Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to Ülker Bisküvi First Quarter 2022 Financial Results Conference Call and Webcast. I will now hand over to Beste Tasar, Investor Relations Officer. Madam, please go ahead.

[Verda Tasar, executive]

Hello, everybody. This is Beste. Welcome to our first quarter 2022 financial and operational results. Here with me in the room, our CEO, Mete bey; and our CFO, Fulya hanim, right now. Now I leave the ground to our CEO, Mr. Mete Buyurgan. Mete bey, please?

[Mete Buyurgan, executive]

Thank you, Beste. Good evening, good afternoon, everybody. Welcome to our investor meeting Q1 2022. In fact, I don't like to start presentations with challenges instead of opportunities. But unfortunately, this is the fact and let's remember the very big challenge that we have faced in the first quarter. I must say that we have started the year with another challenging year, through another challenging year. As you know, FX volatility is one of our biggest concern. So we are trying to resolve the impact of the FX volatility, FX increases versus Turkish lira versus other FX rates. Commodity price increases is another big challenge. After many years, we are observing that the high rate of increases in commodity prices and continuous increases, in fact, I must say. So as you may remember, starting from last September, October, we are facing with continuous commodity price increases, not only in Turkey or in our geography, but also all around the world. Supply chain issues, especially logistics prices, logistics challenge is quite a tough challenge for us and it creates some, it has some impact on international business continuity. High inflation environment all around the world again. But in Turkey, after 20 years, we are facing with a very high rate of inflation right now. Consumer behavior change due to long-term pandemic impact and economic challenge as well together. So we are observing some basic change on the consumer behavior, which we are following up very closely. And last but not least, the Russia and Ukraine war is creating another pressure on our business, in our categories actually all around the world for our industry as well. So those are the big challenge. And despite all of those challenge, I must say that we keep running and managing our company in a very strong and successful way. We have, as you know, as I mention always, a low-cost base operating model, which allows us to be agile, strong. And as an organization, our fast decision-making process help us to resolve the problems, challenge very quickly. We are trying to overcome those challenge through 8 pillars actually. I would like to mention those 8 pillars, basic pillars which we are relying on to overcome the challenge. First one is sustaining the market leader position. We are a strong market leader in our categories. So we are having some leadership skills and reflexes. So we are trying to maintain our market leader position through our strong heritage in the market. Effective pricing strategy is one of the most important tool for us. Otherwise, as you know, we are not able to manage our gross margins, profitability. So on-time decisions and effective pricing strategy decisions were quite important and we did it in a good way. Cash flow priority is top priority right now in the organization. So there is a big awareness in the organization to create cash flow priority during those uncertain times. So we are working on this item, pillar, very hardly specifically. Strengthen the balance sheet against volatilities in FX rates and commodity prices. So we are trying to follow up all the prices of commodities all around the world very closely. We are trying to maintain our positions accordingly so that we are getting the full benefit of this day-to-day follow-up strategy on commodities especially. Successful positioning against competition is quite important. So not only for our competitors but also against the private label. We are having some different growth strategies, which we are implementing in a good way in the first quarter especially. Effective supply chain and procurement strategy. As I mentioned, procurement is right now, together with cash flow priority, one of the core activity for us right now, which we are following up day-to-day basis again because business continuity is quite important right now. And managing the consumer behavior change are quite important as well for us. We are running almost more than 80 consumer research only in Q1 in order to understand the trends, change. And we are also partnering with some outsourced companies to understand the new dynamics on demand-making area. And of course, one of our biggest strength is innovation. We are always relying on our innovation capability, which really gives us a big important advantage, competitive advantage in terms of creating more and more value addition and gross margins actually. So as a result, despite heavy challenge, we achieved outstanding results in Q1. We keep our market leadership position almost with the same market share. Again, #1 macro snacking business we have in the geography. And we have delivered 21.1% consolidated EBITDA margin, which is almost one of the highest margin in the quarter till to today. And also our growth rate is more than 111% top line growth in total net sales, which shows a strong growth on the top line. So I must say we are in a very good condition as of Q1 in terms of top line and bottom line performance. But also, we are in a good position in terms of our brands, in terms of our market share in the market. One of the most important thing is our success has been awarded locally and globally by many global organizations, especially one of them is we have been certified as one of the best employers in the world by a global organization, which gives us a huge motivation, in fact. And also in terms of sustainability efforts, our sustainable efforts keep awarded. And also lastly, among Turkey's Happiest Workplace survey sponsored by Capital Magazine. They awarded us as a happy place to work. This is quite important in those pandemic environment and disruptive times actually, as you know. So this is one of the most motivating rewards for us within this year. So coming to our financial performance. Regarding the net sales, we have reached almost TRY 5.8 billion, as I mentioned, with 111% growth. In terms of gross margin, gross profit, we had reached to TRY 1.8 billion. And the growth is more than our net sales ratio as well. And the gross rate as a percentage, we reached to 31.4%, which is a very good margin level during those uncertain times. And in terms of EBITDA, we have delivered TRY 1.2 billion approximately EBITDA level with a 128% approximately growth, which is by far higher than our net sales ratio. Another good trend was our net debt to EBITDA position. Our net debt to EBITDA position is declining versus last year, so after our strong performance. And operating cash flow, we are in a better position versus last year. So all the aspects of the financial indicators, we are in a good position. So if you look at in detail, one of the most important thing was to keep our volume. Actually, we delivered more than our expectation. Our volume has been growing like our growth rate, but in terms of volume was 7%, which is a very good sign in terms of productivity in our supply chain, et cetera as well. We have discussed the net sales and other income, other indicators in our EBITDA. So through our well-aligned, world-class brands, strong financial discipline and a clear road map for growth, we are confident that we will achieve our long-term growth targets for this year and for the next coming years. So I must say again that we are really very experienced in those difficult geography, so in terms of operation. And our, I think, historic data shows us that we are really running in those uncertain environment in a very great way and the Q1 results are confirming with our success actually. Our solid performance driven by volume and value growth. I would like to repeat this one more time because, as you know, in those difficult times, the inflationary environment, due to the price increases, mostly volume there will always happen, the volume loss is always happening. But in our case, we are having volume growth. Another very good positive sign is you may remember from our previous investor meetings, I was always telling that we are on a restructuring in cake category, for example. And as you may see that one of the biggest growth is coming from cake category in terms of volume and in terms of net sales. So it's another good sign, positive sign that our restructuring process is working and we are expecting more and more growth in cake category, especially. We are having a very low-cost base operating model. This is quite important. I'm always repeating this because this is one of our biggest strengths versus our competitors, global competitors. So our SG&A level is only 4.4%, which is one of the lowest SG&A ratios in our industry. And our overall OpEx to net sales is 11.6%, which is, again, very competitive. And our COGS to net sales is again under control despite very serious and very huge commodity price increases and packaging material increases. So that's all from my part. Now our CFO, Fulya Banu Surucu, will give you some more detailed information about our operations and then about our financial details.

