Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the Ulker Biskuvi Q3 2020 Financial Results Conference Call and Webcast. I now hand over to Beste Tasar, Investor Relations Officer. Madam, please go ahead.

[Verda Tasar, executive]

Thank you, Jennifer. Hi, everybody. Welcome to our third quarter operational and financial webcast. Here with me in the room are Comet, will be here for explaining our operation and financial developments for the third quarter. Now I'm leaving the ground to Her.

[Fulya Surucu, executive]

Beste, thank you. Hello, everyone. Thanks for joining our meeting where I will be sharing Q3 results with our investor community. Let me start with management's review. So we have outstanding first 9 months results for 2022. So in the first 9 months, we recently gained incremental market share in the market. So if you might remember, this number was 35% market leader position in snacking category in our prior webcast meeting. Now it is 6% market leader in snacking categories. So we are strengthening and improving our market leader position, and we have just gained another market share very recently. So we are also #1 in macro snacking business. We delivered 18.9% consolidated EBITDA margin with 127.8% top line growth in such a difficult high inflationary environment, outstanding 9-month results -- so if we take a look on the financial one by one, we see that revenue growth is 127.8% versus prior year. Gross profit is 134% and EBITDA growth is 42% versus prior year.

And you see that our EBITDA growth is higher than gross profit. Gross profit growth is higher than revenue growth. Net debt to EBITDA decreased to 2.99% from the calculation of the pace of the balance sheet and operating cash flow also increases versus prior year. The KPI, which we are extremely proud on this page is gross margin percentage of 29%, which is 80 basis points higher than versus what we had in prior year. So this clearly shows how successful and effective our strategies are implemented. So we demonstrated to the market in the last 3 quarters that we are able to surpass inflation increases to our product pricing, very effective and successful pricing and revenue management, you see on our numbers, effective cost management and excellent supply chain management drives this gross margin percentage increase versus prior year, which is 80 basis points in such an inflationary environment. And on top of that, we gained market share, and we strengthened our market leader position and improved it in the market and continue to be #1 in both snacking and macro snacking business. So very tough and inflationary environment continued in Q3 as well. I mean, challenged with inflationary pressures we took actions to fight inflation, effective mix management, pricing and sizing strategy and high focus on brand equity, which also led to market share strength in the market. Macro environment gets tougher and tougher, but we continue to a high focus on our operational excellence, outstanding supply chain management and pricing and seismic activities also continued very successfully, which drive our Q3 and first 9 months results. Currency, currency also Turkish lira continue to depreciate. But as we have also discussed in the prior quarters, our hedging activities continued in Q3 as well. And you will see on the coming pages that we were able to increase our hedge total amount in Q3 as well. So let me take a look on our total P&L. We talk about total revenue gross profit. Again, I would like to take your attention to our gross profit margin in Q3 only. We delivered 27.7%, which is 0.7 points higher than prior year, which was 27% and EBITDA margin, again, increasing momentum from 16.9% prior year to 17.2%, thanks to our very effective pricing, revenue management, supply chain and cost management. Net income is pretty much in line what the market expectation is the main driver of that is the fair value loss of the short-term investments mainly tied to equities. But I want to share with you that as a management team, together with our CEO, we took the decision to strengthen our treasury policies, and I will be sharing good news very soon with our investors as well.

