Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2020-Q2

[Operator]

Welcome to Ülker Bisküvi Second Quarter 2020 Financial Results Conference Call and Webcast. I now hand over to Beste Tasar, Investor Relations Director. Madam, please go ahead.

[Verda Tasar, executive]

Thank you, Marina. Hi, everybody. This Beste from Ülker. Welcome to Ülker Bisküvi first half financial and operational results webcast. I now hand over the ground to Ülker Bisküvi's CEO, Mr. Mete Buyurgan. Mete, please go ahead.

[Mete Buyurgan, executive]

Good afternoon. Hello, everyone. Before starting the presentation, let me introduce myself first. I started -- my name is Mete Buyurgan, as Beste mentioned, and I started my career in Colgate Palmolive in marketing. I've been there for almost 11 years in various positions in sales and marketing functions. Then I joined to Hobby Cosmetics, which is a local leading personal care company as the GM of the company. I ran the restructuring and growth process. I ran the restructuring and growth process, and finally, M&A process of the company and sold out the company to Dabur India, which is one of the big giants -- FMC giant of India. And I stayed with them, in the company, as the CEO of the company for 4 more years more. And then I joined to Yildiz in 2014 and afterwards as their VP. And in the last 2.5 years, I am the President of Turkey and Central Asia Regions. And finally, I became the CEO of Ülker as of March 2020.

So starting with the presentation, I would like to give some information about the macroeconomic overview of Turkey. As you know, after the COVID-19 impact, the retail sales volume -- retail sales were declines in many of the markets actually, so this is same in Turkey. Seasonal and calendar adjusted retail sales volume with the constant prices increased by 3% in May. However, there was a sharp decrease in April and in March. Industrial production rates declined as well, and consumer confidence index has started to increase, especially after April. Compared to previous month, increase is 5%. And as of June, the inflation rates food -- in food industry is almost 12.9% in Turkey. In terms of market growth, we are in a strong category, actually. As the leading FMCG company in the region, we supported the category in terms of growth as well. Our categories, including chocolate, biscuits and cake, there is a 5.2% volume growth, while 2% value growth in the markets. The market is mainly driven by the chocolate category. The chocolate category has been -- a sharp increase, actually, in the half -- first half with 10% volume growth and 28% value growth. Biscuits growth is much moderate but is still growing in terms of volume in -- like 3.4%. While cake market has been shrinked almost 2.9% in terms of volume.

As you know, in all of -- almost in every company, in every country, unfortunately, the pandemic, the COVID-19, was one of our top agenda, actually, in the second quarter, so it was really a tough times. And still, we are in tough times in terms of this pandemic COVID-19 virus. So let me explain the milestones for COVID-19 in Turkey, in our main country and then what we had as an action for -- versus COVID-19 in order to sustain our business. In Turkey, the first cases has been seen in Turkey in March, and the government started to give many protocols, yes, including curfew at the weekends, holiday, 'restrictions for the different age groups; closing the schools and malls and so on. So I must say that Turkey managed the first phase successfully versus many other countries. So we were in -- we were in a lucky situation, actually, in terms of management of the COVID-19. But of course, it has a huge impact in our industry, in our economy as well, especially because of the curfews and the travel restrictions and various restrictions in the country. After the first cases has been diagnosed in Turkey, we had determined 4 priorities, 4 key priorities: safety and well-being was our first priority, safety of our employees, colleagues and consumers; building and investing in our brands to sustain our business during the pandemic; accelerate digitalization for commercial excellence; and keep focusing on strict management for the supply chain resilience, again to sustain our business. As the first priority in details, actually -- especially for our operation plants, like manufacturing plants and sales force, there, we have determined detailed guidelines implemented. We had very strict extra hygiene rules executed in our head office and manufacturing plants and in all our operation areas. Work-from-home and remote working policy rapidly organized. So thanks to our strong IT infrastructures, we were able to manage our remote working policy in a successful way.

And in building our -- and building and investing in our brands, of course, this is all our philosophy as a continuous practice. Especially, in the first quarter, we had very successful NPDs in the country -- in Turkey and in MENA as well. So we get -- we got the benefit of those very successful innovations and NPD launch in the first phase of the years as the growth drivers in our top line performance. By the way, we keep investing our Ülker main brands in many of the countries. And of course, our sub-brands, we keep investing in terms of communication, consumer promotions and so on so that we keep gaining market share in many of our brands and in many of our categories.

