per unit case metrics and ensure delivery of our quality growth algorithm. 13% growth in NSR per unit case was significantly higher than the 9% increase in COGS per unit games, which led to gross margin expansion. Similarly, tight OpEx management resulted in OpEx per unit case declined by 8%, leading to 50% growth in EBITDA per unit case.

Next slide, please. As discussed in the previous slide, the real contribution to EBITDA margin expansion mainly came from 2 factors: first, top line to indicate growth, which was above the cost per unit case growth; second, continued tight OpEx management.

International markets like Pakistan and Iraq, where profitability was previously challenged, have shown significant improvement in their margins. As Burak mentioned, in the operational review, focused RGM initiatives as well as efficiency measures in Pakistan and price increase in Iraq led to this profitability improvement. Some OpEx items also continued to be below normalized levels due to the pandemic-related restrictions, such as travel and meeting expenses. And this has also helped to contain OpEx at all levels. Along with the strong operational performance, the negative working capital has also helped to generate strong free cash flow with solid improvement from previous year. All these factors helped to sustain our leverage ratio at historically low levels.

On to the next slide, please. We have a healthy balance sheet with strong liquidity. On top of that, in line with our conservative approach, we continue to keep our net loan FX position, protecting us against currency fluctuations and mitigating our risks. Our consolidated net debt is only USD 202 million, 0.48x of rolling 12 months consolidated EBITDA.

Next slide, please. Finally, I want to talk about our cost breakdown and hedging initiatives. We get this question quite often. Therefore, I wanted to give a picture of our COGS split into FX and local currency as well as the hedging levels of major cost components. On a consolidated basis, our cost of sales is approximately 3/4 local currency and 1/4 of currency base. Though this varies from market to market, for example, in Pakistan, share of hard currency is in single digits, while in Iraq, it is the highest in our portfolio.

Only few of our markets have an organized derivative market. Therefore, hedges through financial markets is predominantly down in Turkey. In some of our other markets, as much as regulations allow, we cover our FX exposure by holding hard currency cash in our accounts. In Turkey, on top of the financial hedges, we also have dividend income flow from international operations in U.S. dollars, which also cover our FX-based raw material exposure.

Looking at the cost of goods sold breakdown by ingredients. Around 1/3 of our cost base is concentrate, which is mostly based in local currency, 20% to 25% is sugar, again, mostly regulated and local. Portion of imported and/or FX-denominated sugar is not significant, and most of it can be hedged through financial markets. In this regard, we hedged 100% of our sugar exposure in unregulated markets for 2021. Another 1/3 of our COGS is packaging. Here, resin has the highest share. We hedged around 62% of our 2021 exposure on resin. Cans, also a small portion, is the more straightforward item to hedge and we have 74% hedge covering the whole year. The recent significant increase in commodity prices is not expected to have a major impact on our 2021 results, given our hedge position. However, we continuously monitor the pricing environment, and we are looking to work in appropriate price levels for 2022 and beyond, once we see opportunities in the market with a proactive approach.

With this, we came to the end of the financial section. I now hand the floor over to Burak for his closing remarks. Burak, please?

[Burak Basarir, executive]

Well, thank you, Andriy. First of all, let me say that it appears reiterating our full year 2021 guidance despite very solid first quarter results. There are still many uncertainties related to the path of pandemic and vaccination process in our geographies. Therefore, the solid performance in the first quarter encourages us, but does not lead to any guidance revision.

We are looking beyond the pandemic and making sure that our immediate steps are in line with our strategic priorities and result in creation of sustainable value for all of our stakeholders.

Our strategic priorities focused on 5 pillars: accelerating quality growth; being the best in FMCG execution; winning with our people; digital for industrial leadership; and winning with our stakeholders. In our main priorities, we are also focused on the following: having a balanced portfolio with focus on our strategic categories of core and tactical brands as well as continuous innovation through new offers addressing affordability and premiumization; mix management, and precise RGM, for example, use of advanced data analytics for highly tailored price promotion and assortment; digital transformation by building an ecosystem of solutions and infrastructure leading to growth, efficiency and productivity. While doing all of these, we keep on investing in our people, in our communities, tracking our sustainability targets closely, creating value for the community and the clients.