On the next page, I'd like to share with you very good news related to our sustainability. So our sustainability program is extremely strong. We started this journey in 2014, received a lot of prestigious awards, and we also delivered what we promised. The latest we have evolved the winner of the sustainable business awards with our Beyond cocoa project, which gives us 100% of Coco from agri courses traceable to farm gate, 32.5% of cocoa to administrable to farm gate. So how we will be -- I mean, we are very strong in sustainability. And as you all know, refinancing is a very important topic for us. And this refinancing will be starting ability linked as well.. So let's take a deep side in our third quarter, again, with a lot of challenges in macro, both local and global successful back-to-school period in all regions. We have implemented this very successful back-to-school programs, which were -- have been a success. We continue to invest in our brands and in our brand equity. And innovation, yes, we are a very strong company with almost 8-year presence in Turkey with a strong market leader position. Innovation is extremely important for us. We keep developing and investing in innovation, and you will see on the coming pages that both in international and domestic market, innovation contributes significantly to our sales. We continue this momentum. Effective balanced channel mix management was a top priority and outcomes, strong top line growth through volume and mix, solid operational profitability and high contribution from innovation new products to our sales, both domestic and international. So 5 KPIs in terms of Q3 consolidated performance, this time, both revenue, gross profit and EBITDA approximately their growth is 150% versus prior year. Again, gross profit margin is reached 27.7%, and growth is 70 basis points versus prior year. So the momentum continued in Q3 only as well. We were able to surpass inflation to our prices of our products, effective cost management, supply chain management, which drives these results and net debt-to-EBITDA decreased to 2.99 from 3.54% from the face of the balance sheet, and I will share the covenant purpose calculations over the coming slides as well. successful quarter on the back of successful back-to-school period. So total -- I mean, very flat volume, a slight decrease on the volume and the cake volume increased by 14.2%. -- snacking sales volume increased in total 144%, dispute up by EUR 155.3 million, charted up by EUR 128.7 million.

Tech sales are up by 76.9% versus prior year. And year-to-date results, volume increased on all discrete chocolate and Cake, significant revenue increase in triple digits in total by 127.3%. On top of that, market share gains, reaching to 36% market leader position as of September by the end of September. So let's take a deep side on our domestic operations. So we are #1 in the script. We sustained our market share position at 40% from Q2 to Q3, number one, market share in discrete in Turkey, #1 in chocolates against extra 2% market share from Q2 to Q3 reaching to 40% from 38%. And C, we are making significant progress in cake and this momentum continued in Q3 as well. In Q2, from 21% market share, we were able to reach 22% market share. We strengthened our #2 position in cake in the market as well. As shared and discussed innovation is extremely important for us. You see on the Page 15, some of the new products that have been on the market and on the shelf this year. And in total, they contributed 15% of the total domestic sales in Q3 2022.

And I'm also happy to share that we have a very strong pipeline in terms of new innovations coming over the quarters and years as well. Turkey numbers. Volume increased from -- by 4.3%, total snacking sales volume up by 4.3%. -- total snacking revenue up by 161.9% and gross profit increased 153.3% and EBITDA increased 161% as margin was up by 10 basis points, driven by gross profit margin in Q3 only. And when we take a look at the 9 months consolidated year-to-date numbers, we see a 6.2% snacking sales volume in Turkey versus prior year. snacking revenue 132.4% increased versus prior year. Gross profit increased by 133.7% and EBITDA increased by 142% and EBITDA margin improved by 90 basis points and realize is 17.5% in Turkey.

So all numbers are going up in a much healthier and stronger base. So the peso does not change when we come to our exported international operations. So we also continue to gain market share in some of our international markets as well. In Saudi Arabia, we were #1 in discrete, but we increased our market share from 24.5% to 25.5%. We sustained our market leader position in Egypt. And in chocolate, in Kazakhstan, in our Q2 webcast, we shared with you that we were #3, and now we are #2 in Kazakhstan in chocolate reaching to 15.5% market share in Kazakhstan. Innovation same strategy, they contribute 5% of our total international sales in Q3, and you see some of the new products that have been on the market and shafts in our international businesses as well.

Let me take a look at some of the numbers in our international businesses. Volume was slightly down, pretty much flat and slightly down. However, snacking sales increased revenue up by 125.2% total revenues. Gross profit increased by 134.6% and gross margin realized at 36.6% with an increase of 150 basis points, allingtohigher top line contribution and successful cost management. And in terms of EBITDA, EBITDA margin improved by 160 basis points and realized at 21.1%. We for the improvement development and sustaining the strength of the company continued in our international businesses as well. I also wanted to give you some highlights related to our acquisitions, acquisitions highlights. So I have gone through some acquisitions in the past. So how they impacted us? And what was the earnings contribution, the most recent acquisition that we had in Q4 2021.