[Fulya Surucu, executive]

Thank you, Mete bey. Hello, everyone. Thanks for joining our meeting. Good afternoon and good evening to everyone. So let me continue with our domestic operations. As you can see, we were able to maintain our market leader position with 36% market share. As mentioned in the previous slide by Mete bey, not only we are the market leader in snacking category, we are also #1 in macro snacking business as well. So #1 in biscuits, #1 in chocolate, #2 in cake. And this is versus Q4 2021, you also see the market share development and increases in all 3 categories: biscuits, chocolate and cake. This is another very important indicator that we not only were able to maintain and increase our profitability, we were also able to increase our market share in all these 3 categories. We see an increase on volume trend of approximately 3% versus the year-end and in revenue by 56.5% versus year-end of 2021, which also drove this market share results, as you can see on the page. When we go to next page, as part of our growth engine, innovation is at the heart of our operations and at the heart of our strategy. All of our 3 categories, innovation momentum continues and will continue throughout 2022. You see some of the products of our innovation pipeline on the page. And I'm also happy to share with you that we also have a very strong innovation pipeline throughout the year and throughout the years. When we take a look at our Turkey financials versus Q1, you will see that all categories, volume, sales, gross profit and EBITDA, we received significant growth. So volume increased by 10.5% and total volume increased by 10.8%. All the remaining 3 categories, sales, gross profit and EBITDA, we were able to maintain 3-digit growth numbers. 110% revenue growth versus prior quarter, mainly driven by our effective and very successful pricing strategy and strong focus on executional excellence, excellence in our execution. Gross profit margin reached to 26.6%, 50 basis points increase. And this translated to 19.7% EBITDA margin by the end of the year, which is the highest EBITDA margin we reached so far in our domestic operations. And you see the absolute value increase from TRY 301 million to TRY 692 million by the end of Q1 '22 versus prior quarter, prior year quarter. So let me continue with our international export and international operations. Very strong performance continued in our international business as well. As you can see on the page, we again maintained our strong market share position in all 3 regions: Saudi, #1, biscuits 25.3% market share. And you see the increase versus prior, 2021, from 25.1% to 25.3%. In Egypt, again, #1 position, biscuit 18.6% market share. You also see below the market share increase in Egypt region as well. And in Kazakhstan, we were able to reach the #3 position, 13.1% market share. And Albeni became the #1 in biscuits with filling. And the other Albeni product became the #2 in countline. So it kind of became like the perception is Albeni is like their local brand. Again, our innovation strategy momentum continues in our international businesses as well. Our NPD sales contributed 5% of our total international sales in Q1. Both in Saudi, Egypt and Kazakhstan, again, needless to say, we also have a very strong pipeline in our international business for innovation products as well. Now we take a look on our total financial results in our international businesses, where we see very strong results. Despite slight decrease on volume, sales, gross profit and EBITDA increased both in absolute value terms and margin perspective. The main reasons being on-time pricing activities and effective pricing strategies, sizing activities and productivity improvements. They all drive the strong financial results. So revenue up by 111.5% versus Q1 '21 to Q1 '22. Gross profit increased by 116%, more than the revenue increase. And margin, we were able to maintain margin, even exceed slightly the margin that we had last year in Q1. And in terms of EBITDA, we were able to increase our EBITDA numbers by 125%. The breakdown of our international businesses, you can see Saudi, a slight decrease on volume, 2.9%. But despite the volume decrease, we were able to reach the revenue growth of 14% and year-over-year EBITDA growth of 34.5%. And the same momentum continues with Egypt. Despite volume decreases, we were able to reach 8.1% revenue growth. And for Hamle, 15.3% volume growth versus prior year's Q1. And we ended up at 40.7% year-over-year revenue growth for Hamle. In terms of EBITDA margins, for FMC and IBC, we were able to reach 23.3% EBITDA margin; for Hi-Food, 10.7%; and for Hamle, 13.3%. Our next section is acquisitions. So on this section, we