Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to Ulker Biskuvi Q2 2023 Financial Results Conference Call. Remember that this call is being recorded.

I now hand over the call over to Beste Tasar, Investor Relations Officer. Madam, please go ahead.

[Verda Tasar, executive]

Thank you, and hello, everybody. This is Beste. Welcome to our second quarter and first half operational and financial results. Here with me in the room are CEO, Mr. Buyurgan; and our CFO, Mrs. Fulya Surucu with me now.

Now I leave the ground to our CEO for the opening remarks. Mete Bey?

[Mete Buyurgan, executive]

Thank you. Hi, everyone. Thank you for joining our investor meeting for half 1 of this year. I would like to share some headlines regarding our operations in the very beginning of the presentation. As the headlines, I would like to say that I'm very happy to share with you, we had a promising and very healthy top line growth almost in all categories. In fact, top line and bottom line, I must say.

In terms of gross margin -- gross profit margin, as mentioned in the beginning of the year, you may remember, we were sharing our plans together with you. So our sourcing strategies and our [ power pack ] management of our productivity efforts maintained very strong gross margin, which provided us like 3% higher than last year in terms of gross margin percentage.

In terms of bottom line performance, EBITDA performance, we are exceeding almost TRY 4 billion due to very strong cost discipline and very strict SG&A management. We have optimized our debt structure with a very successful executive communication strategy in the beginning of April of this year, in the beginning of Q2. So it was a very successful risk indication process. But also you may know that we just had another action of our Euro bond buyback, which demonstrates our strategy in order to strengthen our balance sheet properly.

So we keep focusing on the execution of our strategy for sustainable growth and investing on our brands for the rest of the year. And I'm very confident that we are going to hit our targets at the end of this year actually. So Fulya is going to share with you some revised year-end projections. As I mentioned, we are right now very -- we are very close to back-to-school period of time.

Now all our campaigns, all our supply strategy, distribution strategies, promotion strategy, which is already for back-to-school period of time. So we are confident, again, to have a very strong and successful back-to-school period of time in our main markets.

Regarding our numbers -- performance numbers, our net sales reached to TRY 19.6 billion, which means almost 65% growth actually versus last year. And in terms of EBITDA, we have reached TRY 4.2 billion EBITDA, which is 79% growth versus last year in terms of bottom line performance. As always -- as you may see in terms of gross profit as well, we are having 82% growth. So there are -- all those 3 figures are showing the quality of our growth, in fact. As I mentioned in the previous slide, the sourcing strategies as operating -- low-cost operating model, of course, biggest enablers -- are biggest enablers for us to maintain and to hit the targets beyond our expectations beyond the expectations. And in terms of net debt EBITDA ratio, our latest ratio is 2.42, which is still very healthy numbers right now, which we will share more details in the next coming slides.

So both gross margin growth and the EBITDA growth is higher than our net sales. This is half of our strategy for sure. And right now, we are expecting the same performance for the second half of the year actually at almost same performance. So shortly, we keep our leadership position in all our markets. We are very strong #1 player in macro snacking business in our strongest country -- same market -- biggest market in Turkey. We are also doing very good in Saudi Arabia, in Egypt. In Central Asia, we keep growing very sharply. So we are very enjoying the -- very much enjoying the performance of, especially Kazakhstan, [ Azerbaijan ] and some other countries' performance in Central Asia. And the top line growth is promising, as I shared, and we will keep the momentum for the rest of the year. Now, Fulya, our CFO, will share with you some more details -- further details through our operations.

[Fulya Surucu, executive]

Thank you, Mete Bey. Good morning, and good afternoon, everyone. Thank you for joining the call. So we keep delivering strong and solid results every quarter over the years, and this quarter is no exception. When we take a look at Q2 figures only, we see the excellent performance in all KPIs.

Let me review with you some numbers one by one. Revenue increased by approximately 60%. whereas gross profit increased by 77%. EBITDA growth ended up approximately 69% and gross margin at 31.5%, which is a growth of 320 basis points versus prior year. Net debt EBITDA from the balance sheet is 2.42%. But as you will see on the coming slides for [indiscernible] calculation purposes, the number is at [ 2.40% ], which we believe is a very healthy level. When we take a look at consolidated operational and financial performance you see the versus prior year growth in all KPIs, especially in terms of operational KPIs.