Via these acquisitions, we were able to have 43% of our total EBITDA as foreign currency denominated, which is a natural hedge and Ananda acquisition, which we achieved a vertical integration and instant synergy combining the 2 cultures instantly since they were under the same umbrella of user body. Now their contribution to our EBITDA numbers incremental 310 basis points. So all the EBITDA numbers that you see on the page would have been 300 basis points lower if we did not have a land acquisition. And we also wanted to share with you our international business EBITDA margin development. So North Africa in 2016, it started 9.2%. There has been some ups and downs, but it is recovering. As you see, we reached to 11.7% and an increase in trend versus 2021, which was 9.8%. The Middle East, we reached 22.6%, which was -- which where we started 18.3%. And Central Asia, we started 6.7% in 2017 and now we reached 15.3%.

And now Chocolate became #2 chocolate market leadership position became #2 in this region as well. I also want to give you some balance sheet highlights. So as I have shared, our hedges continues and as of today, September not as of today. As of September year-end, approximately 60% of the net position is hedged via close currency swaps and forwards, and hedge committee is definitely looking for opportunities. And as soon as we have seen opportunities, we continue to hedge activities to mitigate our FX risk order. And I'd also like to share with you some covenant-based net debt-to-EBITDA numbers, I mean, which is calculated through the definition stated in our syndication facility agreement. In December, 2020 mantas 3.67% in June 2.91 and in September -- as of September, it's 2.84. And we expect the momentum to continue within these ranges as well. Working capital in custom is extremely important for us. So December 2021, we ended up 142 days. As of September is 116 days. We established a working capital committee where we meet on a bid basis. The financing is leading with the key stakeholders like supply chain, sales, marketing and other key business stakeholders, how we can effectively manage and impact our working capital. So I'm also happy to share with you our guidance, which has changed from what we shared with you -- so we are keeping the EBITDA margin of 18.6%, and we revised our guidance to ILS 26.5 billion by the end of year. And I also wanted to share with you the trend and also so, I mean, from 2012, how our EBITDA and net sales also you can see on the page that a very healthy increase in terms of net sales. And this year, we expect to end business sales by 26.5%, keeping the 18.6% EBITDA margin despite all very challenging and tough environment and challenges and we expect to reach EUR 4.9 billion EBITDA by the end of the year. Again, our priorities do not change, continue to support our brands and continue to invest on brand equity, retained volumes and value, growth and absolute value terms through our share gains and definitely strength in balance sheet and cash. So thank you. We will be happy to have your questions.

[Operator]

[Operator Instructions] We have a first question from Daniel Zaczkiewicz from Barclays.

[Daniel Zaczkiewicz, analyst]

Could I just ask about your credit ratings and the balance sheet liquidity. So both of your ratings are currently on watch negative due to the agency's concerns about refinancing and in particular, refinancing of the April 2023 syndicated loan. Could you just update us on what your plans are on this and whether we should expect a refinancing before the end of the year?

[Fulya Surucu, executive]

Thank you. We are in the process of refinancing our core syndicated loan certainties. And we have already started working on it, and we have already appointed key lead partner banks, which are currently part of our current syndication with approvals on the way. I mean we expect the accruals soon. Together with our key lead partners, we have begun approaching existing lenders. And on the week commencing of October 24, I was in London and Dubai 4 days all week, together with our appointed Kyle partner banks for the road show where we approached our current syndication banks and the new potential banks. So what we aim is -- we expect to execute the deal as soon as possible. So the maturity is April. And we want to have an early refinancing. Hopefully, we will have some concrete progress by the end of the year. Initial indications from our road show and from our current syndication banks and new potential banks are quite positive. -- will continue to progress. We are currently working on that very intensely with our key finance business partners.

[Daniel Zaczkiewicz, analyst]

Okay. I just have another question just have you considered buying back any of your bonds at the current price, potentially liquidating your short-term financial investments to fund buybacks?

[Fulya Surucu, executive]

That's definitely in plan. However, we have to set all the plans in a priority. The first priority is refinancing and completing the years very successfully in terms of all financial KPIs. And definitely, bond buyback is something that we are considering seriously and something that we will consider definitely very soon after refinancing is completed.

[Operator]

The next question comes from Antonio Gomez from [Technical Difficulty]

[Unknown Analyst]

Can you hear me?