In terms of accelerating digitalization for commercial excellence, actually, we had to start to initiate 2 big initiatives: first on the suggestion orders for retailers. This is an online system for our sales teams to increase the efficiency, decreasing the -- in terms of decreasing the time spend per sales visit and increasing the penetration of our SKUs. Plus, we had initiated -- in 2019, we have started to initiate e-order project for gathering the orders from traditional channels, almost 150,000 sales outlets, small groceries and so on. So right now, we are in a very strengthened position in the competition in terms of getting the orders online from our small -- even small retailers.

And focusing on strict management for supply chain resilience was another big priority for us, especially, again, the utilization in regards with IoT in our high-output lines completed. The project has been almost complete in our baking factories. We have designed 14 plus 14,what -- we call as 14 plus 14 precautions against the COVID in our plants and in our head office, which is very effective, actually, in terms of hygiene rules and all other rules. Close -- closely monitoring all our raw and pack material stocks, especially for the imported ones, in terms of lead times and others. We were following up very closely. And of course, finally, our HR and operation teams, demonstrated remarkable resilience to keep our plants running and to provide the existing service levels to our customers, which was one of our biggest strengths in Q2, actually, during the COVID-19 impact.

So regarding our performance for Q2 and the first half operational performance. As you may know that our -- this year is our 75th year in Turkey. We are accelerating our 75th year in Turkey, and we are having the largest capacity in the region with strategically located plants in terms of chocolate and biscuits and cakes. We are having 10 manufacturing plants in 4 countries in our region, and our capacity is around 1 million tons as of today.

In terms of top line and bottom line performance. At Ülker Bisküvi, our top line net sales has been reached to TRY 4.5 billion with a 20% growth, which is a remarkable growth in the market right now despite the pandemic impact. And our gross profit has been reached to 28.8%. It has been increased almost 24.5%, even bigger than -- higher than our net sales, actually, which is a very healthy and positive sign for us. And in terms of bottom line, we have reached

TRY 195 million EBITDA for the first half with a 22.5% growth. And our EBITDA margin has been reached to 17.6% EBITDA level with, again, very low net debt-to-EBITDA position, actually. So I am happy to say that we keep growing our bottom line and top line performance as we had in the last 3, 4 years continuously.

In details -- if you look at it in details, I am very happy to present to you that -- especially in Q2, we keep growing, actually, in terms of volume despite the COVID-19 impact because, as I mentioned previously, most of our sales channels has been closed for almost 40, 45 days. Even our target groups have had too many restrictions in terms of curfew and others. But despite all those impacts, we keep growing, actually, in -- not only in Turkey, but also in all our operational countries. This is a very positive sign for us in Q2, not only for in terms of volume and top line, but also in terms of bottom line. We had a remarkable achievement in Q2 in terms of EBITDA bottom line performance as well. So overall, in how far we -- I will say that we had a very positive, strong first half in 2020 for our performance. Regarding our categories, especially in Q2, biscuits category started -- keeps growing, actually, while chocolate category is growing very fast. The only shrinking category was cake, especially in Q2. This is mainly because of the increasing rate of home cooking and people started to spend their time at their home during the COVID. Because of the COVID-19, it has a very negative impact in cake category especially. As we look at half 1 performance, it is almost similar. Biscuit sales was up almost 18% in terms of value. Chocolate is the biggest drivers of the growth with 28% growth. This is also our very strongest model in our categories in Ülker Bisküvi. And cake sales was down almost 9% in the first half.

Another information about our performance is revenue breakdown. Our international and export sales, export revenues, net sales is keep increasing comparing versus in previous years. So as of half 1 2020, we have reached all -- I mean our international and export sales has been reached almost 39.5% of our sales. So we can say almost 40% of our sales is coming through international operations and export sales. And in terms of bottom line EBITDA performance, 47% of our EBITDA performance is coming through international and export sales again, which is a very -- again, another positive sign of we are having a healthy international and export business in our total overall business. Thank you very much. Now I am passing over the presentation to Cenker to give some much more detailed information about our operations and financial information.

