Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to Ülker First Quarter 2018 Financial Results Conference Call and Webcast. I'll now hand over to your host, Beste, from the IRO. Madam, please go ahead.

[Verda Beste Tasar, executive]

Hi, everybody. Thank you for joining us today, Ülker Bisküvi's First Quarter 2018 Financial Results Call. Now I'm leaving the ground to our CFO, Cenker, for discussing, and then we will take the Q&A.

Cenker?

[Cenker Uçan, executive]

Hi. Good day, everybody, and welcome the Ülker Bisküvi 2018 First Quarter Earnings Call.

So we closed the books on a very successful year, and we had very solid and strong start to 2018, with improving top line momentum and continued progress in margin expansion, driven by both our domestic and international operations. So we are so pleased that we have surpassed one of our main target by 15% of EBITDA margin of 15.2%, which is the highest margin ever that we have reached. Having said that, robust volume have also translated into higher revenue growth and margin expansion, thanks to our strategy of focusing profitable products. In Turkey, we continue to build our momentum with double-digit confectionery revenue growth, and despite these double-digit food inflation since 2015, we've continued to receive positive results, thanks to our tight cost management processes. In the first quarter of 2018, our star brands, which are Çikolatali Gofret, Biskrem, Caramio and Hanimeller get the highest market share within the last 3 years. I also would like to highlight that we launched very successful products in Turkey, like Biskrem Extra, Sakliköy and Kat Kat Tahinli. On the international side, after the completion of our acquisitions, we are enjoying the positive contribution to our market shares. In Saudi, we became strong #1 in biscuit category with a market share of 20%; and in Egypt, where we were #3 in our last webcast, we improved our position and we are ranked as #2 with a market share of 14.5%, where reached track record market share in international market. After all, we exceed our EBITDA target of 15%, which we believe is the proof of our capability and agility in the operating in emerging markets. Thanks to our strategic moves, now we are seeing the positive returns of our investments in all the regions we produce, like Saudi, Egypt and Kazakhstan, we managed to increase our top line.

Before starting presentation, I will go over the market figures and provide market insights, and then, I will provide you the details of financial results. And finally, I will make the closing comments, and then we will have Q&A session. Let's take a look at macro indicators we follow. In terms of macroeconomic developments in Turkey, calendar-adjusted retail sales volume with constant prices decreased by 1% in February 2018 compared with previous month. Based on the [indiscernible] that we stated previous, industry production registered a quite strong 9.9% year-over-year increase in February after posting a 12.9% year-on-year growth in January. Consumer confidence index declined by 1.3% to 71.3% in March, the lowest level since December 2017. Consumer Price Index increased by 1% in -- and food inflation was realized at -- as 13% in March. So in terms of market growth dynamics, the total confectionery market grew by 4% in volume and 18.5% in value as of March 2018 in Turkey. Biscuit market grew by 2% in volume and 15% in value terms, and chocolate market grew by 7% in volume and 20% in value terms. So if we look at -- as we can -- if we are looking to our growth, I mean the branded products growth, we have grown 3.5% in volume terms for biscuit and 8% for chocolate in Turkey, which show us that, as we [ said ], we are growing more rapidly than the market growth, which we -- enables us to increase our market share and also increase our profitability. As we [ said ], we are operating in Turkey over 70 years, and we are the leading confectionery company in Turkey. And after the acquisitions that we did in 2016 and '17, we became largest producer of the region, including Middle East, North Africa and Central Asia. In 2017, we have invested more than TRY 350 million in our facilities for CapEx in order to increase our capacity and efficiencies, which enables us to decrease our -- the fixed cost in production and have sustainable profitability improvement in coming years through this important investment. And we hope to close the IBC deal in a couple of weeks. After the finalization of IBC acquisition, we will have 10 facilities in 4 countries, and our capacity will exceed more than 950,000 tons.

