Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to Ülker Bisküvi Second Quarter 2018 Financial Results Conference Call and Webcast.

I will now hand you over to your host, Beste Tasar, IR Officer. Madam, the floor is yours.

[Verda Beste Tasar, executive]

Hi, everyone, my name is Beste, and I'm here with Mr. Cenker Uçan. Now I'm leaving the ground to our CFO, Mr. Cenker Uçan, to discuss Ülker Bisküvi's second quarter operational and financial results. Cenker?

[Cenker Uçan, executive]

Thank you. Good day, everybody, and welcome to the Ülker Bisküvi 2018 Second Quarter Earnings Call.

Actually, I am so happy to announce another very strong quarter results in both international and domestic markets building on the momentum created in the beginning of the year. So we posted very solid top line results with good performance across all regions and remain focused on our executive plans we committed to our investors.

So at Ülker Bisküvi, we maintained our growing sales dynamics, both locally and abroad, and consolidated confectionery revenues amount to TRY 1.3 billion, which represents around 16.3% growth. And in our first quarter webcast, we shared that we surpassed our ultimate EBITDA margin target of 15%, and again, this quarter, we achieved 15.2% EBITDA margin, and year-to-date, our EBITDA margin realized at 15.4%, which was the highest margin ever that we have obtained. Despite all the headwinds in the second quarter, we achieved to post all-time high net profit, resulting TRY 241 million with an increase of 168% and thanks to effective hedging instruments that we did.

In Turkey, we continue to build on our momentum with [ double-digit confectionery revenue ] growth, and despite the double-digit food inflation since 2015, we continued to receive positive results at profitable business sites, thanks to our tight cost management and effective price adjustments. In international markets, now we are seeing the positive returns of our investment. In all the regions, we managed to increase our top line and production volume, and after the completion of our [ recent acquisitions ], we are enjoying the positive contribution to our market share.

In Saudi, we became [indiscernible] strong #1 in biscuit category with a market share of 21%. In Egypt, we improved our position, and we are ranked as #2 with a market share of 14.7% where we reached track record market share in our history. And we grabbed this market share from our competition and reached highest-ever Ülker value share. Moreover, we got the Sagia approval for IBC, and now we have stated our financials this quarter retrospectively in accordance with CMB reporting standards.

So before starting my presentation, I will go over the macro figures and provide market insights, and then I will provide you with the details of financial results, and finally, I will make the closing comments, and then we will have Q&A.

Let's take a look at macro indicators we follow. In terms of macroeconomic development in Turkey, calendar-adjusted retail sales volume with constant prices decreased by 1.3% in May 2018 compared with the previous month. Based on the TurkStat restated series, industry production surged by 7% year-over-year in May, and consumer confidence index increased by 0.4% year-over-year to 70.3% in June. Consumer Price Index increased by 2.6% in June compared to previous month, and food inflation was realized at 18.9% in June.

Now an update on the business. The Turkey total confectionery market grew by 3.2% in volume and 16.7% in value terms. So as you might see on the slide that the growth is mainly driven by chocolate category, which was grew around 6.9%, and in value, it's 18.7%. And the total biscuit market grew by 0.5% in volume and 14.1% in value terms. And cake market grew by 3.2% in volume and 18% in value terms.

So as you might see that the total confectionery market grew in Turkey, although there is a volatility in the market, and we expect not a material change going forward in terms of market dynamics.

As we said, we're operating in Turkey over 70 years, and we are the leading confectionery company in Turkey. And not only in Turkey, after our successful acquisitions in 2 years, we became the largest producer of the region including Middle East, North Africa and Central Asia. In 2017, we have invested more than TRY 300 million to our facilities in order to increase our capacity and efficiencies, which enables us to decrease our fixed cost.

And after the finalization of IBC, we will have 10 -- we have 10 facilities in 4 countries, and our capacity will exceed more than 950,000 tons. And as you remember as of 2017 year-end and 2018 Q1, at Ülker, we have broken records for all financial metrics, and now we are continuing our momentum in Q2, 2018.

On top line, our total volume has grown by 0.9%, and the total revenues increased by 9 -- 13.9%. As you know, this growth rate also includes the impact of nonconfectionery sales, and the apple-to-apple growth rate for confectionery business is 16.3%.

And in terms of profitability, our gross profit has increased by 12.5%, and our EBITDA is realized as TRY 200 million with a growth rate of 20% compared to previous quarter. And our consolidated EBITDA margin has realized at 15.1%, which is 100 basis points higher than previous quarter. And our net income has increased by 168% and reached to TRY 242 million, which is the highest level of the net income in our history.