[Fulya Surucu, executive]

Sure. Yes, we can hear you.

[Unknown Analyst]

So my question was, firstly, on your international business. You can see that on a quarterly basis, year-on-year, there was a significant decline in the quarter, which versus previous quarter, you were growing and now you were declining. Could you just explain the decline for that this quarter?

[Fulya Surucu, executive]

Sure. In fact, the things have started to improve and I mean, started to come back where it was before. Like in Saudi Arabia, we were able to do in a 3 phasing seismic activities, pricing and sizing activities, which led 19% growth on a year-to-date basis in Saudi Arabia. And both, we see an increase in Godiva and Albin in Saudi Arabia. And we also gained market share in Saudi Arabia, mainly from our competitors. So things are coming back. I mean the Cobian schools were off that impacted our Saudi business significantly, but things are coming back. So we're gaining market share, with gaining pricing and sizing activities. And with the increase of the sales and especially Godiva and Albini, -- some of the Arabia is back on track. That's how I can say. I mean, Kazakhstan, I mean you have seen the increase on the EBITDA margin from, again, it increased to 15.3% on top of that increase in market share. In Egypt, again, there is a September year-to-date 4.7% growth versus prior year. There has been some challenges, but it is, again, almost on track, but we will see the developments over the coming quarters more strongly.

[Unknown Analyst]

Okay. And then my second question is 2 parts. First of all, you mentioned that your net position has been updated to 60% close now with Euro 268 of hedges, whereas in the previous quarter, you had 45% of your open position hedged with $275 million of hedges on euros. So I was just wondering what your hard currency cash mix is now? And the second part question is, on your cash flow, you have a movement in cash flow from investments. I was just -- I just wanted to confirm if that was a redemption on your mutual -- on your financial investments, AKA your mutual funds...

[Fulya Surucu, executive]

Yes, as of September, you see a conversion of approximately $50 million from our financial assets to deposit cash. As I have shared, some decisions are taken to strengthen our treasury policies related to our financial assets, which will be in line with international practices. The decision is there. The execution is progress, and it will be resolved very soon. But the momentum started and you see on our financials. What was the other question? The second question. sorry. Yes, related to hedges, yes, as of September year-to-date, total hedge position is EUR 268 million. And we started the with EUR 500 million open position. We continue to hedge. And this momentum will also continue throughout the year and next year as well.

[Operator]

The next question comes from [ Pedro Nunez from Banco Central. ]

[Unknown Analyst]

Yes, I wanted to ask 2 questions, one on the income statement some more details on your income from investment activities and expenses from investment activities. I wanted to ask for more details on what those are. And I also wanted to ask, you mentioned your covenant based net debt to EBIT also wanted to ask the level of the covenant-based interest coverage.

[Fulya Surucu, executive]

Yes, related to your covenant question, so you see the net debt to EBITDA was 2.84. The other covenant of interest coverage ratio is around 300. So the target was -- so we are above the target as of -- at the end of September. And we do not expect any issue by the end of the year as well. In fact, numbers might even improve, but we will see what will happen within the next few months. So no issues from that perspective, both interest coverage ratio and net debt to EBITDA, and you see the decrease in trend in both -- not in net debt EBITDA. And in terms of P&L question, it's mainly the fair value loss of investments, short-term investments that we have signed in equities -- but as I have shared, we are taking actions and actions in progress. So from now on, we will not be exposed to the volatility of the market.

[Operator]

The next question comes from Josefina Rodríguez, Morgan Stanley.

[Josefina Rodríguez Duran;Morgan Stanley;Analyst, analyst]

I do have a follow-up on the refinancing side. I think you mentioned you were in London and Dubai and you're approaching new clients as well. Are you receiving from your current pool of banks, some like pushback, meaning they want to grow, for example, the amount of exposure. And I guess a follow-up as well is, are you planning to refinance the full amount? Do you have any plans to like liquidate the financial investments to refinance a smaller amount of debt -- and I guess, worst-case scenario, what's the plan being things don't go as you expect?