As you remember, 2017 was the year of Ülker. In all financial metrics, we have broken records. And now we are continuing our momentum in Q1 2018. On top line, our total volume has grown by more than 2%, and total revenues increased by 10.4%. But as you know, this growth rate also includes the impact of non-confectionery sales. And apple-to-apple growth rate for confectionery business is more than 14%. In terms of profitability, our gross margin and EBITDA margins have grown by 30 basis points, and our EBITDA margin has exceeded more than 15% and ended up with 15.2%, which is the highest level of our profitability in our history. Our net income has increased by 8%, and reached to more than TRY 120 million in Q1. And we are closely monitoring our debt levels. And our net debt-to-EBITDA is healthy with a ratio of 1.7. So as I mentioned before, we have continued our growth, and our confectionery revenues have increased by 14%, which show us the price increase for confectionery business is more than 12%. So which show us that, as we are monitoring our products very closely, and if needed, we are making price increases in order to maintain our profitability and sustainable growth. And as I mentioned before, our EBITDA margin reached to 15.2%, and we have 12.3% growth in our EBITDA value. So in terms of consolidated performance highlights, the consolidated confectionery sales volume increased by 2.3% in the first quarter and the total consolidated biscuit sales volume increased by 3%, and the branded volume has increased by 5.7% in Q1. And the total consolidated chocolate sales volume was up by 4%, while the branded chocolate volume improved by 7% in Q1. And the total cake operation contracted by 6.3%, and the branded cake volume was down by 5%, which is mainly due to the price increases that we made in Q1. We are seeing the negative impact in terms of volume. However, we are expecting the normalization in Q2 1 -- in Q2 in cake segment. And the total consolidated confectionery revenue has grown by 14%, and in all 3 peer categories, we posted a very, very growth in Q1 and the total branded biscuit revenue expanded by 17%, the chocolates for 17.5% and the cake revenue increased by 6%. If we are starting with domestic operations, we maintained our leadership in total confectionery business, and our total market share in Turkey is 13.6%. And in all categories, you might see that we maintained our position in chocolate, and we gained market share in biscuits. And currently, our gap with #1 is 2 percentage point in biscuit category. And we believe that we will be the #1 at the end of year-end on a [ mix ] basis. And for cake, we've maintained our market shares, with market share of 26.8%. And in chocolate, we maintained our respectable position, and our market share is around 13.7%. On Page 12, we have presented our products pictures. And as you know that the synergy products are quite important for us. And in Q1, we have continued to launch the synergy products in Turkey and continue to export to the neighboring countries. And in Q1, in Turkey, we launched the McVitie's Thins, which we produce in Turkey and used to export to U.K., and launched in Turkey with the name of McVitie's Ince, and -- which -- another product is Ülker Flipz. This product is a snack and chips category. And we are very hopeful for this product in order to gain also market share from the snacks categories going forward. And the total contribution for synergy products as of Q1 is around more than TRY 50 million, and our expected revenue for 2018 from this category is to reach more than TRY 200 million on a full year basis. And for the branded -- I mean the Ülker-branded products. In order to gain market share, we launched a number of -- couple of numbers of products in biscuit category. And the total contribution of the Ülker-branded new launches is around more than TRY 50 million. And we believe that we are continuing our growth in Ülker-branded business in Turkey going forward. So in terms of volumes, so our total volume in Turkey has increased by around 2.7%. However, the branded volume grew by 3.9%. And the total overall revenue for Turkey has increased by more than 14%, and the branded revenue have increased by 15%. And the gross profit has increased by 14.3% in Q1, and our gross profit margin was stable in Q1 with the gross profit margin of 22%. And we were able to increase our EBITDA margin in Turkey by 7 basis point. And our EBITDA margin for Turkey operations has ended up with 14.1% as of Q1 2018. And you know that we are focusing more to the branded and -- starting from 2015, so the share of the branded business was increasing. And so now, compared to previous years, it has normalized. So in terms of volume, the share of the branded business has increased from 90% to 91%, and the total revenues generated from branded business has increased from 94% to 95%. So if we are moving to the international operations, so starting from 2016, we have completed 4 acquisitions. And now we are waiting for the legal approvals for IBC. And so in line with our expectation, we believe that this deal will be conducted in a couple of weeks. And we believe that we are going to consolidate IBC in Q2 '18 financial figures.

