Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to Ülker Bisküvi 2018 Third Quarter Financial Results Conference Call and Webcast. Today's speakers will be Cenker Uçan, CFO. I will now hand you over to Ms. Beste Tasar, Head of Investor Relations. Ms. Beste, the floor is yours.

[Verda Beste Tasar, executive]

Thank you, Gezam. Good day, and welcome to Ülker Bisküvi third quarter 2018 earnings conference call. Today's call will be hosted by our CFO, Mr. Cenker Uçan. I now would like to turn the call over to Mr. Cenker Uçan. Cenker?

[Cenker Uçan, executive]

Hi, everybody, and welcome to the Ülker Bisküvi 2018 third quarter earnings call. So actually, we are very pleased to announce another strong quarter results, both in international and in domestic markets, moving on the momentum created in the beginning of the year.

So we generated solid top line and bottom line growth, strong margin expansion, thanks to our good performance across all the regions.

And we broke another record as reaching 16% EBITDA margin in this quarter.

As we have spoken out in all platforms, we have seen the positive impact of our strategic investments out of Turkey. And as of third quarter 2018, we have been monitoring this sustainable growth not only in our international revenue, also in our market shares as well.

In Saudi, which is our second largest market, we have expanded our leading position by reaching highest revenue and adding 3 percentage point market share compared to last year. Having said that, our international revenue maxxed 38% of our total revenue in quarter 3, which creates a natural hedge and important advantage for us enabling our total business to become more robust and manageable.

Most importantly, we have reached to our targets and we successfully applied what we have committed to our investors.

Another good news is related with our Ankara market Turkey. In all categories, we gained market share and strengthened our position, which -- with efficient marketing activities.

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

Let's take a look at macro indicators we follow. In terms of macroeconomic developments in Turkey, calendar-adjusted retail sales volume with constant prices increased by 0.4% in August 2018 compared with the previous month. Based on the 2 statistical data as of August 2018, industry production decreased by 11% compared with same month of previous year. And manufacture of food products increased by 1% compared with August 2017.

Consumer confidence index realized as 59.3%, reflecting a decrease by 13.7% compared to September 2017. CPI increased by 6.4% in September compared to previous month. And the food inflation was realized as 27% in September.

If you are moving to the next slide on Page 4, the market dynamics. The total confectionery market in Turkey grew by 4.8% in volume and 19% in value terms. And the total biscuit market grew by 2.2% in volume and 16.7% in value terms. And the chocolate market grew by 8.8% in volume and 21% in value terms. And lastly, the cake market grew by 4.7% in volume and 19.7% in value terms. So as you might see, the market is growing in Turkey in terms of volume and value. And at Ülker, we are growing in line with the market dynamics and gaining market share in all categories that I am going to cover for you.

At Ülker, we are operating in Turkey over 70 years, and we are the leading confectionery company in Turkey. And now 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 in 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 -- we have 10 facilities in 4 countries, and our capacity exceeded more than 950,000 tons.

And starting from 2017 year and during Q1 and Q2 2018, at Ülker, we have broken our -- all records for all financial metrics. And now we are continuing our momentum in Q3 2018 as well. And when we look at this quarter's highlights, our consolidated volume realized as 130,000 tons with a growth rate of around 5%. And our consolidated revenue have increased by 37.4%, driven by both positive volume growth and solid pricing in domestic and international operations, and which we are also seeing the positive impact of FX rates.

We are very pleased to deliver again outstanding profitability ratio, so our gross profit has increased by 45% and our gross profit margin has improved by 150 basis points and reached more than 28% levels.

And on the other hand, our EBITDA has increased by 38%. And we have expanded our EBITDA margin by surpassing 16% and posting more than 15% EBITDA margin consecutively 3 quarters this year. The improved EBITDA margin of 16.1% has mainly been driven by positive contribution of international operations and strong operational execution in all market in quarter 3 and continuous cost efficiency projects.

And finally, our net profit has realized more than TRY 220 million and increased by 161% compared to previous year. And we are enjoying positive impacts of our hedging instruments we applied in April 2017.

So if we are moving to Page 8. So I have just covered quarter results and jumping to cumulative September results. So for September '18, cumulative figures in terms of volume has increased by 2.7% and our cumulative revenues have increased by around 20%. And if we are talking about only for confectionery side, since there is a nonconfectionery sales in 2017 for Istanbul Gida, the total confectionery revenues have increased by 22%.

