Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Ülker's earnings conference call on the 30th of May 2024. [Operator Instructions] The format of today's recorded call will be a presentation by Ülker's management team, followed by a question-and-answer session. So without further ado, I would now like to pass the line to Ms. Beste Tasar. Please go ahead.

[Verda Tasar, executive]

Thank you, Michael. Hello, everybody. Welcome to Ülker Bisküvi First Quarter 2024 operational and financial earnings webcast. Here with me in the room are CFO, Fulya Banu Surucu, for evaluating our first quarter results. Now I'm leaving the ground to her for her starting comments. Fulya ma'am?

[Fulya Surucu, executive]

Beste, thank you so much. Thank you. Good afternoon, and good morning, and thank you, everyone, for joining Ülker's first quarter results webcast. On behalf of our CEO, Mete Buyurgan, Buyurgan couldn't attend the call today due to a very unexpected last-minute travel plan, and he apologizes for that. So let me start sharing with you that all financial figures are reported using TAS 29 financial reporting in hyperinflationary economies unless stated otherwise, but all our figures and numbers are per inflation accounting. So I'm very pleased to share that 2024 is off to a solid start with a track record of strong results operationally and financially. Solid top line growth, effective pricing and cost management coupled with our agile way of doing things, we delivered very solid results, which I will be sharing on the coming slides soon. To accelerate our strategy of snacking leadership and sustainable long-term growth, we continued to invest in our most beloved iconic brands and capabilities in this quarter as well. Despite a very challenging and operating environment, we were able to maintain our very strong market share position and we had a very successful Eid and Ramadan period with a lot of activities that supported our leadership position. And as you all know, Ülker has a very strong sustainability journey that started almost 10 years ago and you can see some of the awards we received in this quarter related to sustainability, which a couple of them is -- we won the gender awards in supporting female farmers in Ivory Coast and Aliaga Weat Project won social responsibility award that are business related to our sustainability in this quarter. As you all know, we have come a long way to reach operational excellence and cash and you see some KPIs on the operational excellence page such as net loss, overall equipment efficiency, implementation of IoT systems and lost time accident rates, which are all really favorable. And on our footprint, strong performance all around the world on the next page. We were able to increase our revenue almost in all regions throughout the world that we operate. Turkey grew on revenue 16.9%, EBITDA grew 14.2%. Turkey exports 4.3% and 7.2% in terms of EBITDA growth. And Central Asia's revenue growth of 1.5%. There is a decrease in EBITDA growth by 22.2%. Middle East grew by 1.3% in revenue and 6% EBITDA decrease versus prior year. And North Africa grew 67% and 59.6% revenue and EBITDA growth, respectively. And you can see the revenue growth breakdown of our regions geographically, and you also see the net revenue by division. Revenue breakdown is 68% domestic and 32% international revenue breakdown. And net revenue by division shows that 68% of the revenue is from domestic. And you see the regions breakdown of 13% Middle East, 3% North Africa and CA making up approximately 4% of our total regions in the breakdown and 11% export. And the global market share and NPD, you see the strong market share across all of our categories, 34% in Turkey and 28% in Middle East. You see that we are #1 in Turkey in biscuit, chocolate and cake. And all these figures are very strong market leadership position. And revenue contribution of NPDs make up a significant amount in our numbers. As of Q1, 11% of the domestic revenue and 7% of the international revenue is through new product launches. So in summary, despite very challenging highly volatile environment, we stay agile and focused in dealing with short term as well as executing against our long-term growth strategy very, very successfully. So financial performance. As you can see, we delivered very strong financial performance as of Q1. You see the total volume growth of 15%, a very healthy, very strong volume growth that we delivered at 15% versus prior year. Revenue grew by 13% and gross profit grew by 18%, higher than the revenue growth. So gross profit increase and revenue increase show that we implemented sound pricing strategies, including both pricing and revenue growth management and we balanced the need to offset the inflation and maintain solid volume growth as you can see from our numbers, volume, revenue and gross profit. EBITDA, we were able to reach 20.6% EBITDA number, featured in line with prior year's adjusted inflation numbers. Net income, we were able to reach TRY 2.2 billion net income, slight decrease versus prior year, mainly driven by deferred tax increase. Excluding deferred tax increase, in fact, our net income also increases by 11%. Net debt EBITDA, we continue to reach a very healthy net debt EBITDA numbers as of Q1, we're below 1.5. When we take a look at volume and revenue contribution by category, we see that our core categories, biscuit, chocolate and cake demonstrate more resilience and more elasticity than the broader food and sector universe. You can see how these factors are reflected in the figures of snacking sales volume and sales value. Total snacking sales volume increased by 17% in Q1 2024 and of that 17%, biscuits contributed 11%, chocolate contributed 24%, and cake contributed 26% to the volume growth. And you can see the breakdown, how much of these categories make up of our total sales volume, biscuit making 51%, chocolate 40% and cake 8% of our total volume. In terms of snacking sales volume, total snacking sales volume increased by 13%, 5% is from biscuit increase, chocolate is 18% and cake is at 23%. And on the next page, you see the regional breakdown of our total revenue, gross profit and EBITDA. And total revenue grew by, on the domestic side, 17%, whereas it grew by 5% in international markets. Gross profit increased by 18%, whereas it increased by 17% in international and 14% and 11% in EBITDA in domestic and international businesses, respectively, very healthy growth and very healthy numbers. And in the international operations, EBITDA percent development, you can see the numbers. We were able to increase the Middle East and North Africa EBITDA margins from 20.7% at year-end to 22.4% in Middle East. And in North Africa, we were able to increase the EBITDA margin to 14.4% from 14.2%. Slight decrease in Central Asia, mainly due to economic conditions in Kazakhstan and a strong investment on marketing activities to boost our brands further. And on the remaining part of the year, we expect it to recover. As you all know, having a stronger balance sheet is one of our key priorities that we set a while ago, and you see the results demonstrate that we continue strengthening our balance sheet program further. Our net debt/EBITDA reached 1.49%, so we are below 1.5%. And our total FX hedge number makes up 65% of the total open position is hedged via cross currency swaps and forward. And you can see the net working capital days and net working capital. Huge focus within the organization with all departments show that we were able to reach 82 days almost 10 days decrease versus prior year, mainly driven by effective management of inventory and A/P mainly. As you know, we have also kicked off the Eurobond financing. CMB approved our application in the total amount of $550 million. So Eurobond financing is in progress. And we are currently working with the most reputable business finance business partners. The financing is in progress and continues. And we also wanted to share with you our management guidance for 2024 and also 2024 priorities. We think that we will end up the year with TRY 85 billion in terms of net sales, and we should be able to reach 18.5% EBITDA margin on a full year basis. As we have shared again in the last broadcast meeting, I want to again emphasize the 2024 priorities that is still valid for Q1 as well. So inflationary challenges, they still continue and the proactive actions we are taking. Price versus volume, as I have shared a couple of slides before that we're trying to balance pricing, cost management and the volume for inflation impacts and the other impacts that happen in the environment. Investment in brand and innovation, we will continue to strengthen our iconic brands and continue with innovation. Digitalization and acceleration of AI adoption and supply chain operations, modernizing and making sure that our supply chain operations get stronger and stronger. And always, portfolio optimization, making sure that we have the best portfolio to meet the needs of our customers and consumers. So I think that's all for Q1 2024.