Now I would like to cover this again. So as you know, in Saudi, we were very strong. And after the acquisition of UI MENA operations, so with the support of McVitie's, we are very strong #1 in Saudi, and our market share is more than 20%. And further, in terms of FMC operations, the total volume has increased by 17% and the total net sales has increased by 25%. And one another important thing that after the acquisitions, we made a lot of efficiencies in our facilities, and now we are seeing the positive contribution of our studies. And now the EBITDA margin in FMC has increased by more than 190 basis points, and the current EBITDA margin is more than 16% as of Q1 2018. For Egypt, so we have a lot of improvements in Egypt. So as you remember that during our meetings, I was explaining that we are planning to produce McVitie's in Egypt facility, and we are expecting also gaining market share in Egypt. And also in terms of profitability, we will see a huge improvement. So in line with our expectations, so as you incur, we became #2 in Egypt, and our market share is around 14.5% in biscuit. And for the market -- for the Hi-Food company financial results, the total volume has increased by more than 10%. The net sales has increased by 40%, so which we clearly see that also we are making related price increases in Hi-Food in order to avoid the negative impacts of devaluation.

And in terms of EBITDA, it -- the EBITDA has increased more than 700%, and the EBITDA margin has increased to 15%. So I mean, the previous year EBITDA margin was one digit, and now we have high double-digit EBITDA margin. And we are seeing the positive impact of McVitie's production in our facility. And we believe that this profitability will continue in Egypt facility through the year of 2018. So UI MENA operations, so as you remember, we have acquired the Hamle global company and UI MENA operations at the end of the year, 2017. And the Hamle operations are going well in line with our expectations. The total volume has declined by 10%, and the net sales has declined by 4%. But in terms of EBITDA margin, we have still strong EBITDA margin in Hamle operations. So this is how also we are seeing a negative trend in terms of financial status. But due to the reporting, the import business for Hi-Food have been recognized under Hi-Food facilities. So therefore, the sales of Egypt around 5 million dinar (sic) [ AED 5 million ] have been recognized under Hi-Food. So that's why it seems that the business has declined. However, this is mainly due to this segment reporting matters. And IBC. So as I mentioned to you before, we are waiting for the approval for IBC. So this acquisition is quite important for us because we are expecting to consolidate FMC and IBC in one -- under one umbrella, and we aim to decrease our fixed cost. And we will stick on to make KSA a local production for Middle East. And we will enjoy from the multi-production opportunities for Ülker, McVitie's and Rana. And we hopefully believe that we are going to consolidate IBC in Q2 financial figures. For Kazakhstan. So in Kazakhstan, we continue to gain market share. And in chocolate countline business, we have a very strong #3, and our market share is very close to 10%. So in terms of Hamle financial results, our net sales has increased by 4%. And in terms of EBITDA margin, we are very close to 10%. And after the finalization of our CapEx, which we believe that, in Q2, our EBITDA margin and net sales growth will continue in Q2.

So I have covered the market share of international operations, but I would like to show you the trends of our market share. So in Egypt, we were able to increase our market share by 1.8 percentage point, and currently our market share is around 14.5%. And in Saudi, we gained 0.4 percentage point market share, and our market share is around more than 20%. And in Kazakhstan, in chocolate countline business, our market share has increased by 0.7 percentage point, and currently our market share is around 9.2%.