So for the second quarter, I have covered the results, so if we are moving to the cumulative figures as of June '18, we see that the total confectionery volume has increased by 1.6% and the total confectionery revenue has increased by 15.1% and our gross profit margin has increased by 30 basis point and reached to 27.1%, and our EBITDA margin has reached to the 15.4%, which is the highest level in our history.

If we are moving to the confectionery growth of our Ülker -- based on Ülker results, the total consolidated confectionery volume improved by 0.9%, and whereas the revenue increased by 16.3%, and biscuit volume remains the same and the total revenue growth for biscuit is more than 17%, and the total chocolate volume increased by 6.2%, which are driven mainly by the new launches, and in terms of revenue, it has increased more than 7%. And the cake volume has declined by 12%, which are driven mainly by price adjustments, and in terms of revenue, cake sales has increased by 6.7% as of second quarter '18.

In terms of cumulative figures, the total consolidated confectionery volume improved by 1.6%, whereas, the revenue increased by more than 15%, and the total biscuit volume increased by 1.6%, and the revenue growth has realized at 16.3%. And the total chocolate volume increased by 4.9%. And the revenue has increased by 16%.

So as you might see that, in all categories, at Ülker, we are able to increase our volume growth, and not only the volume. We have also reflected the commodity price changes to our sale prices, and so therefore, the revenue growth has been adjusted to our financial statements.

So if we are moving to the domestic operation results, so I would like to start with the market share information. So as you know, at Ülker, we are #1 in total confectionery business in Turkey, and our total market share is 35%, and in chocolate, our market share is around 35.5%, which we are very dominant in chocolate, and compared to previous quarter, our market share was flat in chocolate category.

And another good thing is regarding to the biscuit, so as you know our main strategy is to become #1 for biscuit category in Turkey as at year-end, and now we become #1 in the biscuit in terms of volume as of June 2018. And so in terms of value, the market share has increased by 1 percentage point compared to previous quarter, so we believe that we will be also #1 in terms of revenue metric in Turkey for biscuit category as well. And for the cake side, the market share was flat compared to previous quarter.

So now, I would like to move to our new launches. So at Ülker, we are paying attention and also giving huge importance for the synergy products and new product launches in terms of -- in order to gain market share. So on the left side, you are seeing the pictures of the new launched synergy products, and as you remember, the total contribution of the synergy products was TRY 156 million in 2017 on a yearly basis. And as of June 2018, we recognize TRY 112 million from these synergy products, and our aim is to reach more than TRY 200 million in whole year 2018.

And at Ülker, we are now acting as a production hub for Godiva for the whole region, and we have started to export also Godiva chocolates to the Saudi and U.K. and Europe market. And another good thing is that, as Godiva chocolate producer and also marketeer, so we became the market leader in premium chocolate segment in Turkey.

On the right side, we are seeing the new launches for biscuit, cake, chocolate categories for Ülker-branded products, and the total contribution as of June for -- which comes from these products is around TRY 97 million. And so we are still continuing to invest in our brands and also our products, and we believe that, as I mentioned before, we are going to become #1 in biscuit category in line with our strategy.

If we are moving to the financial results for domestic operations, so I will be starting with Q2 results. So in terms of volume, domestic market volume improved by 0.8%, and the branded volume has increased by 0.6%. And the total revenue increased around 12.4%, and the branded revenue has increased by 11.4%, and the total price per ton improved around 11.4%. And our gross profit has increased by 8.5%, and our EBITDA represents around 8.8%, and our EBITDA margin has conducted with 13.7% for domestic operations as at Q2.

If we are moving to the cumulative figures for domestic operations, the total volume increased around 1.8%, and the branded volume increased by 2.3%, and the total revenue for the -- the total revenue has increased by 13.4%, and the branded revenue was in line with the total growth, and the gross profit increased by 11.5%, and our EBITDA margin for cumulative basis for Turkey operation has realized around [indiscernible].

So in line [ with ] our strategy, we are focusing more to the branded products in order to improve our gross profit and also gaining more market share. So the share of the branded side, the branded business has increased. So in terms of volume, the share of the branded business increased from 91% to 92%, and in terms of revenue, the share of the branded business is the same in line with previous year, which is 95%.

So if we are moving to the international part. As you remember, starting from 2015, we had a very solid strategy. At Ülker, we are operating in emerging markets, and we have very strong muscles in operating in emerging markets. So therefore, in order to extend our business in the neighboring geographies and in the continents, so we have decided to acquire the Yildiz Holding factories in Saudi, Egypt and Kazakhstan, and in line with our plan, currently, as of May 2018, we have completed our acquisitions in Middle East, North Africa and Central Asia.