[Cenker Uçan, executive]

Thank you, Mete. So hi, everyone. So I am very happy to present another very stronger results as we did previously. So we have maintained our position in the market. So first of all, I would like to start with our anchor market, Turkey. As you all know, that, in Turkey, as Ülker, we are clearly #1 in market share, having 38.3% market share in total confectionery market. In this case, as you might remember, we had a strategy to be #1, and we achieved this strategy in the beginning of 2019. And after 2019, we have continued to increase our position in the market and open the gap with #2. So as of June 2020, our market share in biscuit category has increased to 43.3%, which was 40.8% in 2019. So in a 1-year period, we were able to increase our market share by 2.5 percentage points. And in chocolate, as you know, that we are very dominant, and our market share is nearly 3x higher than #2, and we have continued to maintain our position in chocolate category. And currently, as of June 2020, our market share in chocolate category has increased to 42.1%. And in cake, we have maintained our position and having market share around 21.4%.

So on the next slide, as you clearly know that we are seeing the pictures of our products. And first, I would like to start with our synergy products. As you know that after the pladis at Ülker, we have became a product -- a main product producer for Godiva, and we have started to produce Godiva chocolate bars in Turkey and introduced in Turkey and also started to export to all international markets. And in addition to that, we have started to produce some McVitie's categories, which we are calling all the type of products as the synergy products. And in 2019, yearly contribution of these synergy products was around TRY 424 million. And as of June 2020, we were able to sell around TRY 240 million synergy products, and we are aiming to reach around TRY 500 million on a yearly basis. So that's why, I mean, one of our main drivers are coming from these synergy products. And on the right side, we are seeing the pictures of our NPDs. NPD is quite important process for us because we are able to increase our market share with these NPDs and also continue to increase our profitability. And total contribution on the 2020 launched NPDs is around TRY 108 million and which represent around 4.6% of total net sales. So if we are looking these NPDs between 3 years horizon period, so the total NPD share is increasing to around 8%. Now I would like to cover second quarter Turkey financial results. So as Mete mentioned that despite COVID-19 in Turkey and also in all markets, we were able to increase our position in the market, and we believe that we managed this difficulty in a very successful way. And so, in Turkey, the total volume has increased around 0.6%. And we have a net sales growth around 12.7% in Turkey. And our gross profit margin has ended up with 21.5%, and our EBITDA margin has increased to 15.6% in Turkey as well as second quarter 2020. And if we are looking to the cumulative figures, so our total volume has increased by 2.3%, and we have a revenue growth around 18% in Turkey. And despite all this difficult environment, we have increased our gross profit margin by 90 basis, and our gross profit margin jumped to 22.9%. And we have a 15.3% EBITDA margin in Turkey, which is 30 basis points higher than last half period. So in line with our strategy, we have continued to focus to produce more branded. And currently, the share of the branded business is -- we can say that's still flat, where we have 90% volume share in branded, has increased to 91% as of June 2020. And in terms of revenues, the share of the branded production is increasing, which was 93% in '19, and it has increased to 94% as of June 2020. Now I would like to move to export and international operations. So as you all know that in line with our strategy from 2016, so we have completed all our acquisitions, Saudi, Amir and also Kazakhstan and now where we are seeing positive impacts of these acquisitions within the year.

Now I would like to start with our second anchor market, Saudi. As you all know that, in Ülker, we are clear #1 in biscuit category in Saudi. And we -- just with Ülker branded market share is -- are 16.4%. And if we are adding our second brand, McVitie's, our market share is reaching to around 25%, which is 10 percentage points higher than #2 in the market. And if we are covering the financial results of our first acquired entity, FMC, we have a volume growth around 15.8% in FMC, which is a quite significant growth, considering the difficult environment due to the COVID. And in terms of top line, we have 14% growth in net sales, and our EBITDA margin was in line with previous year, which is 15.6%.