[Verda Tasar, executive]

Thank you Fulya. We are open for questions.

[Operator]

[Operator Instructions] We will take first question from Ms. [indiscernible] from Barclays.

[Unknown Analyst]

Congrats on results. I have a few questions, and I would like to go one by one, if I may. So my first question is, I noticed that your free cash flow was negative in the first quarter. So I was wondering, is this related to working capital outflow? Also following up on that, I can see increase in receivables to related parties. Could you please explain this and how that impacted your free cash flow?

[Fulya Surucu, executive]

Yes. Thank you so much for the question. In fact, this change is mainly primarily attributable to an increase in trade receivables in line with the sales growth and seasonality in sales is driven by Ramadan period, affecting monthly phasing of shifting sales led to an increase in receivables. There is no significant deviation in cash conversion rate compared to prior year. So this is just a seasonality impact, which we expect to recover over the coming months and quarters. So mainly related to the increase of sales and very effective use of Ramadan period.

[Unknown Analyst]

Okay. Got you. Also on your guidance for 2024. So you expect TRY 85 billion in total revenue. What is the real growth rate implied in this forecast? And also, could you please share what are your inflation and FX assumptions for this guidance. Would you say that the growth will be mainly achieved through Turkey operations? Or it's a balance between Turkey and international operations?

[Fulya Surucu, executive]

We assumed around 45% inflation, which is in line with the expectations of the market as well. So the growth will come mainly from domestic, export and international businesses on a balanced basis, like it happened in prior years. And in Q4 2024, we believe that we will be able to reach those net sales number by the end of the year.

