Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to Ülker Bisküvi Q1 2021 Financial Results Conference Call and Webcast. I now hand over to Verda Tasar, Investor Relation Officer. Madam, please go ahead.

[Verda Tasar, executive]

Thank you, Naomi. Hi, everyone. Thank you for joining us today. Here with me today are CEO, Mete Buyurgan; and CFO; Cenker Uçan. Now I leave the ground to our CEO, Mete Buyurgan. Mete, please?

[Mete Buyurgan, executive]

Thank you, Verda. Hi, everyone. I would like to start with the general overview of the first quarter for Ülker. So if we can start with the macroeconomic overview in Turkey and some other countries. I must say that with regards to macroeconomic overview in the last 1 quarter, it's a quite challenging year, not only in Turkey, but also all around the world through prolonged COVID impact, increasing commodity -- and increasing commodity price pressures, actually. Specifically in Turkey, as you may know that we are in a lockdown for 17 days, schools are still closed, which has a negative impact on the demand side, but of course, public and the employees, our employees has our number one priority. So we are working with the authorities very closely in every country that we are operating.

In terms of macroeconomic indications, as you know that in Turkey, especially, specifically, we are struggling with high rate of inflation right now through -- which caused some commodity price increases and also fixed rate increases, devaluation of Turkish lira against FX, creating some challenge. So -- but we are -- I am confident on dealing with all those problems, and we are having good performance in Q1 again, and I am much more hopeful for the next coming quarters.

One of the biggest challenge in the domestic market, our key market in Turkey, this is the volume shrinkage. Volume shrinkage is the most important challenge for us in Q1. And most probably, we are going to face with volume shrinkage again in Q2 as well.

As you may see on the chart that our total snacking category has been shrinked like almost 7% -- 6.7% in terms of volume, while there is a growth of 17% approximately. It means that, as you know very well that this is basically the value increase is totally coming through price increases in the overall market.

The biscuit category has been shrinked very, very sharply. It is more than 10% in terms of volume, which has a huge impact, of course, in our total revenue. And cake category keeps declining -- is declined -- which declined by 15% -- 15.3% versus last year's -- previous years. On the other end, chocolate category is much more stable. The shrinkage is only 1.7%, and there's a growth of 20.9% value growth. So thanks to our diversified category portfolio, which makes us much easier to deal with, to overcome the shrinkage problems. So this is 1 of the biggest challenge for us, which we faced in Q1, and we have some strategies to deal with for the next of the -- rest of the year.

In Q1, successful works in HR innovation carried out by Ülker have been recognized by different authorities, especially Ülker was deemed worthy of 7 awards in the field of human resources, HR activities at the MANA Stevie Awards, which was -- which ranks us very highly.

And as you know, that innovation is one of our important core and important muscle in terms of our sustainable growth. So we are not looking for or we are not working on just for our consumer products, but also we are always looking for innovation opportunities for our raw materials or packaging materials. We had invented a new wheat seed, which we called it Aliaga. It's a patented new -- a totally brand-new wheat seed, which is suitable for Turkish climate. So it will help us for the next coming years in terms of having sustainable wheat for our bakery products basically.

And 5 of our new innovations have been awarded by the Marketing Turkey organization as the best innovations. Sustainability and sustainable sourcing topics are very important priorities for us, for Ülker. And we keep investing to our communication efforts with our branding through linking them with our top priorities of our brands. So that's a very general overview of my part. Now I am -- Cenker, you may go ahead with the detailed slides. Then I'm going to be happy to reply to questions.

[Cenker Uçan, executive]

Thank you, Mete. Hi, everyone. I hope you are well and safety and healthy. So as you know, that Ülker, our company is the largest confectionary company in the region. And we are -- we are having 77 years of experience in Turkey. And starting from 2016 with the acquisitions, we became the largest confectionary company in the region. So as you all know that we -- apart from the market share, we have the largest capacity in the region with strategically located plants. So if we go to the first quarter consolidated performance highlights, our revenue has grown by 13.2% compared to last quarter and we have 8% growth in gross profit.

