Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, welcome to Ülker Bisküvi First Quarter 2023 Financial Results Conference Call and Webcast. I will now hand over to Beste Tasar, Investor Relations Officer. Madam, please go ahead.

[Verda Tasar, executive]

Thank you. Hello, everybody. This is Beste. Welcome to Ülker's First Quarter Financial and Operational Results webcast. Here with me in the room are our CEO, Mete Buyurgan; and our CFO, Fulya Surucu. Now I leave the ground to our CEO, Mete Buyurgan, for the opening remarks, Mete.

[Mete Buyurgan, executive]

Thank you, Beste. Good morning, good afternoon, everyone. Welcome to our first quarter call. I'd like to give you an update on our business and strategy at the very beginning of the presentation. But I think we should first remember circumstances, especially in the last 8 to 12 quarters, such as pandemic supply chain breakdowns, logistic crisis and almost inflation areas.

So it was very difficult, like 2, 3 years, I must say. And if you are going to look for the first quarter at the same time, we have run our business in the -- in the right direction despite all those cars. But in the first quarter, as you may know that we had a derating earthquake, which impacted 3 fees and millions of people in our home country, Turkey, but also it was impacting some neighborhood countries at the same time. And again, despite all those crisis, we did well. We did great in the last quarter and in the last 2, 3 years. And I can say we are here in front of you with that it's very outstanding start to the year.

If I may talk about a little bit on the earth peace, as I mentioned, it was already devastating earthquakes -- so when we heard that Heartbreak has been happened, we -- at the same day, we were in the field. We sent a lot of food stuff to support the impacted people in the region. We have tried to resolve the problems, transportation pros, logistic progress, accommodation problems of our employees in the region at the same time, and we keep investing in the region, and we are very visible. We are going to be very visible in the end of the year at end of the year of this year with loss of different activities.

If we come back to the first quarter, I must say that we had a robust top line growth driven by effective pricing and effective product category mix management and channel mix management. So our growth rate was significant. Gross profit margin, we are almost 3% above prior year, which is showing the quality of our growth in a great way. EBITDA, we reached in terms of we reached TRY 2 billion EBITDA, which is again a bit exceptional EBITDA margin of 23.2%. As far as I remember, it is the highest EBITDA, which we achieved. And I will -- I must thank to our low-cost operating model reaching to this EBITDA level because our low-cost operating model is giving us a lot of agility lots of flexibility at the same time. So we are enjoying profit order of our business model act. Refinancing completely successfully, one of the most important task in the first quarter was to refinance our loan structure, and it was done very successful, thanks to our finance team, sustainable teams. It is also very important for us because this is the first sustainable loan or cash, which is great. And I would like to thank again to our banks, to our partners who are supporting our business for many years.

We keep our presence in strongly in international markets. If we look at our geographies -- for is going to give some details and as a summary part, I must say that especially Turkey growth and also Central Asia growth is quite successful. In Central Asia, VAV keep growing in the last 2, 3 years is, in fact, in a consecutive way, and we gained market share. We become very strong market players in most of the Central Asia countries.

Of course, keeping focus focusing on our execution to execution of strategy towards our vision of brand equity, investing on brand equity and developing our capabilities. And of course, with the lands growth and expansion is also our successful areas, which we had good results in the first quarter. As a result, we have -- we keep our most strong market leadership in taking category in our hometown on country in Turkey. We keep our strong macro snacking leadership in the industry, 23.2% consolidated EBITDA margin and 72% top line growth, which are really promising.

If we look at the numbers more deeply, our revenue has been reached about TRY 10.1 billion with a 72% growth, as I mentioned. EBITDA level is also TRY 2.3 billion, which is the growth of 88%. Again, I will have mentioned stress that our EBITDA and gross profit margin growth is higher than net revenues, which again shows our quality of growth, but also we are getting the benefit of our diverse procurement strategies at the same time. And very importantly, net debt EBITDA ratio is keep declining. Right now, it is almost 2, which is, again, very healthy, and our gross margin has been reached to 34.3%, which is in a great shape as of today -- as of first quarter.