[Unknown Analyst]

And what is the growth rate that you're implying in your forecast in real terms, year-over-year?

[Fulya Surucu, executive]

Just give us a second.

[Unknown Analyst]

Yes, sure.

[Fulya Surucu, executive]

Well, it is not comparable, inflation basis numbers, but we can get back to you later on that.

[Unknown Analyst]

Okay. Okay. Also a related question, I noticed that your Middle East EBITDA decreased. Could you please explain what were the drivers of that? And what are you expecting for the rest of the year?

[Fulya Surucu, executive]

It is mainly due to higher marketing spending to boost and support our brands and brand equity in the region. We expect it to recover, just the seasonality, over the coming periods. And over the coming quarters, we expect it to recover and to increase in terms of EBITDA margin.

[Unknown Analyst]

Okay. And my final question, a very quick one, if I may. So this new IFC loan, was it already reflected in the debt balance in the first quarter.

[Fulya Surucu, executive]

As of Q1, it is not reflected, because we have received this in April. It will be reflected as of Q2 numbers.

[Unknown Analyst]

Okay, understood. And also, congrats on the CMB approval. Looking forward to see what you're going to do.

[Operator]

Our next question comes from Ms. Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

I have a follow-up question on international margins and weakness in MENA. I mean, not only MENA, but Central Asia was also weak in terms of EBITDA generation. However, I mean, we reported an improvement in the international margins. Can you please elaborate what happened, I mean, what is causing this margin improvement in the international side, while the most profitable markets are seeing decline in EBITDA? And second question is about your hedging position. Can you please remind us your latest hedging position? And will there be any change in your position in the rest of the year?

[Fulya Surucu, executive]

Regarding your first question, Turkey exports contribute to the International segment. So that's the main driver of the increase. Regarding your second question, as of Q1, our hedge position is 65%. We do not want to be below 60%. That's what our policy. But again, we monitor how the FX rates fluctuate. And definitely by year-end, we do not want to be below 50%, 60%. That's our policy. It will not change significantly.

[Operator]

Next question comes from Mr. Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

Congratulations for good results. My first question is about the trend so far in the second quarter. When we look at the first quarter, it looks like the trend was upbeat. Your margin guidance is a little bit conservative possibly, but I would like to know then how that goes in the second quarter so far. And the other question is about the Eurobond issue, at which stage are you in that? And again for the following years, what's your strategy ahead?

[Fulya Surucu, executive]

Cemal. Regarding the Q2 volume, yes, we had a very successful Q1 volume growth and April was also very strong. And I mean, demand towards our product in the market continues, but there are 2 months to go -- to close the Q2. As of today, I cannot give a clear guidance related to volume growth for Q2, but definitely, once the Q2 results are out, we may revise our full year numbers as well. But I can tell you that so far, so good. The positive momentum continues, but we'll get the actual numbers once we issue our Q2 results. Regarding your second question, Eurobonds. We have already established finance business partner groups. We have our legal counsels. We have already started working with them a while ago. The process is in good shape. We definitely want to refinance our Eurobonds financing sometime within this year and hopefully, as soon as possible, and capture any opportunity while the markets are supportive. So CMB approved our number, total number was $550 million, below than what is outstanding as of today, which also shows our commitment to decrease leverage and maintain the decreased leverage numbers further. Was there any other question, Cemal?

[Cemal Demirtas, analyst]

Yes, yes. But, again, your guidance top line where you mentioned -- I guess you mentioned your year-end inflation expectation. Could you give us the average also, because when -- if we put, for instance, 40% for the year-end, the average comes to around 55%. So maybe in your assumption, because when we make the comparison, we might need that. Any average number you can share as an assumption in your numbers?

[Fulya Surucu, executive]

In fact, 45% for the year end.

[Cemal Demirtas, analyst]

Year end. Yes. And then any number for average, could you share or maybe we can ask later.

[Fulya Surucu, executive]

Maybe we did not calculate it. I mean, just based on the year end's 45%. That's how we calculated our numbers forecast.

[Cemal Demirtas, analyst]

Okay. And about this inflation accounting issue, I voiced this several times, but I understand that capital market board is limiting the disclosure of trade CFR of 29. But I will continue to tell that even to the capital market board that, for more transparency and for transition, it was needed for sure. So now it's making -- not in your case, but in many cases, it's making the job very difficult, not only for locals, but also for international investors and the analysts. So that I would like to highlight it again. They can limit it, of course, by the board, but at least, I would have expected from the companies to defend this. For the transparency, I think there should be better conditions. That's just a quick comment of me.