So I would like to also cover these geographies separately, but I would like to mention that, at Ülker, currently, our 34% of our revenues come from international businesses, which represent around 41% share in terms of EBITDA. So -- and we aim to increase our foreign revenues going forward in order to grow these geographies as well and also to have a natural hedging mechanism for our financial statements.

So I would like to start with Saudi business first. So as you know that our first investment in Saudi was the FMC company. So in terms of volume, the total volume has increased by 14.5% in Saudi FMC company, and the net sales increase is around 21%, and with the effective pricing strategy and also cost management, our EBITDA margin has increased in FMC from 13.7% to 14.4%.

Another good thing is you know that, at Ülker, we are very strong in Saudi, and we are very dominant in biscuit market, and our market share is 21%, which I am going to cover lately in the presentation as well. So -- and also, we had very successful Ramadan campaign and also very effective launches in gifting and sharing categories, especially for Godiva as well.

So our new baby, IBC, so I would like to cover IBC as well. The total volume has increased by 40%, and this represent around 32% revenue growth. And another important thing is the EBITDA margin of the company, which was 17.3% and now increased to 28%. So IBC is very critical business for us because IBC is also only the local brand of Rana, and we -- our aim is we are going to merge these 2 operations in Saudi, and also we are going to enjoy from the synergies for procurement, production and distribution capabilities. And we believe that our cost to serve in the region will decline in Saudi in the coming periods.

So if we are moving to Egypt, as you know, the macroeconomic environment in Egypt is now better than compared to previous periods. And the total volume has increased around by 7.4%, which is -- mainly comes from the successful Ülker and McVitie's launches. And the total net sales has increased around 37%. And the EBITDA margin has increased more than 400%. So as you remember that, after the acquisition of UI MENA, since we have acquired the distribution and production rights of McVitie's, the -- our strategy and also our plan was to produce McVitie's in our -- all facilities. And now Egypt is one of the -- our targets, and since we have started to produce McVitie's in Egypt, you can see the very aggressive EBITDA margin in our facility, which was 4% in 2017, has jumped to more than 15% and conducted 15.7%. Another good thing is regarding to the market share because, previously at Ülker, our market share -- we were #3 in the market, and now we became -- become #2, and our market share is around 14.7%.

So if we are covering the UI MENA operations, I mean, the Amir company, the total volume has -- is in line with previous year, so which is mainly due to the import business for Egypt, which has been shifted to our Hi-Food facility so that -- but we are seeing here a minor decline. However, the net sales has increased by 2% and another good and important thing is about the EBITDA margin. So the company's EBITDA margin was 22% in 2017 and has increased to more than 26%. So our aim is at Ülker to be very strong #1 or #2 in all Middle East and North Africa countries all around the world.

So -- and our last investment is in Kazakhstan in Hamle. The total volume has increased by 4%, and the revenue has increased by 13.9%. So I mean, we have nearly finalized our SKU optimization activities in Hamle, and we are very close to finalize our CapEx investment for the couple of months, and once we are going to finalize all of the CapEx process in Kazakhstan, we will be able to produce biscuits and also McVitie's in our facility, and we will be also exporting to Russia and China our product, which we are aiming to increase our export opportunities in this country as well.

So in terms of market share. So in Egypt, we are very strong #2, and our market share has increased by 0.2 percentage point, which was 14.5% in first quarter and increased to 14.7% as of second quarter. And in Saudi, we are also able to increase our market share, which was 20% in Q1 and increased to 21%. And in Kazakhstan in chocolate countline business, we are very strong #3, and our market share was 9.2% and increased to 10%.

So as I mentioned in the beginning of my presentation -- so as a recap, we are very successful in international operations, not only for revenue and EBITDA growth and also gaining market share was another highlight for June 2018.

So not only in Turkey, we are also reviewing our SKUs and products and then also giving attention for the synergy products, and we are seeing the pictures of the new launches in international markets.

And now, maybe we can continue with the financial results for international operations, and we can start with Q2 on the results. So the total volume increased by 1.2%, and the branded volume has increased by 3.2% in international side. And the revenue growth is around 29%, and the branded revenue growth is around 29%, and the total confectionery revenue growth is 25%.

And the gross profit has increased more than 17%, and our gross profit margin was 25% -- 25.2% in international side, and our EBITDA margin is around 17.3%, which is very close to 18% in Q2 2018. And further, cumulative figures, the total confectionery volume increased by 1.2%, however, the branded volume growth is more than 5%, and the total revenue growth for the June 2018 is around 18%, however, the branded revenue growth is more than 23%. And our gross profit has increased more than 200 basis points and reached to around 38%, and our EBITDA -- cumulative EBITDA margin for international operations is 18.5% as of June 2018.