If you look at the P&L, I emphasize most of the important topics like EBITDA, net sales and others. But I would like to get your attention to net debt -- net income position at the same time. We are, again, unlike to our previous quarters, we had reached to a high net income level at the same time. So those are the very quick updates. Now Fulya Surucu, our CFO, will continue to the presentation with some detailed information. Fulya?

[Fulya Surucu, executive]

Thank you, Mr. Buyurgan. I'm very happy to share our strong Q1 performance results to go through details one by one. For 2 consecutive quarters, we delivered net income positive, and all KPIs are very, very strong. So snacking sales volume and snacking sales value on Page 8, snacking sales volumes slightly down by 2.5%, mainly driven by biscuit offset by chocolate and cake volume increases versus prior year quarter. However, our snacking sales value increased almost by 74%, biscuit 57.6%, chocolate 88.5%, and cake 81.1% increase was prior quarter.

So let me take you through on domestic and international businesses. Let's start with domestic operations. We have a very strong #1 position, and we continue to sustain this #1 position in Turkey, biscuits 39% market share, chocolate 40% market share, #1, #1, and cake 20% market share with #2 position. You can see on the page that we were able to keep our market share positions versus last quarter of last year. And you also see on the second page that new product development sales contributed 11% of our total domestic sales in Q1 2023, which also highlights the big importance we give to innovation.

So let me take a look on the 2Q results in terms of sales, gross profit and EBITDA. First, I'd like to highlight that on each quarter, gross profit margin increased versus prior year on each quarter of 2022, and the momentum continues. So in Q1 2023, we were able to increase our gross profit margin by 5.8% versus prior year in Turkey only. When we take account sales volume, it's pretty much flat. Making sales increased by 90% and gross profit by -- increased by 5.8%, reaching to total 2.4% gross profit margin, and this translates to 23% EBITDA margin, which is 3.3% higher versus prior year.

Again, our effective pricing management, mix management and thanks to our low-cost operating model helped us to reach these outstanding results in terms of gross profit and EBITDA -- and the picture does not change when we take a look on our international businesses. Solid growth in our key markets. We kept our #1 position in Saudi Arabia, Egypt and a very strong #2 position in Kazakhstan. So biscuits #1 in Saudi Arabia, #1 in Egypt in biscuits, and we became #2 chocolate centers in Kazakhstan.

And again, new products contributed 5% to our international sales. When we take a look at our numbers, snacking volumes slightly down versus prior quarter snacking sales increased by almost 50% versus prior year and gross profit, we were able to keep our very healthy, strong gross profit margins in our international businesses around 38%, and we were able to increase slightly our EBITDA margin reaching to 23.5%. So in Saudi Arabia, we were able to increase our sales by 20% and kept the EBITDA margin in Egypt, successful pricing activities in executed and very good fight against inflation -- inflation increases surpassed the product prices, which also led to EBITDA margin increases. And in Central Asia, a great success story. You will also see on the coming pages how our EBITDA margin evolved over the years significantly.

On the acquisitions update part, you see with all these acquisitions, we were able to sustain a very healthy portion of our EBITDA margins on foreign currency denominated. So as of Q1, 25% of our EBITDA is foreign currency denominated. And the latest acquisition on AGA acquisition that happened on the last quarter of 2021 contributes 390 basis points to our EBITDA margin. So all the numbers would have been 4% lower if we did not acquire Banan, which also shows that it was a great and a very important acquisition that we included in our portfolio.

On Page 18, you see our EBITDA percent development in all our international businesses. North Africa region, it increased to 15%. As I have shared, we were able to surpass the product inflation prices to product pricing and successful pricing activities in product and mix management delivered 15% EBITDA margin in North Africa. Same in Middle East, saw very a healthy growth on revenue, slight flat volume versus prior year delivered approximately 25% EBITDA margin. And on Central Asia, our EBITDA margin almost tripled since 2017 on a steady basis. It all increased over the years. The expansion growth and the profitability is a great success story in our Central Asia region.