On Page 23, we are continuing to new launches in international market as well. So we launched Godiva also in Kazakhstan. And in Egypt, I have also mentioned that we have started to produce McVitie's in our facilities. And in Saudi, we are continuing to launch Godiva and McVitie's and Ülker brands in Saudi. So in terms of financial results. So the total confectionery sales for international business was flat. However, the branded volume has increased by 8.3%, and the total confectionery revenue in international business has increased by 13.7%. However, the branded revenue has grown by 19%. And our gross profit has increased by 9%, and the gross profit margin improved by 190 basis points and reached to 37%. And we have a positive impact to our EBITDA margin, and our EBITDA margin reached to 17.4%. Not only in Turkey, we are focusing to our branded business, and the share of the branded business is also increasing in international markets, and the share of the branded volume has increased from 74% to 80% in Q1. And the -- in terms of revenue, the share of the branded business has increased from 81% to 85% in Q1 2018. So in terms of balance sheet highlights. So our debt structure is quite important for us. And as I also mentioned to you before, we are very closely -- we are monitoring very closely our debt structure. And our net debt structure is very healthy. And currently, our net debt-to-EBITDA ratio is 1.7, and 84% of our debt structure is through long-term facilities. As you remember that in 2017, as Ülker we have obtained 2 syndication facilities and 1 investment loan from an international bank. So therefore, our debt structure is long term and in a healthy term. In terms of net working capital. So the working capital requirement over net sales ratio was 16.6% in March 2017 and now is slightly a little bit higher to 2017, which is around 17.2%., so which is mainly due to the seasonality. As you know that the Ramadan period is coming, and due to this seasonality, there is a slightly increase in net working capital. In terms of net financial FX structure. So in April 2017, using cross-currency swaps, so we are now seeing positive impact to our hedging strategy. And currently, we don't have any net FX exposure our -- in our balance sheet, and the net position after our derivative transaction is around TRY 360 million. And now, as of today, we are going to see the positive impacts of this transaction going forward. Now I would like to open the call for questions.

[Operator]

[Operator Instructions] We have a question from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

Cenker, my question is related to your FX position. As we see from your presentation, you have a long position in terms of balance sheet. But I would like to understand, how does the recent move in currency affect your balance sheet and income statement? That's my first question. And the second question about the outlook in second quarter in both domestic and international markets.

[Cenker Uçan, executive]

Thank you, Cemal. So for in terms of derivative transaction, as you know, in accordance with IFRS, we are applying the hedging accounting. So in line with this accounting policy, all the impacts -- I mean, profit and losses, are recognized on the balance sheet side. So as of 2018, since the FX rate is increasing, although we have had with cross-currency swaps, our P&L are not affected and the income and expenses are recognized on the balance sheet. So as of March 2018, you might see that we have a derivative asset on our balance sheet, which is amounting to TRY 87 million recognized in Q1. So going forward considering that, as of June '18, if the FX rates are continuing to increase, we are seeing the positive impact to our balance sheet. So the derivative asset number will increase. However, in terms of P&L, we are not seeing the negative impact because the interest has been already secured with Turkish lira. So that's why we are applying this hedging accounting. So this is the -- due to the hedging accounting. So for Q2, so in line with our -- I mean, for Turkey, we are not seeing any negative impact in Turkey. So we are now getting prepared for Ramadan period. And for April results, the sales figures are in line with our budget figures. And for international side, it is also continuing in line with our expectation. Now I will be traveling to Kazakhstan, and we are expecting to finalize the CapEx for Kazakhstan in Q2. So we are not seeing any negative impact for Q2 for Turkey and international operations.

[Operator]

Our next question is from Kayahan Demirak from Is Invest.

[Kayahan Demirak, analyst]

Cenker, I just have one question about the cacao prices. As you know, there has been a huge increase in cacao prices year-to-date. And how much purchase you have secured so far and what price? And going forward, at some point, you might have to increase your prices in Turkey. And given the competitive landscape and price elasticity, you think you can preserve your gross margin at Turkey operations in 2019?