wanted to share with you how acquisitions impacted us over the years very transparently. As you all know, the most recent acquisition was Önem and let us share with you where very transparently how they performed over the year and how they contribute to our EBITDA. But before we start, just to remind you what our acquisitions were. So you can see on the page that since starting March 20, 2016, Hi-Food, FMC, Hamle, UI MENA and IBC became part of our portfolio, and very recently by the end of Q4 2021, Önem became part of our portfolio. All these were very strategic moves, which helped Ülker Bisküvi to build higher scale in primary markets, to build instant synergies between the 2 companies that accelerated Ülker's profitability and enhanced sustainable growth, vertical integration achieved upon announced acquisition. And I am very happy to share with you that as of Q1, Önem contributed incremental EBITDA margin of 330 basis points to consolidated Ülker EBITDA numbers. And as you know, the most difficult thing during, I mean, upon the acquisitions are the culture integration. Since most of these acquisitions were part of our organization, we did not have any transitional issues. In terms of culture integration, we were able to maintain and enjoy the instant synergies regarding the culture integration. On the left hand, on the right-hand side, you see the EBITDA contribution of our acquisitions. In fact, again, let me remind you that 44%, as of Q1 2022, 44% of our EBITDA is driven by our international operations, which is also another natural hedge that our portfolio, our company has. When we break the 44% of international operations, you see the FMC, IBC, Hi-Food and UI MENA numbers and including the Turkey export. Let's take a look how these EBITDA margins developed over the years. So North Africa, when we acquired it, its EBITDA was 9.2%. And as of today, it's 10.7%. There is a little bit fluctuation in 2022, mainly driven by COVID and high inflation and the market shrink in Egypt. Take a look at Middle East: FMC, IBC, UI MENA. When we started in 2017, when they became part of our portfolio, it was 18.3%. And as of first quarter end, it's 24.6%, almost 6% increase in EBITDA margin. And their total EBITDA contribution to Ülker Bisküvi is 20.2% to the total absolute value of our EBITDA. Central Asia, Hamle. In 2017, it was 6.7%. And as of today, it's 13.3%. And the total EBITDA contribution is 2.3%. So overall, what we can say that we are quite happy of all of these acquisitions. We see instant synergies, and we see that they were all very strategic right decisions and moves that we had. And as I have shared, just to again emphasize, Önem contributed 303 (sic) [ 330 ] basis points to our EBITDA margin by the end of Q1. Let me continue with our balance sheet highlights. Our net debt to EBITDA is 3.22, which was 3.53, which we shared with you by the end of the year. So we owe it to our strong EBITDA performance that we had in Q1. And I believe that this momentum will continue over the coming quarters as well. Maturity breakdown of our loan is 15% to 85%. And again, working capital days, which was 142 days by the end of the year became 107 days by the end of Q1, mainly driven by accounts receivable and inventory. You know I shared with you that as part of the target hedging strategy we established a hedge committee. And as of today, we increased our hedged amount from 20% to 30%. And as of today, it's 30%. Out of our open position, EUR 150 million is hedged. And on top of that, EUR 30 million Önem Gida forward also executed. Our instruments were cross-currency swaps and forwards, and we will continue this momentum over the coming quarters as well. So before I share with you our 2022 guidelines in terms of net sales and EBITDA margin, let me share with you what our balance of year priorities are. Top line growth and sustain profitability is our #1. So we believe that we will continue to sustain profitability with an increased top line growth. Strengthening balance sheet and cash flow is another very important priority and keep adjusting to changing conditions via strong agile structure, so things keep changing continuously. And we have a very agile organizational structure and a very agile decision-making mechanism in the organization, which will help us to adapt to changes very quickly. And as a last page, I'd like to share with you our 2022 guidelines, guidance in terms of net sales. A 75% increase versus prior year from TRY 12.5 billion to TRY 22 billion. And we believe that we will be able to maintain 18.6% EBITDA margins despite huge commodity and raw material increases that we had and that we will continue to have throughout the year. Thank you so much. Beste?