On the lashed highlights, I'm really happy to share that our net debt EBITDA in terms of covenant calculations decreased to 2% as of March 2023. It is on a decreasing trend versus prior year where we ended up at around 2.3%. In terms of working capital, we ended up the year with 97 days. Now it is 96 days, taking the business cycling seasonality effect, we were able to decrease it by another 1 day. In terms of hedges, 48% of the open position is hedged by the end of Q1.

And as I have also shared, this is another important treasury policy we have executed and taking into 2020 and which will continue in this format. And the instruments we have used this cost currency swaps forward and the maturity breakdown of our loans are 49 short term, 51 long term as of Q1. We also like to share our full year guidance. We realized TRY 28.2 billion by the end of 2022, with 19.4% EBITDA margin. Our full year expectation is TRY 40 billion for net sales and 19% EBITDA margin as our initial guidance for 2023.

And on the second -- on the next page, we also like to highlight our EBITDA growth and EBITDA margin growth over the years, so -- which shows that we were going to end up the year in terms of revenue with TRY 40 million and TRY 7.6 billion EBITDA reaching to 19% for 2023. So we have a very successful both operational and financial grade performance by the end of Q1. And we believe that it will continue throughout the 2023 as well. Thank you so much back to Beste.

[Verda Tasar, executive]

Thank you, everyone, for listening up. We are happy to hear your questions.

[Operator]

[Operator Instructions]. The first question comes from Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

Congratulations for their successful results. I'm trying to understand the margin drivers, particularly in Turkey. I mean you have an outstanding EBITDA margin. How much price increase have you done in the first quarter? And I mean, since you have not also revised your year-end numbers guidance, is it reasonable to assume that because of a limited lira depreciation in the first quarter, you may have one-off high EBITDA margin or this is very sustainable in the remainder of the year?

[Mete Buyurgan, executive]

Thank you for the question. Regarding your first question about the drivers of the margin. As I mentioned in my previous part product mix, category mix and channel mix were quite important. They are the biggest pillars. But on the other hand, we have -- we don't have any price increase in the first quarter. However, we had some price increases in the last quarter of the last year. So previous quarter, I must say. So we are getting the benefit of that increase at the same time. And also, as mentioned, again, the low-cost operating model is giving us multiple impacts in terms of EBITDA and gross margin growth. So those were the biggest drivers of the increases.

Regarding your second question about the stability of this profitability. Of course, the profitability is on a very higher side. On the other hand, we started to observe in Turkey, especially a little bit in European countries and in Turkey, I must say. We are observing some -- we are experiencing some slowdown in demand by the consumers in every category, it's not only snacking, but also other FMCG categories as well. We are also observing some slowdown on the retailer businesses, especially the discount respect. So we are going to -- we are very confident on our yearly targets and our year-end targets. But on the other hand, there will be some small decrease on the profitability for this quarter and third quarter, I must say.

[Hanzade Kilickiran, analyst]

Okay. So I understand. I mean, your guidance could be met and if not exit on the EBITDA margin because of this very strong first Q even though...

[Mete Buyurgan, executive]

Yes, because we are going to... Right, definitely because we are going to support the demand by the -- by some volume promotions and so on in this quarter and the third quarter. That's why the margin is a little bit dilutive, but as guidance, we are sticking with our guidance targets, and we are very confident on that. As you may see on the screen, it's going to be minimum 19% EBITDA margin again.

[Hanzade Kilickiran, analyst]

Okay. And I have a final question about Turkey. I mean I presume that you also -- you may see some sort of extra sales because of the efforts of Article because confectionery items became the key tool to send to the area. Have you also observed some sort of support on your sales because of the earthquake?

[Mete Buyurgan, executive]

There is no... Not too much impact because Hana we have in February, especially the same amount of the earth. We have sent a lot of trucks, so almost 30 trucks, big trucks, free of charge products to the region. So there is not an impact on sales actually due to the demand of the -- due to the demand of that area.