[Fulya Surucu, executive]

So our strategies, I mean, we shared it with our current syndication banks and we need potential banks, our strategy. Our strategy is mainly not to increase the total amount, in fact, decrease the leverage. So based on that strategy, we are talking with our finance business partners and the current indications are quite positive. And as I have shared, we have also appointed some key lead partner banks that also are helping us during this process and will continue to help us. So this is our strategy, and we will move towards the strategy. And I strongly believe that we will be able to finalize this strategy very successfully. If things go wrong for some reason, we have mostly enough funds to close the refinancing, but that will not be the preferred option. Preferred option strategies decreased leverage and finalize the process as soon as possible with current syndication banks plus if possible, new potential banks which -- who showed their interest as well.

[Josefina Rodríguez Duran;Morgan Stanley;Analyst, analyst]

Okay. And I guess you also mentioned across the call that you are changing your policy in terms of the financial investment. Is there like some more like color or comments that you can give on what you're trying to achieve and the changes you are making on that side?

[Fulya Surucu, executive]

Well, I mean, we are strengthening the policy to be in line with the international treasury policies. It is in progress as soon as it's finalized, which will be finalized very soon. I'll share more details. But I can share with you that the exposure to volatilities in the market will end.

[Operator]

The next question comes from Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

I have a quick question on the receivables from related parties. And is there any plan to collect them from Jorge holding next quarter? And second, is there a small increase in these receivables because I'm calculating that it increased in dollar terms. So I just want to be sure that whether you lend more to Yildiz Holding or that's just like an interest calculation?

[Fulya Surucu, executive]

There is no increase in the receivables. The main increase -- I mean there is no incremental lending to any parties. The increase has mainly driven FX increase. and interest increase that we have accrued. Currently, we are working with one related to payment plan, but I cannot give you any exact date when those will be collected. But I can assure you that it did not increase. The only increase use-related the interest that we accrue in Q2. And... Going to increase?

[Hanzade Kilickiran, analyst]

All right. And is it possible to give some sort of color on consumption trends in Turkey and also minor region currently?

[Fulya Surucu, executive]

Consumption in Turkey, I mean you have seen our numbers in Turkey. Volume increased market share increase gross profit margin percentage increase. So we are leveraging the advantage of being a market leader in this sector. And we have done it very successfully and we demonstrated to the market in the last, especially 3 quarters that we could do it, and we will continue to do it. So we are facing with those challenges. The consumption, the consumer behavior change, definitely. I mean there is -- let's say, there is a shift in terms of consumer behavior from like traditional trade to more discounter channels.

But again, you see from our numbers with the effective channel mix pricing, product mix management, -- we were able to manage that as well, but we are aware of it. And according to that, we are also developing strategies to answer to respond to these consumer behavior changes as well. Pretty much similar things is also going in MENA region, but I have also shared with you that in Saudi Arabia, we were able to increase our share by share, increase our sales by 19%, and we were able to implement the pricing and sizing activity in a 3-layer phases, and we also gained market share from international competitors. So the momentum is also continued. I mean, we are aware of the consumer behavior change, but we are being very proactive to respond to this consumer behavior change impacts and taking actions proactively.

[Hanzade Kilickiran, analyst]

Okay. So there is not a very sizable volume risk in the fourth quarter?

[Operator]

[Operator Instructions] We have a question from Warren [indiscernible] from [Technical Difficulty]

[Unknown Analyst]

My question is regarding the volume in international operations in the third quarter. The price increases were quite substantial. And as a result, we have seen some volume contraction. Should we expect this trend to continue in the fourth quarter? Or the price increases are stand basically, volume growth will recover volumes will recover in the last quarter?

[Fulya Surucu, executive]

Sizing activities also contributed to volume contraction. However, we are in the recovery phase. As I said, the volume increase in Southern area. In Egypt, on a year-to-date basis, in fact, the volume increased by 4.7% on a year-to-date basis in Egypt. And we expect to continue the momentum in Q4 as well. So more significant volume decline expectations. On the contrary, the recovery is expected very strongly in Q4 for our international businesses as well in terms of volume.

[Unknown Analyst]

Okay. Thanks, Despite all the price increases, volumes in Turkey are doing extremely well. Should we expect this trend also continue in the last quarter of the year?