If we are moving to our second facility, IBC. This is the McVitie's production facility. And after the acquisition of IBC, we have started cross-productions between our 2 facilities. Actually, the financial metrics are in line with previous year. And currently, we have 27.4% EBITDA margin in IBC facility. And on the next slide, we are seeing the trend of our Saudi business. As you might remember, in 2016, while we have acquired the first company in Saudi, at that time, our EBITDA margin in Saudi business was around 13.6%. And currently, the total consolidated Saudi business profitability reached to 21%. And -- I mean, after 2018, we have clearly managed this integration process within these 2 facilities. And our cost to serve in Saudi has declined very rapidly and which positively impact our gross margin increase. And despite this profitability increase, we have continued to increase our market share in Saudi. And if we are moving to Egypt business, in line with our strategy, we have a budget that we have targeted to be #1 also in biscuit category in Egypt. And at -- in the first quarter of 2020, we were able to increase -- we were able to be #1 in biscuit category in Egypt as well. And currently, our market share is 17.4%. And of course, we are seeing positive contribution of our McVitie's production in Egypt, which positively impacted our revenue growth. And also, profitability has increased. And in terms of volume, the business has grown by 6.2%, and we have a 7% growth in revenue. And currently, our EBITDA margin in Egypt is 16.7%. And in 2016, the profitability of Egypt business was around 7% to 8%. So with all these initiatives and actions taken within a 3-years period, currently, our EBITDA and margin has increased very strongly and in a very sustainable way.

And if we are looking to the UI MENA operations financial results, so as you know that this company is the owner of McVitie's production and distribution rights and importing the McVitie's brand and exporting to all MENA countries. And currently, we have also very sustainable growth in this company. Our volume growth is around 8.7%, and our EBITDA margin has improved to 33.9%, which is 1.6 percentage point higher than last year. And finally, our rapid-growing country is Kazakhstan. As some of you might remember that we had committed to grow very strong results in Kazakhstan after the condition of the CapEx investment. And in first half of 2020, we have 25.3% volume growth in Kazakhstan, which represents around 40% revenue growth. And another significant and important area is in terms of EBITDA margin. And currently, Kazakhstan business EBITDA margin moved to 14.1%. And as you might remember, while we have acquired this company in '17, 2017, the EBITDA margin of the business was 3% and thanks to positive impact of our CapEx investment and also initiatives that we have taken in the market and in the factories.

So if we are moving to the market share summary in all markets. So in Saudi, we were able to increase our market share by 50 basis points. And currently, our market share is very close to 25%. In Egypt, we were able to increase our market share by 50 basis points and moved to 17.4% as we already become #1 in biscuit category in Kazakhstan -- in Egypt, sorry. And in chocolate business for Kazakhstan, we are continuing to grow and also gaining market share. So last period, we were #4 in chocolate business in Kazakhstan, and now we became #3. And we believe that this momentum will continue in Kazakhstan. And currently, our market share is 13.2%, which is a 1.6 percentage point higher than last year.

So not only in Turkey, also in the international factories and export business, we are seeing the pictures of the products. So we are continuing to introduce new products in these markets, so these are the pictures.

And if we are moving to the financial results of exports and international operations, in the second quarter, the total volume growth was around 11.2%, which represents around 25.9% revenue growth in international side. Of course, this is mainly coming from these price adjustments and positive contribution of FX. And the gross profit is around 36%. And we have EBITDA margin around 20.8%, which is similar to last year.

And in terms of cumulative figures, we have a volume growth around 10%, and then we have 24% revenue growth in international side. And our gross profit margin has improved by 60 basis point and reached to 37.9%, and we have 21.1% EBITDA margin. So as you clearly see that in Turkey and in international business, we have very strong financial results in all parameters despite having this difficult environment due to the COVID-19.

And not only in Turkey, we have also a strategy to continue to focus on the branded side, and the share of the branded portfolio has continued to increase in international side as well, which we have 81% volume share and 86% revenue share. So this trend will be maintained in the coming periods.

So if we are moving to the balance sheet highlights, actually, as you clearly know that we have very healthy balance sheet structure, and we have TRY 562 million net debt and which is around 0.4 multiple in terms of net debt EBITDA. And after the international syndication that we have closed in April, we have a very healthy maturity breakdown, which we have 52% long-term liabilities. And considering the current new syndication, we have already started to consider the alternatives. So we will be updating you once we have a clear picture. And in terms of net working capital days, I can say that we have slightly increased net working capital days, which was 71 days last year and increased to 79 days, which is mainly coming due to the declining days of trade payable, because due to the COVID-19, we have evaluated some positive and advantageous procurement activities. So that's why we have shortened our days in the trade in payables side, but this action will positively impact our gross profit margin. And we had TRY 64 million free cash flow.