[Verda Tasar, executive]

Thank you. If you have questions, please feel contact with the Investor Relations. And we will move to the Q&A session. Lydia, please go ahead.

[Operator]

[Operator Instructions] We have a question from Kayahan Demirak from AK Yatirim.

[Unknown]

I have a question on your, the financial investments, these funds with less than 3 months' maturity. I see some decline in the value. There is no cash outflow for further investments. I mean, the last month was a bit volatile. I'm talking about March. And there is further volatility in the financial markets. So what you can tell us about the current performance of this fund? And would you plan to continue to keep majority of your short-term cash-like investments in these funds given that you're trying to, I mean, maintain a certain level of net debt to EBITDA. And also another question. Is it possible to provide the guidance in terms of operating cash flow that you are exiting for this year?

[Fulya Surucu, executive]

Thank you for the question. Related to our investments, due to the market crashes all over the world, we have seen some decreases in our value of our investments. However, we expect it to recover over the coming quarters. We are not concerned about it at all. And in terms of guidance, we are working on it, but I mean we wanted to share with you what we believe in terms of net sales and EBITDA. Cash flow numbers change very fast depending on the commodity and raw material increases that we need to invest to have a business continuity and which are basically not predictable. So that's why we chose not to give any cash flow forecast this time. But we are very confident in terms of our sales and EBITDA margin performance and forecast.

[Unknown]

Okay. And as a follow-up, you said expected to recover in the coming quarters. Should we think of it as the next quarter or through the end of, year-end quarter?

[Fulya Surucu, executive]

Next quarter, over the coming quarters, towards the end of the year.

[Operator]

[Operator Instructions] There are no further questions. Dear speakers, back to you.

[Verda Tasar, executive]

Dear all, thank you for participating on our first quarter webcast. Fulya, Mete bey, thank you for joining us.

[Fulya Surucu, executive]

Thank you.

[Operator]

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