[Operator]

The next question comes from Ece Mandaci from Unlu Securities.

[Ece Mandaci Baysal, analyst]

I have 2 questions. One is on your slide on the presentation, Page 24, you have shared your volume guidance for 2023. I assume that this number includes a Angad volumes as well. So just thinking about the snacking volumes, how much growth or decline should we assume or you're expecting for 2023? And secondly, when I look to your EBITDA margin performance on a country basis, there is a significant growth in Kazakhstan and Egypt on a year-over-year basis. But when we look at the consolidated EBITDA margin performance, we are seeing a much lower increase on a basis point basis on a year-over-year basis. So is there the effect of lower margins in the exports from Turkey. Is there any value to effect from there? It would be great if you can share your views on the EBITDA margin performance going forward on a country basis.

[Mete Buyurgan, executive]

Thank you. Again, for the volume expectation of this year, as I mentioned, it seems there will be some slowdown we are experiencing in the last April and May right now. There are multiple impacts. But on the other hand, we are seeing observing these trends in many other markets in Europe, Central Asia, Middle East, North Africa in many markets. We are believing that this will be not for a long time. So we are expecting a flat volume impact versus last year at the end of the year. But this quarter, in the second quarter, we are going to observe some like 4 or 5, we may see 4%, 5% growth decline in terms of volume due to slowing demand in the countries will be based big countries.

[Fulya Surucu, executive]

And your second question in terms of EBITDA margin. So North Africa, Middle East and Central Asia, there EBITDA margin increased significantly. But now you take a look on our EBITDA margin shares. North Africa makes up 1.9%, Middle East, 16.3% and centrally just 3.6%. The risk is coming from year-end, it increased by 3.3% on a consolidated basis. That's the number that you see is just mainly simple that. Hope that helps. Can I -- sorry can I share? Yes, please go ahead...

[Mete Buyurgan, executive]

Can you hear us?

[Ece Mandaci Baysal, analyst]

Can you hear me?

[Mete Buyurgan, executive]

Yes, we can hear you, ask your question.

[Ece Mandaci Baysal, analyst]

So when I look at your just international margins, EBITDA margins, just I wanted to clarify myself. There is a 30 bps increase to 23.5% as of first quarter '23. But I think the growth in Africa, Central Asia under the International segment is much higher on a year-over-year basis. So there could be some possibility that exports from Turkey is diluting the overall numbers for international EBITDA margin?

[Mete Buyurgan, executive]

I may. There is some dilution EBITDA, of course, there is a dilution from export of Turkey. But in consolidated terms, we are -- there is some profit sales in Turkey, some profits over the respectful market. So overall, that is a great shape. But yes, you are right. There is some small impact of dilution.

[Ece Mandaci Baysal, analyst]

Yes. So going forward, for these regions for Egypt, for example, or for Kazakhstan, should we assume still margin improvement on a year-over-year basis in the second quarter, third quarter or the quarters ahead?

[Mete Buyurgan, executive]

Yes, definitely because you may see the Slide 19 on Page, Slide 19, Central Asia, for example, is growing every year almost steadily. So we are expecting the same EBITDA margins as it is in the first quarter, both for North Africa and Central Asia.

[Operator]

The next question comes from Antonio Luiz Gomes from Ninety One.

[Antonio Luiz Gomes, analyst]

I just wanted to get a little bit more color, firstly, on your working capital line, particularly the related parties, receivables and payables. There was a big increase in the quarter, which led to a cash outflow, which negated your increase in EBITDA. And so I just wanted to understand why has there been a large step-up in your related party working capital?

[Fulya Surucu, executive]

Thank you for your question. It is mainly driven due to the sales increases and reflected to our accounts receivable increases. Seasonality, sales increase, product mix and other than that, there is no other species of increase on those receivables.