[Fulya Surucu, executive]

Cemal. I understand your point of view, but we are restricted by CMB regulations, and that's how we need to show our numbers.

[Operator]

[Operator Instructions] In the meantime, we'll take a couple of text questions. The first text question came from, [indiscernible], a retail investor. First of all, congratulations on the strong Q1 results. Is it possible for you to provide insight into the sales volumes for the second quarter, will the 16% growth achieved in the first quarter be maintained?

[Fulya Surucu, executive]

I think I have already answered this question.

[Operator]

Okay. We will be moving to the second text question, might have already been touched on. You had a very strong volume growth in the first quarter of the year, what's the major reason for such a big volume growth? Should we expect the same growth for the whole year?

[Fulya Surucu, executive]

The main reason -- I mean, now we break it down, is mainly driven by Turkey domestic numbers and international and Turkey export numbers, but the main driver is coming from Turkey. As I have shared a couple of minutes ago, we started Q2 again strong, very strong, but I cannot share any numbers right now. May is not closed. We have June, and we have another holiday season where gifting products may not be consumed as much as during the Ramadan period. So we have to wait and see, but the strong momentum continues, but I cannot clearly state any number as of right now. We will see the actual numbers once we issue the Q2 results.

[Operator]

Okay. We have a voice question from [indiscernible].

[Unknown Analyst]

I would like to ask about the commodity prices. There's a fluctuation happening in the cocoa prices and oil prices. As far as I know, there is a hedge policy going on, on you. And I want to ask, is there a pricing power occurring due to increased cocoa prices? And do you gain an advantage in the market due to the commodity fluctuations.

[Fulya Surucu, executive]

As you have also stated, we had a hedge policy for commodities. In terms of cocoa, we have a hedge policy of being hedged for the next 12 months. And as of today, I can tell you that 2024 numbers are already hedged in terms of quantity and price. And it's pretty much the same. We have a similar hedge policy for the other key raw materials that we procure, like wheat, sugar and oil and nuts as well. So as of today, I can tell you that we do not have any issue in terms of pricing and quantity for these raw materials. So we'll continue with [indiscernible] being proactive in the market and being in a competitive edge in the market.

[Operator]

We have a follow-up question from Ms. [indiscernible] from Barclays.

[Unknown Analyst]

Yes. Just a quick follow-up. So obviously, you mentioned that you can't say what the Q2 volumes will be. But if we look at the year in general, what would you say is the seasonality in terms of volumes, sales volumes or demand throughout the year from quarter-to-quarter?

[Fulya Surucu, executive]

Well, the demand for our products continues. It is in a very strong momentum. And as I have also shared during my presentation that the demand for our products is very resilient and very low price elasticity in terms of when you compare with other products in the food sector. And we have been the #1 market leader with a very high brand equity. We take the leverage advantage of this, I mean, throughout the year, and it looks like we're going to get that advantage in 2024 as well. So I cannot state any number, but I can only share with you that the strong momentum will continue. And the Q1 results in terms of volume growth is great.

[Unknown Analyst]

But in terms of like seasonality, do you like maybe expect any quarters to be even stronger or weaker because of, I don't know, like holiday season or Ramadan or something else?

[Fulya Surucu, executive]

Well, there is -- I mean, Q2, Q3, Q4 might be more challenging than Q1. So they might hit inflation. We do not know exactly how inflation will shape. There might be some political stability in the region, Middle East and all our key markets. These will be the drivers, but what I can tell you that Ülker Bisküvi is ready for each scenario. So we have a couple of scenarios to make sure that we meet our targets. But as of today, growth momentum will continue. But depending on these drivers, it may change. And the remaining of the quarters might not be as strong as Q1, but we will do our best to make sure that we'll meet the targets that we met in Q1.

[Operator]

We have a follow-up question from Ms. Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

I have a follow-up question on margin guidance. You are guiding around 18.5% EBITDA margin for the full year versus over 20% realized in the first quarter. Do you think that this is a conservative guidance? Or do you see a major headwind in the rest of the year? And I just made a rough calculation on your guidance about the real growth. And it looks like that on the revenue side, you are still looking for around 5% growth. So apparently, you look for, I think, good consumption in the rest of the year or strong pricing. So I'm trying to understand whether margin guidance is conservative or not.