Ulker's agile business model, its proven resilience to severe macroeconomic challenges drive these excellent results again in this quarter. We were able to drive top line growth in all regions and categories in Q2. So when we take a look at making sales volume, there is a slight decrease for some -- for each category, but we were able to maintain it in line with first prior year overall, but slightly sales volume increased by approximately 59% for each category, discrete chocolate and cake, 53%, 64% and 57%, respectively. And dynamic effective pricing model with mix management, proactive initiatives to mitigate risks and strong focus on cost control, whether it's supply chain or procurement, and our passion on innovation new and products deliver these results, as you see on our page for each category solid growth numbers for both sales and snacking sales volume in Q2 2023.

So for domestic operations, Ulker Biskuvi holds the market leader position in Turkey. We are a very strong #1 in biscuit with 39% market share. Again, very strong #1 leader in chocolate with 39% market share, and we also hold a strong presence in cake category with 20% market share.

As I have shared NPD and innovation, we are very passionate about innovation as well, even though we are an iconic brand in Turkiye at present as a market leader for 8 years. We are also one of the most innovative companies in Turkiye. As you can see on the page, 11% of total domestic service driven by new products. And you see some of the pictures of our new products on the page. New product innovation and meeting the changing needs of our consumers is a high priority for the company, and we have a very strong innovation pipeline for the coming quarters and years as well. So let's review the solid results in our core markets Turkiye. Let me take you through our business results in Turkiye. As you all know, we have gone through some challenges in the first half of the year. Impact of earthquakes, elections in Turkiye, macroeconomic challenges, monetary policies and volatility and FX and uncertainties were the main hot topics in Q1 and Q2 in Turkiye. While navigating through all these challenges with extra ordinary headwinds, we were able to deliver excellent results in our core markets, as you can see. Let me take you through our strong figures one by one. Less volume versus prior year and 72% increase on revenue from growth in all categories. We have been building strong growth, positive margin increase on a steady basis in each quarter, and we again did this quarter as well, 28.6% gross profit margin, which is 4.9% higher than prior year's Q2. This also translates future EBITDA that came at 19.4%, which is 2.1% higher than prior year.

Both strong Q1 and Q2 drove exceptional results in Turkiye in the first half of the year. Again, our focus on cost controls and our strong strategies -- implemented strong strategies drive these excellence results in the first of half of the year in our core markets, Turkiye. [ Flat ] volume, 81% increase in snacking sales, gross profit of 30.6%, which is 5.4% higher than versus prior year half 1. And we ended up the EBITDA at 21.3%, which is a very healthy and very strong high EBITDA number. In fact, the same number in the last year was 18.5%, which also led to 18% increase versus prior year. Thanks to our agile decision-making model that transform all these challenges into opportunities in our core markets, Turkiye. International markets, we sustained our solid business market positions in all of our international markets, almost 24% market share position in Saudi, 19% market share position in Egypt and 16.6% market share position in Kazakhstan. And same innovation and new product focus continue in our international markets as well. In Q2 2023, 6% of our total international sales was driven by NPD sales.

So let me take a look at our half 1 performance in our international markets. Slight decrease in volume due to softer volumes in cake category and sizing activities, sales increase of 45% and gross profit increased by almost 44%. We were able to reach 37.5% gross profit margin in our international markets, which drove a 22.5% EBITDA margin in the first half of the year, which is very strong and healthy. Our international operations are mergers and acquisitions in our international markets, drive 36% of foreign currency-denominated EBITDA, as you can see, which is also bring some natural hedge to our financials as of half 1. And the most recent acquisition that took place in Q4 2021, rather than incremental 3.3% EBITDA margin as of half 1 2023, 3.3% incremental EBITDA. And when we take a look at EBITDA percent development in years for our international markets, we see the success story over the years. North Africa ended up at 15%, which is in an increasing trend since 2021. We believe that 21.3%, where we kept pretty much the same EBITDA margin. And Central Asia, let's take a look how we started in 2017 at 6.7%, and the latest one as of Q2 is 18.2%, which shows us real success story in Central Asia over the years. Our balance sheet highlights our disciplined and prudent financial management prioritizes 3 important pillars as part of our capital strategy that we laid out very clearly. Number one, maintain an improved strong liquidity position, preserve cash, strengthened balance sheet and drive the company's leverage position for a healthier level. And here, you see the results as of Q2. Despite we had a sharp hike in FX by the end of June, we ended up the net debt EBITDA at 2.4% despite all these huge hike and despite we have foreign currency-denominated loan on our balance sheet, it's at 2.4%. And as the management team, our objective is to maintain and decrease this figure over the quarters and over the years.

High focus on working capital pays off with 5 days decreased reduction on working capital rates from 110 last year to 105 days, mainly driven by effective inventory management, as you can see on the page. We continue to mitigate our risks by taking actions proactively. So we continued our hedge transactions. As of Q2, our close position at 52% on the FX -- open FX position. And as of today, it is approximately 60%. So the increasing momentum on the FX mitigation continues.