On the a FX position side, we have loans in U.S. dollar and in euro. And our total net FX exposure is positive in terms of FX, so we don't have any FX position in our balance sheet. And the total gap is positive TRY 175 million. So this is quite important asset for us because, considering the current fluctuation in FX, so our financial statements are not negatively impacted, and we are recognizing gains due to having that kind of structure on the balance sheet side.

So for guidance side. So as you might recall, we had announced our guidance in our first quarter results as TRY 9 million net sales and 17% EBITDA margin. And we have, considering our recent financial results and actions taken, we have decided to increase our net sales guidance from TRY 9 billion to TRY 9.1 billion, and we are improving our EBITDA margin from 17% to 17.1%. And we believe that we are going to maintain this guidance at year-end period.

For now, this is the end of my presentation. Now I am opening the call for questions.

[Operator]

[Operator Instructions] The first question comes from Ece Mandaci, Unlu & Co.

[Ece Baysal, analyst]

I would like to ask a few questions, if I may. My first question is on the growth trends for the third quarter. Have you observed a deceleration in revenue growth as of July or volume growth, particularly for the chocolate segment? Do you see some trend shifts with the opening of the -- some of the output sales outlook? And have you also observed a move back from the modern channel to the traditional channel? Could you please provide some update on that front? And my second question is on your revenue guidance. This guidance indicates a slower revenue growth for the second half or 15% to 16% [ first hand ]. So could there be any upside to this forecast given the recent volatility and possibly higher contributions from your international operations? Could there be an upside to your estimate?

[Mete Buyurgan, executive]

Thank you, Ece. Let me answer your first question. For the Q3, of course, obviously, it's not going to be an easy quarter due to the, again, COVID-19 impact and lots of uncertainties on the markets. However, on the other hand, as you are mentioning that there will be some challenge in terms of -- regarding with the traditional channel versus modern channel. If there will be some curfews again, then it might change all the considerations of our strategies. But in any case, we are strict with our performance, and we believe that we are going to perform another strong quarter in Q3 because we had some activity plans, plus we are going to some new product plans as well. And we are going to have a very strong promotional campaign for the Q3, especially through the back-to-school period. So we are quite confident to have another strong quarter in Q3 despite all uncertainty on the markets and input prices.

[Cenker Uçan, executive]

So now I'm trying to cover your second question, Ece. So actually, yes. If you are looking from the second half perspective, you might be right. But in addition to that, we have a lot of opportunities. So we have uncertainties in FX and also unknown impact of COVID-19 in line -- in order to be -- in a prudent way. So we have set our guidance as TRY 9.1 billion. So if there will be updates in markets and in positive contribution of FX, so we are going to revisit guidance, our guidance, as we did previously. But currently, our aimed guidance are as I presented in my last page.

[Ece Baysal, analyst]

Can I ask one more question about your dollar-euro position and short position, if possible?

[Cenker Uçan, executive]

Yes. What is your question?

[Ece Baysal, analyst]

So in the balance sheet, you -- again, you also have mentioned, you have a dollar-long, euro-short position given this increase in euro-dollar parity recently. I'm just calculating some articles for the third party. But it's just for the third party probably, is it fair to assume like that? Or should we expect a lower euro-denominated short position by quarter end? Can you just give a color on that?

[Cenker Uçan, executive]

Yes. Currently, we -- I mean, our position is, as we have presented, so -- and we are not aiming to change any change in this position. But of course, if the euro and U.S. dollar parity is increasing, I mean, it is going to negatively impact our FX goals. But of course, all these changes are for temporary types. So therefore, currently, we don't have any plan to change our net FX position.

[Operator]

The next question comes from Kayahan Demirak, Is Investment.

[Kayahan Demirak, analyst]

I have actually a few also. Maybe we can go one by one. My first question, I mean, at the beginning of the year, you were hoping to deliver some improvement in your net working capital and maybe hopefully in operating cash flow. But do you still think that you can deliver improvement in that area after first half results? And maybe in terms of cash cycle, where do you see -- what is the optimal or sustainable level do you see going forward?