And the share -- also in line with our strategy, the share -- the branded share in international side is also growing, and in terms of volume, the share was 75% last year and increased to 78%, and in terms of revenue, it has increased from 79% to 82%. So not only in Turkey, also in international side, our branded business is growing, and our profit and also our market share is positively affected from this strategy.

And now we can move to balance sheet highlights. So our net debt as of June 2018 is around TRY 1.5 billion, and our net debt-to-EBITDA ratio is around 1.9x, which is currently very healthy -- at healthy levels.

And as you might see that 91% of our debt structure is through long-term facilities because, as you know -- at Ülker, we have closed 2 syndication facilities in 2017 from global multinational banks. So our maturity for this indication launch is April 2020 and November 2020. So that's why 91% of our debt is through long-term facilities. And our cash cycle is around 53 days as of June 2018.

So another good and important thing is our net position. So as you remember, at Ülker, we made cross-currency swaps in April 2017, and we have converted our net FX exposure into Turkish lira, I mean, 1 year ago, so now we have very slightly immaterial net FX exposure, which is mainly due to the IBC acquisition. And so we believe that we are going to close this immaterial gap in coming months as much as we can. So actually, this is the end of my presentation.

Now I would like to open the call for your questions, if you have any.

[Operator]

[Operator Instructions] Our first question from Hanzade Kilickiran, JPMorgan.

[Hanzade Kilickiran, analyst]

I have 2 questions. The first one is for Turkey. Even though you include synergy products, we don't see much volume increase as compared to first quarter in the second quarter. Do you think this may be because of some slowdown in the consumer sentiment? Or there's nothing wrong to worry about the Turkish demand at the moment? And the second question is that IBC has very high margins. I'm trying to understand if these margins, 28%, I mean, what drives this high margins? And is it sustainable in the future?

[Cenker Uçan, executive]

Okay. So in terms of your first question about the Turkey. So as you know, Hanzade, the synergy products we have covered that some portion is recorded in our reporting purposes in international side because, since we are -- we have started to export these products, so the total revenue and profitability has presented in international side. So therefore, I mean, in terms of -- as you remember in the beginning of our presentation, the total market in Turkey and in all categories is growing, and there is not any issue for the consumer sentiment. So I mean, regarding to synergy products, all the revenues that I mentioned, the impacts are mainly recorded under international operations financial figures. And regarding to your second question, IBC. Yes, I mean, there is a good improvement in IBC EBITDA. So the main drivers is -- come from the synergies that we have started because we had signed the agreement with UB last year in terms of acquisition of UI MENA and IBC. So therefore, starting from 2018, we have started our synergy projects and also efficiencies and optimization of our facilities. So that's why the EBITDA margin and the revenue has increased compared to previous years. So we believe that 28% is quite high, but the EBITDA margin of the entity would be more than 25% levels. And we can say it's sustainable.

[Operator]

Our next question is from Christopher White, Somerset Capital.

[Christopher White, analyst]

I had a few questions, so I'll do them one by one if that's okay. First of all, why did your domestic gross margin decline in the first half of the year? Is that to do with cost pressures from the currency depreciation? And if so, do you expect to see further margin decline in the second half given what's happened to the currency over the last few weeks and days?

[Cenker Uçan, executive]

Okay. So I mean, if we can say that, at Ülker, we are operating in this country more than 70 years, and we have very strong muscles in terms of -- to react to this volatile environment. So I mean, in 2017, at year-end, we made price increases, and we are monitoring our profitabilities very closely. And due to the volatile environment, so there might be some declines in our -- I mean, the decline is not so much material. So we know that, but we are not expecting decline in the gross profit -- our domestic operations because we have taken the net selections in terms of price increases. And this is a -- I mean, decline is a short-term decline because our business in Turkey is very profitable, which is close to having the EBITDA margin around 14%. So I mean, we are not expecting any decline in gross profit going forward.

[Christopher White, analyst]

Okay. That's helpful. On your balance sheet position, a couple of questions. First of all, why do you choose to have a large cash position and then have debt as well? Why don't you use some of the cash to pay down some of the debt? So that's the first question. And then secondly, obviously, you prudently took measures to hedge your exposure last year, but are you going to prioritize paying down your foreign currency debt with free cash flow given the macroeconomic risks that's been playing out at the moment?