So as you might see both in quarter and cumulative figures, our gross profit margin has increased. And on a cumulative basis, it has increased by 70 basis points and reached to 27.4%. And our EBITDA margin has increased by 60 basis points and reached to 15.7%.

And on the net income side, the -- our net income -- cumulative net income has increased by 95%, nearly a 100%, and our net income is realized as TRY 568 million for September accumulative figures.

So if we are moving to the sales information for category basis, the consolidated confectionery volume improved by 5%, whereas confectionery revenue increased by 37.4% in quarter 3. And biscuits volume increased by 3.9%, and total revenue growth is around 42.8%. And chocolate volume has increased by more than 10% and driven mainly by new launches and successful synergy products and which is a positive contribution to our growth and revenues, and the total revenues have increased by 35%. And although cake volume has declined by 5%, the revenue increased by 19.5%. So we are seeing positive contribution of our export and international operations in terms of volume and revenue growth in quarter 3.

If we are moving to Page 10 based on the cumulative figures. So the consolidated confectionery volume improved by 2.7% and the revenue have increased by 22%. Biscuits volume increased by 2.3% and the revenues have increased by 24%. And chocolate volume has increased by more than 6% and the revenue contribution is around more than 21%. And our cake volume has declined by 7% and the revenue have increased by 9%. So in all categories, so we have seen here positive growth rates and which we believe that our growth rate will continue in the following quarter as well.

If we are moving to domestic operations, Turkey. So as of 2018 September, our market shares are impressive, and we have gained market shares in all categories this quarter. As you might remember that our main strategy is to be #1 in biscuit category as well. And as you might recall from our previous calls and meetings, we are investing our brands, especially for biscuit, and we have defined our strategies accordingly. And now we are seeing positive impacts of these activities, and we gained market shares in biscuit and -- in quarter 3. And our market share reached to around 38%. And our gap is narrowing down and -- on a monthly basis, and our gap is less than 1 percentage point with #1. And we hope that we will be #1 at year-end as we have targeted.

And in chocolate, we are very dominant, and our market share is around 36.3%. And we are currently number #1. And our chocolate market share has increased from 35.5% to 36.3%, so we were able to increase our market share around 80 basis points.

And our -- we have slightly increased our cake market share from 25.5% to 25.6%. So the -- at Ülker, we are still #1 in total confectionery market, around 35% market share.

So on Page 13, we are seeing here our product portfolio and we have divided these portfolio into 2. The one is synergy products and the new product launches. So first of all, if we are starting with synergy products, so as you know that after the Pladis organization, we have started to produce some of Godiva and McVitie's products and which we are calling this product as synergy products. So the -- as of September 2018, the contribution of the synergy products in terms of revenue is TRY 208 million and our expected contribution on a yearly basis is TRY 250 million. So we believe that in the following years, I mean, in 2019 and in the coming years, the impact of these synergy products will be increasing because as Turkey, Ülker, we are the production of -- for Godiva chocolate as well, and we are exporting these products to the -- all regions from Turkey. And as you remember also, we launched Godiva in Turkey and we became market leader in premium chocolate category in Turkey.

So on the right side, we are seeing the newly launched Ülker products. So the total contribution of the new product development is around TRY 150 million. So in this quarter, we have a very successful launch for the health [ on them ] category under the name of Piko 5. And we are very excited for this product. And we are going to see positive impact in terms of market share in the following quarters.

On Page 14, so I would like to cover the financial results of domestic operations. So I mean, in terms of -- our -- in terms of volume, the total volume has increased from 90,000 tons to 93,000 tons. And our revenue have increased by 20.3% as of quarter three 3, and thanks to the effective support for new launches and portfolio optimization. And our gross profit has increased around 8.8%. And our EBITDA has increased in line with the gross profit increase, around 8.8%. And the EBITDA margin for Q3 '18 is around 13.1% in Turkey.

And if we are moving to the cumulative figures, the volume improved around -- by 2%. And our cumulative revenues in Turkey have increased by 15.6%. And the growth rate in gross profit is around more than 10%. And our EBITDA margin for Turkey operations is around 13.6%. So I'm sure there is a disclosure for that with all the figures for segment reporting have been prepared based on the assumption of the products sold in Turkey, so that's why we are -- I would like to underline this information for your attention.