And as you all know, we adopted more prudent treasury policies last year by monetizing the securities portfolio into bank deposits. And as Mete Bey also has shared, we have gone through a very successful syndication loan by the end of April with very highly prestigious international banks, our finance partners. So again, on the syndication loan, we were able to decrease our outstanding loan. We replace [ we refinanced ] $450 million outstanding loan with [ $330 million ] new refinancing, which was also another action that we took to decrease our leverage. Another transaction continues with another great initiative that took place in July. We bought back $50 million worth of outstanding Eurobond as part of the strategy of decreasing the leverage of the company. With this transaction, we also decreased the outstanding Eurobond's balance by $50 million.

So our strong operations continues, and we believe that we will also have a very strong half 2 operations, and we updated our guidance at a higher level. So we shared with you TRY 40 billion guidance in terms of net sales and 19% EBITDA margin in the last quarter's call. However, as of today, we are upgrading the revised guidance of sales to TRY 40.75 billion and EBITDA margin at 19.2%. We also like to share with you the trend analysis starting from 2013, how our EBITDA gross margin and both in absolute value terms and margin levels improved over the years. That also shows the strength of our business model over the years. So thank you. Now we will have your questions.

[Operator]

[Operator Instructions] Your first question comes from Ece Mandaci from Unlu Securities.

[Ece Mandaci Baysal, analyst]

I have 2 questions. One is on your view about purchases. Will we continue buying your Eurobonds and given that -- my second question is that, given that -- there was an increment in your working capital -- And there was an increment in our working capital. So by year-end, and there is also a lower CapEx mix. So by year-end, should we assume a lower net debt-to-EBITDA level for you?

[Fulya Surucu, executive]

Okay. So Eurobonds buyback was a transaction that we implemented to decrease our leverage. So we will access the opportunities over the coming quarters as well. This may continue. So we definitely want to decrease leverage. So that's all I can share. This may continue. It's part of our strategy.

In terms of net debt-to-EBITDA, we believe that we will continue to have a very strong half 2, so based on our latest estimates, there might be a strong probability that net debt EBITDA will be slightly lower than this number by the end of the year.

[Ece Mandaci Baysal, analyst]

Short FX position, will it stay at the current level or they have plans to reduce it more?

[Fulya Surucu, executive]

Our current hedge position is 60%. If we see opportunities over the coming quarters or projected this to increase our coverage more and more. So a short FX position is expected to decrease by year-end as well.

[Operator]

Your next question comes from Erica Ive from MetLife.

[Erica Ive, analyst]

I checked also in the account that you have a short-term debt of TRY 2.6 billion, while I remember last time, you said that where you were expecting to refinance or short-term debt. So may I know what is it TRY 2.6 billion?

[Fulya Surucu, executive]

In fact, the short-term portion consists of 2 items. One of them is the accrual for the Eurobond interest that are due within 1 year. So as you know, we pay the interest of Eurobond 2x in a year. That's the accrual fees. And the second one is, there is a small outstanding loan of -- amount, which is due in next year, it's around EUR 40 million to EUR 50 million, which is also due within next year, which is outstanding at short-term loan.

[Erica Ive, analyst]

I was trying to apply -- isn't there anything else under bank loans because applying the end of -- basically end of period exchange rate. It looked like actually the outstanding debt is a bit higher than EUR 40, EUR 50 million. And I am not taking into account the coupon that falls under the issued debt instruments, if I'm correct. So basically at [ 2.5 67 ]

[Fulya Surucu, executive]

Yes, sure, sure. So there are also some [indiscernible] that are outstanding, but as part of the outstanding loan, all of the outstanding loan, I mean, -- most of it is already refinanced, and the maturity is April 2026, the $330 million. And we can also give you a [ standard ] breakdown. So the breakdown is [indiscernible] on plus [ retro ] credits that are outstanding and then the interest accruals that make up -- the interest accrual of Eurobond, which are due within 1 year because we paid it on a semi-annual basis every year. So that makes up the balance. But if you need any further details, we can definitely get to the breakdown of the outstanding short-term loan.

[Operator]

Your next question comes from Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

I have 2 questions on your operations. You had very -- I mean, you are experiencing very strong margins, particularly in Turkey, and you have been explaining this through strong pricing. But have you done any structural change in your distribution channels, particularly in Turkey, that may also explain this gross margin expansion? Or this is really for the [indiscernible] buy pricing against [indiscernible] Costco? And I want to combine this with the pricing again in Turkey, do you see any difficulty in price in the recent Turkish lira depreciation.