[Mete Buyurgan, executive]

Especially, Antonio, you may know that first quarter is one of the peak season for us. And we had also gifting sales, gifting shipment ramadan is all the gifting candies and Charcot. So it's not a direct apple-to-apple analysis in terms of quarters. So this is a very normal increase due to the sales increase in fact.

[Antonio Luiz Gomes, analyst]

Okay. Okay. That makes sense. Yes. It was still expressive despite a historical increase on the seasonality, particularly your related parties. That's why, I mean, as a percentage of sales, it went from about around 14%, 15% in Q4 of LTM sales to something like 17 your receivables and related to partners, whereas everything else is a stable, your receivables, your inventories, your normal payables, in fact, yes, our normal payables be down a little bit, but that was it.

[Mete Buyurgan, executive]

Yes. And just a note, related parties are our sales companies. So this is directly -- the sales companies, which we are invoicing all our products through those sale companies. So this is a normal trade payable, trade receivable increase due to the volume growth or lifting sales basically.

[Antonio Luiz Gomes, analyst]

Okay. That makes sense. And my final question was on -- regarding your sensitivity to any further Turkish lira volatility you're coming into an election this week. So I was just wondering what your view is on that and what the impact would be of any further depreciation on the lira on your leverage and your EBITDA?

[Fulya Surucu, executive]

Yes. I mean, depending on the election results, there might be some movements on our -- on the Turkish lira. But in any case, we are taking the productive actions. As of today, 80% of our open position is hedged. Just to take mitigating action in case there will be an increase. And we have also set up our capital strategy very quickly. It preserved cash at making the cash as the highest priority throughout the year and throughout the next following 3 years as well. So whatever the result will be or whatever the Turkish lira depreciation or appreciation will be we are ready and we are taking proactive actions, and we are -- we have flexible models to protect the company's profitability.

[Mete Buyurgan, executive]

And also, Antonio, I think the last 3-year performance of cash despite the very high devaluation inflation, how we keep our EBITDA margin -- gross margin and EBITDA levels in an increasing way is a great proof of how we are managing the company in those circumstances.

[Operator]

The next question comes from Daniel Zaczkiewicz from Barclays.

[Daniel Zaczkiewicz, analyst]

Okay So you've seen leverage come down again quarter-on-quarter. I was just wondering whether you actually have like a medium-term target for where you'd like leverage to be? And then could you also just give us some here where we should expect CapEx for this year.

[Fulya Surucu, executive]

Thank you for the question. So we ended up the net debt EBITDA at 2%. So our objective is to keep and sustain this level to be around level around throughout the year and over the coming years as well. In terms of CapEx, there is no additional CapEx rather than the routine business requirements, maintenance and routine business requirements. So no additional and incremental CapEx for this year.

[Operator]

The next question comes from Dmitry Ivanov from Jefferies.

[Dmitry Ivanov, analyst]

May I please ask a question about your debt maturity profile. I think you disclosed that approximately just below 50% of the debt is short term. So I think like in dollar terms, it's just approximately USD 650 million. And as you disclosed, as you mentioned, you already utilized indicated BFD facilities for 330 million. I just wonder -- just to understand, like how do you plan just to meet the rest of the short-term maturity this year. So it's still like if I calculate it correctly, approximately $300 million in maturities in this year? Like do you want -- do you plan to utilize cash? Or do you want -- do you plan just to extend maturities on this debt? So any color on this short-term debt, apart from indicator would be very helpful. This is my first question. Maybe I'll stop here just...

[Fulya Surucu, executive]

Thank you. Thank you for the questions. So this table on Page 21 is the picture as of March 31, 2023. So even though we had all the contracts signed in February and March, we utilized our refinancing and completed on April 20. So on the second quarter, by the end of second quarter, you will see that this will be shifted to long term. And almost all of them will be long term by the end of June, so 95% of it. So the short term is just a phasing because we completed refinancing on April 20, finalized it just after we closed the quarter 1. So you can assume that all of them are -- most of them are long term, which will be due on April 2026.