[Cenker Uçan, executive]

In 2019 or '18?

[Kayahan Demirak, analyst]

Yes, '18, I assume you have secured some purchase at a lower price. But the maybe real impact will be valid in the 2019.

[Cenker Uçan, executive]

Okay. Regarding to your questions, so I cannot give you how much cocoa or which price am I secured. So I mean, this is due to the confidentiality. I am not mentioning these numbers, but as you know that we are securing our cocoa prices in a long-term period. So 2018 is already secured, and some portion of 2019 is also already secured with the previous prices. But as you know, there is a future increase in cocoa prices, but besides that, there is also a huge [indiscernible] in palm oil prices currently. So I mean, this is the trend that we did -- different in 2017, and now 2018, we have a different picture. So in line with our expectation, in terms of commodity prices, so these 2 price changes are going to offset each other. However, due to the FX increases, we are also making some derivative instruments in order to fix the FX. But as we said, we have continued to make the relative price increases if it's needed. So going forward, I mean, 2018 and '19, now we have already reached to 15% EBITDA margin. And 2019, we will stick this target. And we are not seeing any negative impact to decline our EBITDA margin going forward.

[Operator]

Our next question is from Christopher White from Somerset Capital Management.

[Christopher White, analyst]

I just wanted to ask about your capital allocation priorities for the coming few years after you complete the IBC acquisition. My understanding is that the IBC acquisition is the last big acquisition in the group of acquisitions that you've been doing. So once that's completed, what are your priorities for uses of your cash flow?

[Cenker Uçan, executive]

Okay. So I mean, for the capital allocation, so the total budget for 2018 is TRY 140 million. And as you know, most of the investments have been done in 2017 and '16. So therefore, in order to manage the free cash flow very properly, so we are going to be very selective in terms of CapEx spend. So therefore, I mean, the budget for 2018 is TRY 140 million. So after the acquisition of IBC, we will be finalizing the acquisition process in international markets, and 2018 would be an integration year for us, and in Saudi especially, because we are going to integrate the FMC and IBC businesses. And considering the capability of FMC and IBC facilities, we are not expecting to make additional CapEx for Saudi because the capacity is enough for Saudi. Maybe in 2019, we will be considering to make some CapEx in Egypt. But of course, this number will be very limited and immaterial compared to the -- our total CapEx spend amount in the year.

[Christopher White, analyst]

Okay, that's clear. So that means unless CapEx rises a lot, which it doesn't sound as if it's going to, you're going to be generating quite a lot of free cash flow. So I just wondered what your priorities were for that. Are you going to pay down debt from its current levels? Or are you thinking of increasing the dividend? Or what else might you do with it?

[Cenker Uçan, executive]

So our main priority is, of course, to generate more free cash flow. So we will be evaluating going forward. But I mean, as we tell, maybe we will be evaluating some additional acquisition opportunities. Currently, we don't have any plan. But once we are going to finalize all these acquisitions in MENA, and looking at case structure, we will decide whether to pay more dividend in line with our accounting -- dividend policy or continuing to invest our business going forward. It is going to be decided during our Board of Directors meeting.

[Operator]

[Operator Instructions] We have no further questions. Dear speakers, back to you for the conclusion.

[Cenker Uçan, executive]

Okay. Thank you. So in conclusion, we remain fully committed and improved our financial and operational metrics. So following the encouraging result of the first quarter, we are on a track to drive our profitable growth for the rest of the year and deliver on our guidance. So we will continue to invest in our business and enhance our commercial capabilities and further improve efficiency going forward. So I would like to thank everyone for joining the call. We very much enjoyed it, and obviously, we look forward to updating everyone on our full year (sic) [ half year ] results in August. Wish you a good day.

[Verda Beste Tasar, executive]

Thanks you for joining us.

[Operator]

This concludes today's conference call. Thank you all for your participation. You may now disconnect.