Our gross margin have been dropped by 140 basis points, and we have an increase in EBITDA value by 10%. And with having a very strong free cash flow ambition, we have generated TRY 456 million free cash flow, which has also positively impacted our net debt-to-EBITDA ratio.

So as you might remember that from last year, our net debt-to-EBITDA ratio was 0.14 multiple, and with heavy free cash flow generations, currently, we have net cash and we have negative net cash to EBITDA ratio, which is a fantastic result that we have thought about it.

So if we are moving to the volume and value performance, so I'm going to share the results on a consolidated basis. Our total volume decreased by 8.8%, where we have a revenue increase by 13.2% compared to last quarter.

And so sales volume in biscuit, chocolates and cake was down by 8.6%, 6.1% and 23.2%, respectively. And for the revenue side, we have a biscuit growth around 13.4% and our chocolate sales was up by 14.9%, and we have relatively slower growth in cake, which we are expecting to increase in the coming periods. So one of our strongest muscles is we have very strong export and international operations that we are enabling to have natural hedge mechanism on the balance sheet. And the share of the export and international operations are increasing in each quarter. So in 2020, the share of the export and international revenues was 38% and it has increased to around 40% as of first quarter '21. And if we are covering the EBITDA split, we had 46.6% EBITDA share last year, which has increased to 50%, where we are creating half of our EBITDA from international operations and export operations, which is a very strong ratio in terms of having natural hedge mechanism.

So if we are looking to the financial result on a short perspective, we have 8.8% volume growth. However, our revenue growth is 13.2%. Our gross profit has improved by 8%. We had 140 basis point gross profit margin decline, where it has declined to 50 basis points in terms of EBITDA margin. And we have very strong net income generation. As you might remember, we have around TRY 98 million net loss in 2020, which has been revised, around TRY 479 million as of first quarter '21.

Now I would like to start with our anchor market Turkey. So as you know that we are clear #1 in total snacking market with 37% market share. So if we are covering the categories, we have became #1 in biscuit category in the beginning of 2020, and we are still maintaining our strong position in the market. And as of first quarter '21, our market share has improved by 30 basis points and reached 41.3% as of first quarter '21.

And we are a very strong market leader in chocolate category. Our market share is 41.1% as of first quarter and as you know that, our market share is 3x higher than #2. And we are continuing to maintain our position in the coming periods. And we have 20.1% market share in cake category, where we are very strong #2 in the market. So if we are looking to our portfolio, on the left side, we are seeing the pictures of synergy products where we -- which is really quite important NPD process for our sustainable growth and profitability. So as you know that -- as usual, we are the manufacturer for Godiva brand in Turkey, and we are producing all these products in Turkey and also exporting to the whole markets from Turkey. And in addition to that, we are producing McVitie's in our facilities and exporting to some regions. So as of 2020, I am talking about the yearly basis, the total revenue generation from these synergy products was around TRY 516 million which is increasing very rapidly compared to previous years. And this momentum will continue in '21 as well. And in first quarter '21, we have created TRY 110 million revenue from these synergy products. And on the right side, we are seeing the new products launched in '21 under the Ülker brand. As you know that we are paying very attention -- important attention for the NPD processes in order to maintain our profitability and also increasing our market share, so the -- as you see the pictures, we have launched different products in each categories. And the total revenue contribution of these NPDs was TRY 90 million. And if we are covering these NPD processes within 3 years period, the total contribution from these NPDs reached to TRY 266 million as of first quarter. So if we are covering the financial results for domestic turkey operations. So we have volume decline around 13.5%. The main reason of the decline is, as you might remember, we have very strong baseline in 2020 first quarter, driven by the panic buying due to the pandemic. So therefore, we have 13.5% volume decline, where our revenue growth is around 10%, and we have 3.1% increase in our gross profit and the EBITDA margin has been concluded as at 14.1%. In line with our strategy, we are continuing to focus our branded products, which we are always paying more attention. So in line with our strategy, the share of the branded portfolio is increasing, and the -- which has improved from 90% to 92% in terms of volume. And the revenue contribution of the branded portfolio was flat compared to last quarter, which was 94% in our total sales.