And on the international operations, what is the main reason for softer margins in MENA over the years despite successful sizing and new product introductions? Is there a strategy change in terms of channels?

[Mete Buyurgan, executive]

Regarding the first question, of course, the serious impact of right pricing -- on the right time, pricing, in fact, is giving us a huge opportunity and then value. But regarding your comments, you are right, as far as -- in the last, especially 1 year, I must say that there is a very successful channel management as well actually. So we are -- we keep focusing on too much more on the profitable channel actually instead of low-profit channels. So it is giving us another opportunity to increase our profitability level overall in the Turkiye. Regarding your second question for MENA, the margins are a little bit decreasing, but there might be -- there is a very high inflation in Egypt. So it is impacting the margins a little bit. But I think this almost recovered as of this month. There was some price increases again. So they are going to recover the gross margin most for the rest of the year. So the biggest impact is coming through product mix and also high inflation in Egypt.

[Hanzade Kilickiran, analyst]

Okay. I mean when you say that you are changing -- I mean, you are managing to channel mix, have you also changed your distribution margins given to the channels or this completely coming from the channel mix change?

[Mete Buyurgan, executive]

No, no. We don't change any margin for distributor customers. This is just the channel mix actually.

[Operator]

Your next question comes from Dmitry Ivanov from Jefferies.

[Dmitry Ivanov, analyst]

I have 3, quickly, if I may. The first one on deleveraging. You mentioned that your target your goal is to deleverage. Would it be possible just to kind of -- to quantify and provide more color on deleveraging. Are you looking to reduce like absolute amount of debt? And if so, by how much or what's like your comfortable absolute amount of debt on the balance sheet that you think like is comfortable for the business?

Second question on the outstanding bond, which is [ 600 million ] outstanding after the buyback. What's your latest thoughts on the on the refinancing of this bond because it's due in October 2025. So I think you have to make some decision already next year. So are looking to refinance in the capital markets or syndicated loan or other sources of refinancing of the outstanding bonds.

And the last quick question on working capital. What's your kind of -- what's like your kind of guidance for the second half of the year in terms of the working capital there were some outflows related to working capital in the first half. Should we expect some recovery of the working capital in the second half of the year.

[Operator]

Ladies and gentlemen, just one moment. It looks like we are having some technical issues. Okay. Mr. Ivanov, can you please repeat your question?

[Dmitry Ivanov, analyst]

Sure. So can you hear me now?

[Fulya Surucu, executive]

Yes, we can hear you.

[Dmitry Ivanov, analyst]

Yes. So just 3 questions from you, like first, on the deleveraging strategy. So if you could kind of quantify your kind of strategy, are you looking to reduce absolute amount of debt? And if so, by how much or like relative deleveraging.

Second question on the strategy with regards to the bonds outstanding, [ 600 million ] are looking to refinance it in the capital markets or other resources. And the last one is working capital guidance for the second half of the year. Should we kind of expect some reversal of the working capital or additional buildup of the working capital?

[Fulya Surucu, executive]

Regarding your first question, we do not want to quantify the exact amount of the core numbers. But what I can tell you is our direction and guidance is to decrease net debt EBITDA as much as we can. And I believe there's something around net debt EBITDA 1.5% to 2.5% is a healthy levels, and this is the direction and guidance of the company that we aim to have over the coming quarters and years.

Outstanding loan of Eurobond original maturities October 2025. However, we will start working on it as soon as possible. Our time line is beginning of next year. So we will assess all the options and alternatives. And based on the options available in the market, we will definitely choose the most feasible one, the most cost-effective one and hopefully close it as early as possible.

Regarding working capital, you see the working capital improvement versus prior quarters and prior years. So our working capital base improved by 5 days versus prior year. This momentum will continue because internally within the company, we have high focus to have a very effective and efficient working capital. And I think that you should expect again, very healthy numbers in terms of working capital by the end of the year as well.

[Operator]

[Operator Instructions] your next question comes from Erica Ive from MetLife.

[Erica Ive, analyst]

Sorry, a follow-up question on working capital. I can see an increase in receivables from related parties which has valued quite a lot to TRY 1.1 billion from TRY 269 million year-on-year. May I know, what it is related to?

[Fulya Surucu, executive]

This is related to business as usual activities. I mean our business is growing. You have seen our sales numbers and sales growth, and there is inflation, the increase is mainly driven of these 2 drivers, sales and inflation and growth.

[Erica Ive, analyst]

Okay. I understand. Because fundamentally, inventories and the other trade receivables having a different trend. So what is the difference between trade receivables and receivables from related parties, if I may ask?