So in line with our strategy on Page 16, we are focusing on branded products. So in terms of volume and in terms of value, the share of the branded portfolio is flat. So the share of the branded portfolio is 92% in volume and 95% in the year for Turkey figures.

If we are moving to the international operations on Page 18. So we are seeing here the milestones of our acquisitions for the international side. So all acquisitions have been completed. And lastly, we have completed the acquisition of IBC. So due to this acquisition, as you know, we have restated our financial statements for comparative basis.

And now I am moving to our second largest market, to Saudi. So first, I would like to start with FMC. The -- In terms of volume, the total volume has increased by 18% in FMC. However, the revenue growth is much more than the volume growth, which is around 25%. And we are seeing here a very positive contribution in terms of EBITDA. Our EBITDA has increased more than 34%, and our EBITDA margin has increased from 33% (sic) [ 13.3% ] to 14.3%. So as you know, in line with our strategy, we have acquired IBC. And the main aim these acquisitions, we are going to enjoy positive synergies between FMC and IBC. So we will see also the positive figures in IBC financial statements as well.

So in terms of market share, we became a very, very dominant position in Saudi. Our market share is around 23.4% and our main competitors' market share is 15%, which is 8.8% -- 8 percentage points higher than #2. And we believe that we are going to maintain our position in Saudi in terms of market share.

So if we are moving to the IBC operations. So as you know, the purpose of this acquisition was to consolidate FMC and IBC operations, and we are aiming to decrease our cost to serve and create synergies from procurement, production and distribution processes.

So now as you might see, the total volume in IBC facility has increased by 23% and the total revenues have increased in line with the volume growth, which is around 23%. And we have here a very huge growth rate in terms of EBITDA, which is more than 60%. And our EBITDA margin has increased from 21% to 27%. So we are seeing positive impacts on the synergy products -- projects between FMC and IBC, which we had communicated to our investors before.

And Egypt. In Egypt, as you remember, we are going to use Egypt facility as a production for North Africa. And after the devaluation, we made all related price adjustments in Egypt in order to minimize the impact of the devaluation. And now we're seeing here very strong and solid growth rates. In terms of volume, our volume have increased by 11%. And our net sales have increased by 35%, and another record for profitability. Our EBITDA has increased more than 460%. And now our EBITDA margin is -- in Egypt is around more than 15%. As you might recall that the main reason is we have started to produce McVitie's in our Egypt facility. And now we are seeing a positive contribution of McVitie's production and also other synergies and cost efficiency projects that we have applied for all production. And the EBITDA margin of Ülker products are also increasing. And we believe that we are going to invest our brands in international markets. And now we are holding #1 position in biscuit category, excluding wafer. And now in terms of total biscuit market share, our market share is around 15.6%, and we are very strong #2 in Egypt.

And on Page 22, we are seeing here the figures for UI MENA, Amir operation. So as you know that we have acquired UI MENA in 2017, the owners of McVitie's distribution and production rights in MENA and Saudi regions. And the total volume of this operation have increased by 3.3%. And the revenues have increased by 1%. And our EBITDA margin is around 28%. So since we have shifted our production to Hi-Food, so the net sales of Egypt around AED 21 million and EBITDA of AED 4.5 million have been recognized under Hi-Food. So if we are recognizing this impact to -- in Amir financial statement, so our EBITDA margin will be in line with 2017 figures. But in any case, so 28% EBITDA margin is a very satisfactory level for us.

So our last international subsidiary, Hamle Company, which is in Kazakhstan. So the total volume have increased by 8%. And our net sales there increased by 14.9%. So we have a slight decline in EBITDA margin in Kazakhstan, which is around 2.2%. But for 2019, we are little hopeful for our Kazakhstan facility. As you know, the new lines will be ready. And we have now started to drive production, and we'll be producing the McVitie's and also other biscuit brands in Kazakhstan and aiming to improve our export opportunities to Russia and other neighboring countries.