[Fulya Surucu, executive]

Yes. Yes. And based on the expectation, we was our net sales, yes, volume increase, market share increase, profitability increase. Yes.

[Operator]

The next question comes from John Wood from Wood & Company.

[John Wood;Wood & Company;Analyst, analyst]

I have 2 questions. And my first question is related to the FX losses from the financing activities. Given the fact that Lee has depreciated against your around 2% on a quarter-on-quarter basis in the third quarter and constant the fact that your net FX short position, which has increased slightly. I see that your FX losses from the financing activities remain pretty high, first elevated a quarter-on-quarter basis. And what are the reasons behind the FX losses booked from the financing activities in the third quarter and why they remained high as opposed to the second quarter? And my second question is related to the interest expenses. Could you please provide some color on the net interest expenses, which increased on a quarter-on-quarter basis. Is it due to the higher interest expenses incurred or recorded from the -- your FX borrowings or is it something related to the higher volumes? Could you please provide some color?

[Fulya Surucu, executive]

Sure. Your first question, I mean in terms of expenses, I think, I mean, it's kind of accounts of 2 parts. One of them is -- in fact, our short position decreased versus Q2 to Q3. The main increase might be related to FX increase from Q3 to Q2 in terms of short position. And also, there is a big chunk of fair value loss on the short-term financial investments. Maybe you might be looking at them together. When I take a look at -- I mean, so in terms of financial expenses, FX expenses, they did not increase significantly. But if you want to follow up, I can get -- we can get back to you with the table, I mean, what happened in Q2, what happened -- in terms of interest expenses, there was -- I mean, eurobond payback -- no, not 1. So there were some accruals related to our cross-currency swap interest expenses that we accrued. That might be one of the reasons. And the other reasons are routine interest expenses driven from our syndication loans and equals related to Eurobond and so on. And if you need further information, we can give you the breakdown of that as well in a table we can send you.

[John Wood;Wood & Company;Analyst, analyst]

Sure, I will follow up with you later on.

[Operator]

The next question comes from [ Dimitri Ivanov ] from [Technical Difficulty]

[Unknown Analyst]

Can you hear me?

[Verda Tasar, executive]

Yes, we can hear you.

[Unknown Analyst]

Yes. I just wanted to kind of follow up on this working capital strategy. You mentioned that you established like a working capital committee. But when looking at the working capital items, I see some continuation in increase in inventories quarter-on-quarter. Is it possible to give us some kind of color information on the strategy with regards to inventories. It looks like the amount in absolute amount, it is increasing, are you kind of buying -- procuring like raw materials for the next year? So at which point like you will feel comfortable with the level of inventories in the business and where we might see some release of inventories -- so that's like my first question.

[Fulya Surucu, executive]

So what I can share with you is in terms of working capital management, all of our regions have already received very tight targets in terms of key working capital KPIs for next year. And our year-end targets are also very tight and challenging, and we discuss it on a bid basis together with our key business partners within the company. Your second question is, I mean, there are some seasonality effects and there's also an inflation impact. So I mean, from December 21 to September year-to-date, I see like 11 days decrease in terms of inventory and significant decreasing in terms of receivable as well and approximately 30 days or 26 days working capital improvement versus where we ended the year last year. And this momentum will continue, and it will -- it is tracked often, and it is tracked on a KPI basis as well.

So there is an inflationary effect, which is important for increase in inventories. And on top of that, there is a seasonality like I mean some of our key raw materials like let the season starts in July, like sugar. I mean, depending on the market conditions and depending on the seasonality, if you do not purchase weight in July, you missed the opportunity. So we had to buy some based on the seasonality and so on. But what I can tell you is working capital KPIs are very tight. And there is no risk in terms of business continuity in terms of supply of key raw materials. We are balancing all these 4 important items in factors very carefully. But at the same time, there is inflation that it is built in commodity prices, plus that there is some seasonality impact related to our key raw material supplies like each sugar and so on.

[Unknown Analyst]

Understand. That’s all from you. Thank you very much.

[Operator]

We have no more questions at this time.

[Fulya Surucu, executive]

Thank you.

[Operator]

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