[Fulya Surucu, executive]

These are receivables from the customers. But if you have more detailed questions related to receivables, we can get back to you on the balance sheet.

[Erica Ive, analyst]

It will be good to understand a little bit more.

[Fulya Surucu, executive]

Please send your question, and we will get back to you definitely.

[Operator]

Your next question comes from Cemal Demirtas from Ata Investment.

[Cemal Demirtas, analyst]

Congratulations for the operational performance. My question is about the trends in both domestic and international markets. We see some volume decline, but also, we see some price increases that just totally this year growth in real terms, possibly or closer to real term. How do you see the picture in the second half of there?

I see your guidance -- but still -- it looks to me like very close to the guidance. But I would like to understand how do you see the trends in terms of the pricing environment how do you see the competition? And how do you reflect the inflationary factors to your prices? That's my question. I would like to answer whether we are going to see any volume growth going forward, both in domestic or international? Or we should share -- in high inflation environment in most of the times, we see downsizing of the packages. So what's the sensitivity of consumer nowadays? That's my question. And the other question is about -- I see that you merging biscuits and -- which have chocolates -- which are biscuits, which I believe that it will be more visible together already you consolidate, but merging them should create some synergies, maybe you should a little bit give some hint about the potential synergies from taking that action.

[Mete Buyurgan, executive]

Regarding your first question, as you may know -- remember that we had a very devastating earthquake in the beginning of the year, unfortunately, in Q1, which creates too much volume loss at the same time. So it was a very big disasters, but we achieved to recover the losses almost in second quarter, actually.

Ramadan period of time in April was again -- was -- the demand was very low for all the markets, for all the categories, for all FMCG. But after April, the Ramadan period of time, May, June, and in fact, July was a very great mass actually in terms of volume growth as well, not only for the value growth.

So therefore, I am expecting a strong volume demand in the second half of the year. Now as I mentioned in my presentation, we are very close by to the back-to-school period of time. So we are expecting higher demand from the consumers. On the other hand, in a hyperinflation environment, we see that as a consumer sentiment we are observing that consumers are not postponing their demand factor right now.

So this is also an advantage for us right now. And third -- last but not least, I must say, our product categories are quite competitive versus adjacent categories like [ petit-beurre ], like [ Desserts ] you know. So this is another big advantage for us to keep our volume demand by the consumer. So these are the 3 important issues -- important assets for us for the second half of the year.

For the pricing challenge, pricing environment, we don't see any serious problem right now. As you are saying that due to hyperinflation and in the last 2, 3 months, there was too much increase, too many increases on oil prices, the other items in Turkiye and also in Egypt, but we are successfully reflecting our cost to our prices based on our strategies. And you asked about the downsizing and so we have some little work on this. I mean real studies we are still looking for whether we need to do that. But since there is not too much volume loss, we don't want to make any kind of sizing pricing actions. But instead, we are having a lot of RGM strategies, revenue growth management strategy as channel management, product management, category management, so starting a lot of work on our biggest strengths, [indiscernible] we are operating in almost 5 categories in snacking, so which gives us a huge flexibility so that we can easily manage, the right to manage the shift amongst the categories in terms of consumption.

Merger, Fulya, you may address the [indiscernible] merger question.

[Fulya Surucu, executive]

Yes. So our goal in the merger was to increase corporate governance, efficiency and effectiveness and to reduce costs by continuing our activities, under more focused structure, under 1 umbrella of merging our local subsidiaries, which operate in the same sector. I believe that this is a great initiative, and I believe that this will add a huge value to our company in from many perspectives. So we already announced the key highlights to our capital market support and general assembly will be held next week on Tuesday, during the second of August.

And hopefully, we expect the project to close by the end of August -- 31st of August. Maybe after that, we can share more details. But I mean, I strongly believe that this is a huge efficiency effectiveness project that will increase our governance and reduce costs and this should bring us a much more focused structure under 1 umbrella.

[Mete Buyurgan, executive]

It is also going to increase our agility decision-making quality as well because, as I mentioned, we are looking for low-cost operating model in an agile way, in a resilient way. So this is just for creating transparency, but also increasing our agility and resiliency due to less property in the paperwork process actually.

[Fulya Surucu, executive]

Yes, definitely.

[Operator]

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

[Fulya Surucu, executive]

Thank you for your time, and thank you for joining our call.

[Mete Buyurgan, executive]

Thank you very much. Thank you. Looking forward for the next coming quarters. Thank you.

[Fulya Surucu, executive]

Have a great day.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for participating, and now please disconnect your lines.