So if you are covering the market shares, so in Egypt, we were able to increase our market share by 3 percentage point and increased from 12.6% to 15.6%. In Saudi, another success, additional 3 percentage points market share gained, and our market share is around 23.4%. And in Kazakhstan, in chocolate category are -- we gained around 1 percentage point market share and our market share is around 11%.

So on Page 25, we are seeing the pictures of our products in divisions. So as you might see, we have started to sell and produce McVitie's in the regions. And we have started to export Godiva products to all regions, so -- which we believe that we are going to enjoy positive impacts from our synergy products.

If we are moving to financial results. The total volume has increased around more than 12% in quarter 3. And the total revenue have increased by 80 -- 78%, which is related with volume growth and also the positive contribution of FX in our international markets and very strong growth rates in gross profit, which is around 92%. And our EBITDA has grown in line with the gross profit growth, and it has grown by around 90%. And currently, our EBITDA margin is around 21% in international market. And the share of international operations in terms of revenue has increased to 38.6% in quarter 3. And in terms of EBITDA, we have generated 50% of our EBITDA from directly international market, so -- which is fitting our strategy and which we are seeing -- saying and seeing positive impacts to our sustainable growth on a consolidated basis of our company.

And for cumulative figures, the total volume has increased by 4.5%. And our revenues have increased by 40.7% -- or 35.6%. And our gross profit has increased around 37%. And our EBITDA margin has grown by 40 -- 47.3%. And the EBITDA margin on a cumulative basis is around 20%. So on a cumulative side, the share of the international operations in revenue is around 35.6%, which echos 44% in terms of EBITDA, which is very close to quarter 3 ratios.

And the share of the branded focus is continuing also in international side. And in terms of volume, the share of the branded sales has increased from 73% to 77%. And in terms of revenue, it has increased from 78% to 81%. So like Turkey, we will be focusing to the branded side in international businesses going forward.

If we are moving to balance sheet highlights. So our net debt is around TRY 1.7 million -- TRY 1.7 billion and our net debt to EBITDA ratio is around 1.95, which is at very healthy levels. And 93% of our debt structure is through long-term facilities. So as you know, we have 2 syndication facilities with a maturity of -- the year of 2020. And our cash cycle is around 61 days in 2018, so we are focusing more in order to decline our networking capital levels going forward.

So if we are moving to the -- our net effect position. Our net effect position after derivative transaction is around TRY 109 million, so we are seeing here positive contribution of our cross-currency swaps that we applied in April 2017 for the notional amounts around USD 160 million and EUR 30 million, which is helping us in order to have a proper net profit levels. And another important thing here, as you might remember, as of June 2018, our net FX exposure was around TRY 175 million, which is reduced to TRY 109 million, which is very tiny, thanks to our export operations.

So this is the end of my presentation for guidance, so we have a guidance revision. So as you may recall, we updated our guidance in June by TRY 5.5 billion, which was TRY 5.4 billion previously. So based on our very successful quarter and the results and recent developments, we are now again revising the top line from TRY 5.5 billion to over TRY 5.8 billion with a margin of EBITDA slightly over 15%.

Now I would like to open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Jakub Mician from Wood & Co.

[Jakub Mician, analyst]

I would like to ask you on the fourth quarter, how is it shaping up in Turkey, specifically beyond that it has been, in the third quarter, the volumes have held up quite solidly? What have you seen so far on the ground in Turkey, specifically?

[Cenker Uçan, executive]

So as you might -- Thank you for the question. So as you might see on the market growth dynamics, so, I mean, although the market is volatile in Turkey, the confectionery market is growing in all categories. So In fourth quarter, so our expectation is growth will continue because we are not seeing any negative impact in terms of market dynamic. So our expectation for domestic operation will be in line with our guidance figures.

[Operator]

[Operator Instructions] We have no further questions at this time. Mr. Cenker Uçan, back to you for the conclusion.

[Cenker Uçan, executive]

Okay. Thank you. So actually, in conclusion, we remain fully committed and improve our financial and operational metrics. So following the encouraging results of the third quarter, we are on track and to drive our profitable growth for the full year and deliver on our guidance. So we will continue to invest our business, enhance our commercial capabilities and further improve efficient going forward. So I would like to thank everyone for joining the call, very much enjoyed it. And obviously, we look forward to updating everyone on the full year results next year March. Wish you a good day.

[Operator]

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