[Cenker Uçan, executive]

Actually, thank you, Kayahan. So cash and free cash is always our main priority, so we are still sticking on this priority. As you might follow during my presentation, due to the COVID-19 impact, we were able to pay our procurement in cash in order to recognize profit during our procurement processes. So therefore, I mean, our cash flow for Q2 is a temporary period. So we are aiming to see normal free cash flow ratios at year-end if there won't be any unexpected issues due to COVID or Turkish macroeconomic environment. Actually, we are sticking on this target. We didn't make any change.

[Kayahan Demirak, analyst]

And also, this is also discussed in the various calls, as far as I remember. You are carrying a large amount of cash for quite some time to use in a possible acquisition. I mean could you give us some update on that? I mean do you have any specific target in mind or maybe a planned time line to pursue that?

[Cenker Uçan, executive]

Actually, as you know that, currently, there is not any written and accurate plan because, as you know, that the market dynamics are quite important for us. But always, in order to have a sustainable business as we did in 2016 and '17, we are open to consider some opportunities if the market conditions will be suitable. And in that case, I am always saying that there are some companies which are owned by Yildiz. And if we believe that if we are acquiring these assets, our business will be more sustainable way. I mean, which are these companies, I mean the procurement company, [indiscernible], processing -- [indiscernible] chocolate processing and flow processing company, [indiscernible]. And we believe that if we are acquiring these companies, we will be starting our processes from the fresh. And there are sales companies, Horizon, Pasifik, as you know, that these companies are the sales distribution companies of Yildiz, and we believe that we can complete all these corporate governance if they are acquiring Horizon and Pasifik entities. And so within all these acquisitions, we will have all processes from [indiscernible] to the shelf under one umbrella. But I mean all these things are you are familiar that we are discussing in the last 2, 3 years. So far, there is not any accurate plan. So we have a new syndication coming. Now we have already focused and working for alternative refinancing opportunities. So based on the dynamics of the market, we will have more clearer picture. But currently, there is not any serious so far -- a serious written plan for the acquisitions.

[Kayahan Demirak, analyst]

Okay. And about the dividend, my third question. I mean with this year's decision now, the dividend has been canceled 2 years in a row. And as you mentioned in the presentation, the business is doing fine. The balance sheet is healthy, and you received a very sizable dividend income from the Godiva Belgium, maybe 6, 7x higher than -- for the distribution dividend that will be distributed. This year, I mean, is there any particular reason behind COVID that you are very cautious in terms of the cash management despite a healthy balance sheet and going fine business?

[Cenker Uçan, executive]

Yes. As you know that, first, there has been dividend payment distribution decision on 6th of March. But after COVID-19, not only for us, for the old entities operating in Turkey and it was also the suggestion of the Turkish government, so our Board has decided to cancel this decision. And for prudent purposes, it has been decided not paying any dividend in 2020. So as I mentioned before, based on the macroeconomic environment and other economical situation, so we will be continuing to pay dividends in the coming years.

[Kayahan Demirak, analyst]

Would you consider making -- I don't know if the business went well, in next year, may be about dividend payment for past 2 years?

[Cenker Uçan, executive]

Yes.

[Kayahan Demirak, analyst]

Would you consider that?

[Cenker Uçan, executive]

Yes. Of course, we will be considering, but it is going to be decided by the Board. So of course, the timing of this payment and also the macroeconomic environment is quite important, but we have a clear dividend policy. And at Ülker, as we did in previous years, we will be aiming to pay dividend. Because in the last 2 years, Kayahan as you know that there have been very exceptional cases in '19 and '20. So if there won't be any such as exceptional cases, of course, we will continue, as we did, in previous years.

[Kayahan Demirak, analyst]

Okay. And this will be my last question. Sorry for that -- I ask so many questions, but just a very quick one. I see the various news reports in Turkey claim that the Saudi government is taking a very hostile approach towards Turkish companies, exporters. And I know you're based in their factories, but have you experienced any difficulty in doing business in Saudi Arabia?

[Mete Buyurgan, executive]

Thank you for the question. Actually, we are following up very closely all those situations. As you are mentioning that we are very versatile in Saudi Arabia with 2 factories, and we are producing lots of products over there. And plus, we are having some small amount of imports from Turkey but almost the big import from United Kingdom. So actually, we are in a -- we are not in a risky position. We are actually looking for -- if there will be any kind of problem, we are having contingency plans to shift some of our production to our other factories, actually. So we are going to be very well prepared for this.