[Cenker Uçan, executive]

Okay. So I mean, the main reason to having the gross debt -- material gross debt and material cash is mainly Ülker is a very healthy company in terms of net debt structure and also other ratios. So therefore, we obtained these loans with very cheap levels from the multinational banks through syndication facilities. And starting from 2016, we made acquisitions in Middle East, North Africa, Central Asia regions. And so therefore, we have enough cash on our balance sheet in order to consider new acquisition opportunities with the advantage price. So I mean -- so we are observing always the opportunities going forward. So therefore, we have enough cash. So I mean, regarding to your second question was -- is are we planning to reduce our debt or...?

[Christopher White, analyst]

Yes. Yes. Are you planning to [indiscernible]

[Cenker Uçan, executive]

No. No. it is -- there are some clauses in the agreement as well. And currently, we are not considering or we don't have any plan to reduce our gross debt levels. I mean, we are not planning any early payment.

[Christopher White, analyst]

Okay. And then just a final question from me, which is you had a large cash outflow into receivables in both the first and the second quarter of this year. Why was that? And do you expect that to reverse in the second half?

[Cenker Uçan, executive]

Okay. So I mean, you are right. So actually on top of keeping our undisputable leadership in chocolate, we have an ambitious target to be the market leader in the biscuit segment as well. So having a successful Eid period, we -- it was also important in our working capital management. And so on top of other marketing tools, we also extended the payment terms in our sales companies in order to achieve our targets in market in line with our operational priorities. So I mean, the reason of the increase of the receivables from the sales companies is mainly arise due to this reason. And also, another thing was regarding to the 2017 because, as you remember, we created a huge amount of cash in 2017, and some portion comes from the early collection from the sales companies. So -- which we are seeing also the impact of this transaction for the -- having receivable balances compared to previous month and going forward. So as you know, we are going to increase -- reduce our net working capital and also decline our receivable balance going forward in order to generate more cash and now currently as you know cash is the key, and we are going to increase our free cash flow going forward as well.

[Operator]

Our next question from [indiscernible].

[Unknown Analyst]

My question is related to your guidance. Do you share any guidance for the second half of the year in terms of growth prospects in both domestic and international markets and EBITDA margin?

[Cenker Uçan, executive]

[ Jamalway ], so as you may recall, we announced our guidance as low double-digit top line growth, which was around TRY 5.4 billion as at year-end -- for the year-end. And also, our EBITDA margin was 14.7% as we commented to you. And based on -- we had a very successful first half and also, accordingly, we would like to slightly revise our guidance upwards for net sales from TRY 5.4 billion to TRY 5.5 billion. And also, I would like to revise our EBITDA margin guidance from 14.7% up to minimum 15%.

[Operator]

[Operator Instructions] We have follow-up question from Hanzade Kilickiran, JPMorgan.

[Hanzade Kilickiran, analyst]

Cenker, I'm trying to understand how sensitive the Turkish market is against the price increases. Because we remember that during the coup or when you made some sort of adjustment on the chocolate prices, there was a sharp decline in the volume. Do you think this is still a kind of valid stuff -- I mean, price that has to stay in the Turkish market?

[Cenker Uçan, executive]

Actually, as you know, at Ülker, we are #1, and we are dominating the market and considering the volatility environment, I mean, not only we and also the competitors have to increase their prices, I mean, in order to reflect these changes to their cost for the profitable matters. So for the dynamic of the price increases, I mean, after couple of months, the market is normalizing, but in the first month after price increase, so you -- we might see some sharp decline in volumes, but in the -- following this period. So I mean, the market is normalizing. I mean, it is not really related with the consumer side. It is just related with the distributor and retailers because before the price increases, they are making huge level of inventories, so therefore, from the consumption and consumer side, there won't be any material reactions after the price increases, but as you know, and currently, the market is volatile in Turkey, I mean, all the entities and also players should consider reasonable price increases going forward.

[Hanzade Kilickiran, analyst]

And regarding your hedging instruments. Would you please remind us again about this hedging instrument? What is the cost of the hedge? And also, how long is the duration?

[Cenker Uçan, executive]

The duration is until April 2020, and the cost is around 14% in Turkish lira. And it was amounting to USD 116 million and EUR 30 million. I mean this instrument is very favorable compared to current market conditions.

[Operator]

[Operator Instructions] We have no other questions at this moment. Dear speakers, back to you for the conclusion.

[Cenker Uçan, executive]

Thank you, everyone, again. So in conclusion, we remained fully committed and improved our financial and operational metrics, and following these encouraging results of the second quarter, we are on track to drive our profitable growth for the rest of the year. And we will continue to invest in our business and enhance our commercial capabilities and further improve efficiency going forward. So I would like to thank everyone for joining the call, and we very much enjoyed it. And obviously, we look forward to updating everyone on the third quarter results in November. Wish you a good day.

[Operator]

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