So we had very strong M&A track record starting from 2016. So in 2016, we have acquired Hi Food and FMC facilities in Egypt and in Saudi. The main purpose of these acquisitions was to create a regional production hub for Middle East and North Africa.

Following these acquisitions, in 2017 first quarter, we have acquired Hamle in Kazakhstan country. And we have acquired also the production and distribution rights of McVitie's brand. And lastly, in 2018, we have acquired the second facility in Saudi. So with all these acquisitions, Ülker became the largest production company and also the market leader in the total emerging markets. So if we are starting with our first facility acquired in Saudi, the FMC company, we have -- volume increased around 1.6%. And our total net sales in FMC have declined by 5.5%, and our EBITDA margin has been contracted as at first quarter at 15.9%.

So not only in Turkey, due to the COVID-19, there have been also decline in Saudi markets, there have been late opening of schools. And in addition to that, in order to create an economical sustainability from the government, VAT have increased from 5% to 15%. And despite all these reasons, there have been market shrinkage in the Saudi market as well.

However, as usual, we are very strong in the market and as Ülker brand only we are #1, and our market share is 16.1%. And if we are adding 8.1% McVitie's market share, our total company's market share is going to increase 24.2%. So if we look to the numbers, our main competitor's market share, we are seeing 10% point gap between us, which clearly proves that we are a very strong player in Saudi business.

So for our second facility, IBC results. So our volume is flat. We have 8.7% revenue decline in IBC facility. And our EBITDA margin has been contracted at 22%. So we have multi production capability between 2 facilities.

So there have been production switch to our FMC facility. And as I also covered, there have been slowdown in KSA market. So with all this due to the reasons, there has been a volume and revenue decline. But we believe that in the coming quarters, this gap will be compensated. So we have entered in Saudi market in 2016. And at that time, our EBITDA margin was 13.6%. As you see on the chart, in each year, we have improved our EBITDA margin, especially after the acquisition of McVitie's production and distribution rights and also the second facility, we have created a huge amount of synergies, and our market shares have increased very rapidly.

And in terms of EBITDA margin, Saudi business is one of our most profitable operations in our remit...

[Audio Gap]

[Operator]

Facing some technical issues. Ladies and gentlemen, please wait until our technical issues are finished please. Dear speakers, you're connected. Please go ahead.

[Cenker Uçan, executive]

[Technical Difficulty] we have created TRY 450 million. It is [Technical Difficulty] cash, which is coming from our exports and international operation. So we believe that we are maintaining the structure in coming periods. So despite having [Technical Difficulty] there has not been [Audio Gap] impacted, thanks to the, improved our [Technical Difficulty]. Now, lastly, I would like to share our '21 year-end guidance. So as Mete mentioned about the market dynamics, so we are continuing to grow in our operations. And so we are aiming to have 15% growth in revenue, and we are aiming to have 16.6% EBITDA margin as at '21 year-end. So thank you very much for listening us. So now, I'm opening the call for your questions.

[Operator]

[Operator Instructions] So we have a first question from Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

Cenker, I think we missed the international market part because of this technical issue. We observed some slowdown in these markets, particularly in Saudi since -- post VAT increases. And according to my calculations, there seems to be some limited price increases albeit positive currency impact. Actually, there is some price decline. So what are the main reasons behind this relatively weak performance in international markets? And how should we think about this throughout the year? And would it be reasonable to assume that market will return to growth by next year? And the second question is about the intergroup transactions. We are observing that Yildiz Holding has accumulated a good amount of cash from [indiscernible] sales, including some asset sales. So I just wonder if it would be realistic to expect the Holding to pay effective this quarter any -- your ESG credentials?