[Operator]

Next question comes from Harry Whelpton, Vergent Asset Management.

[Harry Whelpton, analyst]

Can you hear me all right?

[Mete Buyurgan, executive]

Hi.

[Harry Whelpton, analyst]

Congratulations on the results. I have 2 questions. The first is more related to the domestic business. And actually, it probably extends as well to international, but it's just whether you're seeing much in terms of down trading across the product categories from consumers?

And then the second question is on Saudi. So I noticed that the volume has been increasing, but the sales has not been increasing in the same amount. So is this just a question of product mix? Or have there been any price changes, active price changes in the market?

[Mete Buyurgan, executive]

Thank you, Harry. So I couldn't get your first question with domestic market.

[Harry Whelpton, analyst]

It's just whether there's been any down trading, product down trading, looking for more value seeking in the market amongst consumers?

[Mete Buyurgan, executive]

Yes. For downsizing, as I think you mean the downsizing for the brands, for the products, yes, we do. Based on the -- I mean, revenue growth management process, our revenue RGM process, we are very -- following up very closely all kind of down trading, downsizes on the products. So we are very active on this every time.

And coming to your second question for KSA, actually, as you are saying, this is mainly because of the price -- product price/mix -- product mix, actually, basically.

[Harry Whelpton, analyst]

Okay. Got it. That makes sense. And on the first question, I was more talking about the consumers, whether they're going shopping and buying maybe more value Ülker products, not less premium products?

[Mete Buyurgan, executive]

Okay. Yes. In domestic markets, as you are mentioning that, I mean we -- the price points are quite important in Turkish market for the snacking market. So what we are doing is we are trying to be visible for all price points. So we are getting the benefit of that through our strength manufacturing capabilities. So we are -- in many of the price points, we are visible with our many of the star brands. So -- and plus, as I mentioned previously, we are having too much value packs, value promotions, multipacks. So you are right. The consumer is tending to looking for much more value with the multiplex and other packaging options, and we are getting the benefit of that with our proactive strategies.

[Harry Whelpton, analyst]

Okay. Got it. That's helpful. And sorry, just a last follow-up question was on the cake side of things. This is a really small part of the business, but it's -- for the last few years, it seems like the category has been declining in size. It seems like more recently, you've been losing share. What's the strategic plan for cakes? Like is there a plan to improve this category? Or is this something that is just kind of naturally declining?

[Mete Buyurgan, executive]

No. Actually, the market is overall shrinking, but we are still having -- we are still very ambitious on cake category, actually. What we did in the last 1.5 years, we changed -- we restructured the cake category from low value add to high value-added products. So that, as you see our financial results, margins are increasing accordingly. So what we are focusing on is more value-added products actually because the cake market, overall, is very low value added. It's like common size. So in order to be distinctive from the overall market, we are trying to change our strategies. And we are having very aggressive plans for the next 2 years, actually, for cake category for creating, launching value-added products and supporting the category with higher communication value.

[Operator]

Next question comes from Hanzade Kilickiran, JPMorgan.

[Hanzade Kilickiran, analyst]

I have one question about the market and also one for your potential acquisition. Can you please share your insights from the current environment in Turkey and international markets? Do you feel yourself comfortable to reflect the negative impact of current FX move to your prices? I mean what is the volume trend so far observed in July into August?

[Cenker Uçan, executive]

So for the FX side, Hanzade, so as you know, that, currently, the U.S. dollar and the other FX currencies are very volatile. But we are very familiar with these changes as we have faced in '18 and '19. But of course, these changes in terms of increases have positively impacted our net profit. I'm talking about the position of the FX, and it is also positively impacting our export profitability. For Turkey, since we have already available fixed procurement, so far, we have negatively -- we have not been negatively impacted. But of course, if this situation will maintain, we are going to look at other alternatives for Turkey in terms of sizing and pricing activities. But so far, we have not taken any actions, and we are monitoring the market in terms of FX valuations.

[Hanzade Kilickiran, analyst]

And can you please remind us the FX portion in your cost? Was it like 1/3 of your cost FX in Turkey?

[Cenker Uçan, executive]

Actually, for Turkey, 40% of our -- 40%, 45% of our total cost of goods sold is FX, which represents around 32% to our net sales. And on the other side, we have a 38% FX revenue. So I mean we have already...