[Dmitry Ivanov, analyst]

And just to confirm, like the new maturity profile of syndicate in EBRD is bullet repayment. So there is no amortization between like April and 2023 and April 2026. So like it's a bullet repayment of both EBRD and did...

[Fulya Surucu, executive]

There is... There is not... So all of our syndication loan will mature on April -- by the end of April 2026. Understood.

[Dmitry Ivanov, analyst]

And just to clarify because I think it's just important. So all like after the reporting date, you took care of all the short-term maturities. So basically, like there was some like other short-term bank loans on the balance sheet, but these like loans were either repaid or extended. So basically, at the end of the next quarter, all the debt will be long-term debt on the chart... Just to come...

[Fulya Surucu, executive]

Yes. They are already classified to long term at the end of April. In the end of Q2... Yes. Thank you.

[Dmitry Ivanov, analyst]

Understood. And maybe like one more question on acquisitions. So I remember back in 2020, you were discussing potential acquisitions, including acquisitions of your distribution, not you, but holding company distribution companies, Horizon and Pacific. Is it still on the table? Are you still looking at acquisitions? And like what's your kind of planned strategy when it comes to M&As, and this will be very helpful.

[Fulya Surucu, executive]

It's not on the pipeline right now. Mete, anything you'd like...

[Mete Buyurgan, executive]

No, it's not on the pipeline right now. We don't have any projects right now for the -- at least for within this year, actually, and others.

[Dmitry Ivanov, analyst]

Understood. Like apologies, last one on this working capital, just to confirm. This increase in receivables in Q1 as you discussed the second one-off. And should we expect some reversal in working capital like in the next -- in this quarter and the next quarter for any kind of guidance on the working capital reversal will be helpful for us. A final question from me.

[Fulya Surucu, executive]

We look at working capital on a hold KPI perspective accounts payable and inventory, you see that it decreased by 1 day from 97 to 96 days and working capital is a high focus and a high priority for us and our focus is to decrease it further over the coming quarters, but there might be some seasonality impacts -- so this is on our focus. And if there will be any increases, it will be due to seasonality, and it will be very temporary. But I mean as of today, I'm comfortable that we were able to decrease it by another 1 day despite some seasonality increases like gifting and so others.

[Operator]

The next question comes from Anjali Doshi from Nuveen.

[Anjali Doshi, analyst]

I think most of my questions are answered, but I just wanted to drill down a bit more on the free cash flow dynamics and outlook for this year. So just to confirm with regard to the CapEx question, what sort of like the level of CapEx to sales that we should assume for this year and I guess going forward, if you can provide some color on that...

[Fulya Surucu, executive]

Expected CapEx is around 1.5% to 2% of our net sales for this year, that's how you can assume, which is pretty much in line with what we had in prior years as well.

[Anjali Doshi, analyst]

Okay. Great. And then to clarify also on the working capital. If I heard correctly, just from the prior question, that is your target to get to 95 days for this year? Or do you think you can even reduce it lower?

[Fulya Surucu, executive]

Our objective is to reduce it over, but we have not set up a clear working capital base as of today, but our objective is to decrease it further and further over the coming quarters. That's all I can share right now.

[Anjali Doshi, analyst]

Okay. Excellent. And then I guess just one other question in terms of looking at the components of -- within the cash flow statement. One of the big changes that we saw last year was the change in nontrade receivables from related parties, which I believe is to the parent yields holding and that nontrade receivables increased by some, I guess, 649 million, and there was a further increase of about 163 million in this quarter. So can you just clarify what the nature of that nontree receivable is? And what we can expect in terms of directionality for that through the remaining quarters of this year?

[Fulya Surucu, executive]

So that's mainly noncash related and the increase is mainly FX increase related. But if you need any further details, we will be able to help you if you have any other detailed questions, but that's all I can say, mainly driven by FX increases, noncash. Thank you. Ladies and gentlemen, there are no further questions. Dear speakers, back to you for the conclusion.

[Verda Tasar, executive]

Thank you, everybody, for joining our call. I hope to see our second quarter results.

[Operator]

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