[Cenker Uçan, executive]

Okay. Thank you. So I am so sorry for the issue in the lines. Can you hear me clearly?

[Hanzade Kilickiran, analyst]

Yes, I can hear you.

[Cenker Uçan, executive]

Okay. For your question about the Saudi business, Hanzade, actually, as I mentioned in the presentation, the Saudi business has been impacted very negatively due to the COVID-19 and also in addition to that, there have been VAT improvement. So of course, I mean, as you know, that in Turkey, we are very agile, and we can take remedial actions very quickly. So of course, we have very strong know-how and ability in these international markets. So we believe that we are going to compensate this gap in Saudi in the coming period. So we have Saudi business -- and not only Saudi, in Middle East and North Africa, we have also export operations. So due to the Lebanon, due to the Yemen political instability, there have been lack of sales. So therefore, I mean, we believe after the COVID pandemic, I mean the normalization environment, our sales would be normalization. And with regards to your second question, it's about our placement. So I would like to underline that, I mean, it is not related to pay. I mean, to get our receivables from Yildiz, which is coming, Yildiz made a different M&A project. So whenever we want, we can withdraw our money. And currently, as of first quarter, we have positioned our cash. I mean, we have continued to place our cash to Yildiz. So therefore, it's going to be decided by us, whenever we want, we can withdrawn our placement. I mean, you can think that this transaction like a placement to the bank.

[Hanzade Kilickiran, analyst]

No, I understand it, but wouldn't it be much better from Ülker perspective to get the cash from the group company. Because they are paying you less interest rate versus your cost of debt because also they have sold some.

[Cenker Uçan, executive]

No. Hanzade, so as I mentioned in our previous webcast call, our interest that we are gaining is relatively higher than the placement rate compared to the bank. So therefore, there is not any lag or loss due to the placement to the Yildiz. So the interest, of course, we are considering the transfer pricing policies. But from the [ hindsight ] perspective, I mean we are relatively gaining more interest from Yildiz compared to the bank.

[Hanzade Kilickiran, analyst]

Okay. But -- all right, but lower than your cost of debt?

[Cenker Uçan, executive]

Yes, lower than our cost of debt, of course. But if I'm going to place to the bank, it is going to be, in any case, lower than our cost of debt.

[Operator]

We have a new question from Kayahan Demirak from Ak Investment.

[Kayahan Demirak, analyst]

Congratulations on this strong cash flow generation. I'll start with my usual questions. Now you have a cash position over $1 billion. And as you mentioned, we have a cost of debt around 7% at least for the Eurobond. But if you wanted to place the money to the bank, it close to 0%. So this brings a huge negative carry.

And as far as I see, you place more money to your short-term financial investments in this quarter. So my question, is there any new development that you're going to use this money in an acquisition. I mean, how long are you planning to wait until -- during this situation? That will be my first question.

[Cenker Uçan, executive]

Okay. Thank you, Kayahan. So actually, we have also covered this question in our previous call. At that time, Mete explained our strategy about our growth perspective. So we have intention to make the M&A which creating a vertical integration and sustainable growth of our business.

But of course, we are -- I mean, once we have a clear decision and road map, of course, we are going to share and kick off this project. But of course, I mean, since -- as of today, there is not any proper decision has been taken yet. Once we will have, of course, we are going to share and announce to you.

[Kayahan Demirak, analyst]

Okay. Okay. Probably, I'll keep asking this every quarter. So my second question is that there was a 13% volume contraction. And consequently, I assume this -- part of it came from this downsizing activity because you have 27% increase in price per ton.

So, I mean, excluding or if you adjust this downsizing impact, what is the actual contraction and how much the market contracted in general in terms of the confectionery market? And as for the cake category, now this decline in the volume continues for the past 5, 6 quarters now in a row. Where do you think this will stop or normalize or stabilize?