[Hanzade Kilickiran, analyst]

Okay. And the other question is about your potential, I mean, acquisitions to utilize your cash. You mentioned about the sales company, the vision company, Horizon, from your reporting. Maybe I'm wrong, but is this a company that you previously thought going to restructuring process on Ülker side?

[Cenker Uçan, executive]

No. So they were always under the umbrella of Yildiz Holding.

[Hanzade Kilickiran, analyst]

Okay. So what is a positive? I mean what -- I mean, what could be the possible of acquiring this company? I was thinking that this could dilute your margins, actually.

[Cenker Uçan, executive]

Actually, yes. But in order to clarify and underlining, there is not any accurate plan. So -- and I've been asked that, would it be any acquisition possibilities? And my answer was, as you all know, that, in the last 2, 3 years, we were talking about what are the next. And if we are going to make one-day acquisition, these 3 companies, [indiscernible], Horizon, Pasifik, might be the opportunities. So, so far, there is not an accurate exit plan.

But with regards to your question, so Mete will reply the answer.

[Mete Buyurgan, executive]

Hanzade, I would like to give some broader information for that, actually, for those opportunities. Especially on [indiscernible], this is very important for us in terms of vertical integration and to manage the end-to-end process in a better way. Especially with [indiscernible] is -- this is our chocolate processing company from [indiscernible] so that if we are going to have an opportunity to acquire the company, it will have a very positive impact in our bottom performance for. But also, it still provides us to be a very strong bean-to-bar company in our chocolate category. As you know that, chocolate, we are very strong in chocolate category in total market share. So we are going to be a very -- we are going to have a very unique competitive advantage, if we are going to acquire the company. In terms of sales companies, it's more or less regarding with the -- yes, please.

[Hanzade Kilickiran, analyst]

Sorry. Before going into the distribution company, with [indiscernible], you mentioned that it's going to be very strong -- I mean, this will help you in the bar category. So it will also have the Godiva bar, right, as well?

[Mete Buyurgan, executive]

It is. They are producing the chocolate raw material of Godiva, yes. This is a processing company. So -- sorry?

[Hanzade Kilickiran, analyst]

And so it will help the premium segment as well?

[Mete Buyurgan, executive]

Yes, right. So it is a bean processing, chocolate -- cocoa bean processing company. And it's the unique company in Turkey in the region actually, which has a unique technology and unique capacity as well as in the region.

[Hanzade Kilickiran, analyst]

Okay. And the sales company, Horizon?

[Mete Buyurgan, executive]

For the distribution companies, it's giving -- it might give us opportunity for another vertical integration in terms of penetrating our products so that we are going to have the opportunity from bean, cocoa bean to retail to the distribution operation. So we are going to create too much synergy. And in terms of corporate governance, we are going to be in a very better position, actually, if we have consolidated...

[Hanzade Kilickiran, analyst]

[indiscernible] regulation?

[Cenker Uçan, executive]

Yes, right. Yes. Every entity will be under one umbrella. But Hanzade, as you know, that, of course, if we have more clearer picture, of course, we are going to also evaluate and discuss this with our investors as well. But currently, there is not any retail and serious plan. These are the -- this might be the opportunity....

[Mete Buyurgan, executive]

This are the only costs, actually, yes.

[Hanzade Kilickiran, analyst]

All right. Finally, about these acquisitions, Cenker, you previously mentioned about a government candy company under Yildiz Holding to be acquired. Is this still on track or it's not on plan at the moment?

[Cenker Uçan, executive]

Actually, this company was also another opportunity, as we previously discussed. But currently, as you know that this company is a joint venture. So therefore -- I mean, they have a good partnership with Yildiz. I mean the [indiscernible] company and Yildiz Holding. So therefore -- I mean, currently, there is not any serious plan for acquiring these assets because -- due to the nature of the entity since it's a joint venture.

[Operator]

We have no further questions, dear speakers. Back to you for the conclusion.

[Cenker Uçan, executive]

So dear all, very much for your participation. So together with Mete, we are very happy and glad to your questions. And so as we previously did, we are continuing to focus our operations. And hopefully, we are going to present another stronger results for Q3. So we are looking forward to meet in the 1st week of November for our September financial results. Thank you very much for your participation.

[Operator]

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