So now we're ready to take your questions. And I also appreciate your belief in our company and then your time in attending this call. So we can open the floor for the questions.

[Operator]

[Operator Instructions]

The first question comes from Ece Mandaci from Unlu Securities.

[Ece Mandaci Baysal, analyst]

Congratulations on the strong results. My question is about the EBITDA margin generation on a segment basis -- on country basis actually. So you just mentioned that the in Iraq and in Pakistan, given the price adjustments, there was a significant impairment in your margins compared to the last year's averages probably. So as far as we know, that the most profitable business country is in Central Asia and then Turkey, Pakistan and Iraq. Is the ranking should be like that from highest EBITDA margin to the lowest as far as I know. So is there a change in the ranking of your EBITDA margin performance? And is that sustainable going forward with possibly increasing cost base in the last quarter of this year? It would be great if you give some color regarding the level of the -- of your international margins going forward, not just in 2021 and for further time horizon?

[Andriy Avramenko, executive]

Okay. I'll take this question. This is Andriy. So thank you for the question, first of all. I know we get a lot of questions in terms of the performance within each country. As you know, as policy and as a competitive policy, we do not disclose EBITDA and EBITDA margins per country, we are not stating for Turkey and international. So I will not be able to give these numbers. But in terms of the rankings, directionally, you're right. And so we continue to, I think, improve our margins or focusing on improvement in our margins across the portfolio. Now when we look at the -- this year, and we mentioned very clearly in the guidance that we look at the sort of flattish EBITDA margin for this year compared with last year, besides the fact that we are cycling very high -- highest we achieved at CCI in terms of the margin.

There are commodity pressures this year. The OpEx and other costs were uncharacteristically lower. Last year it was all the austerity measures that we took during the year. So with all of that, we are cautious. But if we look at the performance of this year, I would say that the rankings should not change dramatically among the countries. And second, all the countries, while they have certain variations in terms of kind of foreign denominated and local denominated costs from the cost structure perspective in terms of sugar, packaging and other ingredients. They are very similarly structured. Therefore, as commodity pressures intensifying and OpEx pressures intensify, they will -- they may be kind of experiencing the similar impact.

So I don't expect any significant change in rankings of kind of our markets in terms of their profitability this year.

[Ece Mandaci Baysal, analyst]

Okay. So another -- from another aspect, we know that in your total portfolio, the percentage of sparkling beverages increased by 400 bps to 81 as far as I know. So with the normalization in this portfolio, probably, in the second half of this year in 2022. Could there be additional margin pressure with the normalization in the portfolio or revenue mix?

[Andriy Avramenko, executive]

I understand your question. It's about sparkling and still kind of mix and its impact on the profitability or the margins. In terms of -- as we go out -- if we come out of the COVID situation significantly by the end of the year. Then for the period that sort of post-COVID period, if you wish, when and if it comes, we expect for the longer term, obviously, an acceleration in the stills portfolio also and potentially significant acceleration as it happened in previous kind of downturn and upturn cycles when we go into crisis, then the consumption of sparkling beverages is relatively higher than stills. But when kind of the economies grow and consumers start going out and experimenting with their consumption. The consumption of still beverages potentially could grow faster than even growth of sparkling beverages. So that effect is expected. And our guidance on the total margin evolution this year accounts for that.

[Operator]

[Operator Instructions]

We have no further questions. Dear speakers, back to you for the conclusion.

[Burak Basarir, executive]

Well, once again, thank you very much for joining our call. I understand when the results are good and great, everything talks to themselves. So thanks a lot for your time and interest, again, believe in us. So we're going to keep doing our best to make sure the second quarter and the rest of the year performs well. And hope to positively surprise you as CCI, like we always do. So be safe, stay safe, and thanks a lot again for your interest in our company. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines. Thank you.