[Mete Buyurgan, executive]

Kayahan, this is Mete Buyurgan. Regarding your question, the first one, as you stated that there's a sharp decline in the volume demand in the categories, not only for our brands, but also for all categories actually as I presented in the presentation.

So this time, there is not too much impact of downsizing due to the regulation barriers. So we didn't have too much or the industry didn't have too much -- too many downsize activities. So it is truly consumer -- less consumer demand due to the lockdowns, curfews and so on.

So that's the first answer to your first question. And once there is going to be relief in terms of COVID impact, we are confident that we are going to get back the consumer demand again, especially for the on-the-go occasions.

Regarding your second question on cake, as you mentioned that we are losing some volume as well. But the market is shrinking a lot, but we are now in this year, in 2021, we are in the middle of the transformation process for cake. We are closing one of our -- we are transferring one of our factory, consolidating with our bakery factory.

So this is going to give us a huge savings and huge margin impacts. And on the other hand, we are transforming our margins with the more value-added products. Actually, we had very successful launch a month ago and they're all margin equity, and they are keeping us -- providing us a huge volume. So April was a very better month in cake.

But as of new year 2022 -- starting with 2022, we are going to be in a very better share in cake industry -- cake category. So we are focusing on that a lot. And plus, because of the climate, COVID-19 impact, home cooking -- cooking at home trend is a very growing trend. So cake is impacted very negatively from this trend, by the way.

[Kayahan Demirak, analyst]

Understood. Understood. And my last question is about the cash flow. I think this quarter, operating -- I think -- but this quarter, the operating cash flow was quite strong, and you had a very limited CapEx need. So do you expect this trend to continue? I mean, I know you cannot keep operating cash flow at this pace.

But do you expect, I mean, unusual further investment of working capital? Or do you see any deterioration in the working capital days for the rest of the year? And maybe just 1 addition on this. We have been discussed this I know but I just wanted to ask, again, for this short-term financial investments that you have right now over TRY 5 billion. What you could tell us about the components of this investment?

[Mete Buyurgan, executive]

For your first question, Kayahan, so as you might recall from our previous meetings, cash is our main priority. So I think we have achieved very strong cash flow ratio as of first quarter. Of course, we are aiming to improve our free cash flow capabilities, but it is going to be dependent on the market conditions because there have been 17 days lockdown in Turkey.

So of course, as you guess, we are the largest company, FMCG company operating in Turkey. And we might support some of our distributors and channels in order to having a sustainable financial position for themselves. But we can strongly underline that, this momentum will continue, except there has been not any different macroeconomic uncertainty environment in Turkey. But we are still sticking on our targets in terms of free cash flow.

For the financial assets. So actually, this is a very wide range of portfolio. It has included different financial instruments, such as government bills, Eurobonds, treasury bills and some of liquid funds. So as you noticed that we have created around TRY 100 million gain as of first quarter. So I mean it is dependent on the market conditions, but we are very satisfied to have such a portfolio in our balance sheet.

[Kayahan Demirak, analyst]

Okay. And as for the return from this portfolio, should I understand that from the numbers that the revaluation gains is kind of a small portion of the gain, but you have some kind of interest income coming from this funds, right?

[Mete Buyurgan, executive]

No. I mean, it is -- I mean, these funds, I mean, is accounted under fair value gains in the P&L. And the interest income is coming from the placement to the bank and your reserves. These are accounted under different lines.

[Operator]

[Operator Instructions] We have no other questions.

[Mete Buyurgan, executive]

Okay. Actually, we entered in '21 in a very strong position financially and in the marketplace, so which give us confidence that we can deliver on our long-term growth targets in '21 and beyond. So thank you very much for joining our call, and I wish to meet with you in our half 1 webcast call. And I wish you a very Happy Eid period next week. Thank you.

[Operator]

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