[Fulya Surucu, executive]

Yes, it may be conservative, but we just wanted to be on the safe side because there are a couple of things that are really unknown like, I mean, inflation expectation. Of course, we have a guidance. I mean, we see how the market reacts and the market expectations. But we cannot, I mean, rely on that 100%. There are a couple of things that are unknown; inflation, key drivers, macros on globally and locally and then the political stability. So based on this, all these taken into consideration, we think that we are comfortable that we will be able to reach 18.5%. But depending on how these key drivers will move, this might be also a conservative EBITDA margin, we will see.

[Operator]

We have a follow-up question from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

My question is about the volume and the pricing side. I see that in real terms, the volume growth is higher than the value growth. Did we see specific price declines in real terms? Could we expect this to continue or because of the cocoa price and other cost pressures, should we expect some increase in the prices?

[Fulya Surucu, executive]

Cemal, when you look at the quarterly consolidated financials, volume is in quantity. It grew by 15%. Revenue grew by 13%, but gross profit grew by 18%. I think gross profit number exactly shows how we blend pricing, cost and mix sense and all the other things that impact these 2 numbers. Product mix, channel mix, they all impact this. But I think gross profit margin 18%, volume increased 16%, revenue increased 13%. This shows a very healthy mix of pricing, costing, cost management, product and channel mix. And do we expect it to continue? I think we were able to demonstrate that in the last 10 quarters. It all continued in the last 10 quarters that we operated. Definitely, our objective is to make sure that it continues. That's how we base our plans, but we will see. I mean, depending on the variables and the factors that I have just shared with you, the results might change. That's why we ended up with 18.5% EBITDA margin.

[Operator]

Our next question comes Kayahan Demirak from Is Yatirim.

[Unknown Analyst]

Hello, do you hear me? I'm not sure my voice is coming to you.

[Fulya Surucu, executive]

Yes, we can hear you.

[Unknown Analyst]

Yes. I'm sorry, because I'm not working at Is Yatirim. I thought the line was confused. So I'm very sorry, I joined the call late and I'm also sorry if this question has been answered already, but I have a question on the working capital side. It seems that your receivable turns, particularly in the domestic market seem elevated. Do you see this as a part of a seasonality? Or this -- do you expect those to remain elevated?

[Fulya Surucu, executive]

This is mainly seasonal. This is mainly related to higher sales in all channels. So we expect it to recover over the coming quarters.

[Unknown Analyst]

Okay. For the whole year, do you expect, I mean, cash conversion from EBITDA to remain strong compared to last year? Or we should expect some deterioration this year related to further investments in the working capital?

[Fulya Surucu, executive]

Here, I can share this. We have a huge focus on working capital, and you see the improvement. You have seen the improvement every quarter in the last 10 quarters. And you'll see the improvement this quarter as well. What I can tell you is instead of committing and sharing with you an exact number, I can tell you that we are committed to optimize our working capital program further and making it more efficient and effective. That's what we are committed and the numbers will come eventually.

[Operator]

Our final text question comes from Mr. [indiscernible] Asset Management. Thank you for the presentation and all the support until now. Also, congratulations for good results. Can you mention also the risks. In recent years, currency appreciation affected you negatively. It looks like you won't be affected by currency this year. You also hedged the commodity. Are there any other risks we are not aware and you did not mention?

[Fulya Surucu, executive]

Yes, you are right. We had -- currency volatility is not a nightmare anymore. We are hedged. And in terms of commodities, we are also safe. From those perspectives, I do not see any further risk unless there is a very big volatility like, I mean, if U.S. dollar FX goes to TRY 50 tomorrow. I mean, this may definitely impact the numbers. I mean, anything that is very unexpected might impact us. But other than that, I mean, we are exposed to the same risks like inflation, macros and political/global risks that may come as unexpected. We definitely incorporate all these items into our forecast, but any big variation in those items might definitely impact us favorably or unfavorably. But I mean in terms of what I can see right now, there is no big risk in terms of FX and commodities. As I have shared on this, something comes up unexpectedly or unless there is a huge fluctuation in one of those FX or commodity prices as an unexpected way.

[Operator]

Okay. Thank you very much. It looks like we have no further questions at this point. I'll pass the line back to the management team of Ülker for their concluding remarks.

[Verda Tasar, executive]

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

[Fulya Surucu, executive]

Thank you, everyone, and look forward to hearing back from you.

[Operator]

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and goodbye.