Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2017-Q4

[Cenker Uçan, executive]

Good afternoon, everybody, and welcome to the Ülker Bisküvi 2017 Fourth Quarter Earnings Conference Call. Actually, I am very honored to announce such a fantastic financial result as at 2017 year-end. And I'm sure, as you might have noticed that, we have reached to the highest margins ever with this substantial growth at top line, which proves we are on the right track.

So as usual, I will go over the macroeconomic figures and provide market insights and then we'll provide you with the states of financial results, and finally, I will make the closing comments and then we will have Q&A session.

Let's start with macroeconomic overview. Turkey's economy grew by 11.1% year-on-year in the third quarter last year, and it is the fastest in 6 years. Economic conditions remain supportive of growth early this year with the manufacturing PMI recording, it is the highest figure in 7 years in December 2017, and both cost-to-consumer and business sentiment should tick up in the same month.

The manufacturing sector performed very well at the outset of the year, with activity in the sector accelerating market bids on [ sorting ] order books. Industry production index averaged 126.6 in 2016 and 134.6 in 2017. Industrial production increased by 6.3% compared with same month of previous year, and we are currently observing an increase in the index December 2017 onwards.

The consumer confidence index, which is published by Statistical Institute in cooperation with the Central Bank, consumer confidence index in Turkey realized at 65.1 in December, a similar level throughout the year. Annual CPI inflation was 12% in 2017, while annual food inflation was around 13.8% last year. If we are moving to the market dynamics in Turkey, the total confectionery market grew by 6.3% in volume, and 16.2% in value terms. However, as Ülker, our branded business has grown by 6.4% and 14.1% in terms of value. So as you might see that, our volume growth has been realized, much higher than the total confectionery market growth and the biscuit market grew by 6 -- 7.8% in volume and 15.7% in value terms.

And as a biscuit segment, we have launched a lot of new products and which we are seeing the positive impacts of our new launches. Our branded biscuit segment has grown by 9.5% in terms of volume and 16.8% in value terms. And the total Turkish chocolate market grew by 4.7% in volume and 18% in value terms. Cake market grew by 6% in volume and 17.5% in value terms. So for 2017, the total Turkish confectionery market has grown, and as Ülker, our -- the total growth has realized much higher than the total market growth.

Let's move to the consolidated performance. At Ülker, we are operating in Turkey over 70 years and we are the leading confectionery company in Turkey. And as you know, after the acquisitions that we did in 2016 and '17, we became the largest producer of the region, including Middle East, North Africa and Central Asia. In 2017, we had invested more than TRY 350 million in our facilities in order to increase our capacity and efficiency, which enables us to decrease our fixed cost in production and help sustainable profitability improvement in the coming years through this important investment. And after the finalization of IBC acquisition that we are currently awaiting the SAGIA approval from the Saudi regulatory. We will have 10 facilities in 4 countries, and our capacity will exceed more than 950,000 tons.

2017 was the year of Ülker. In all financial metrics, we have broken records. On top line, our total volume has grown by more than 3%, and the total revenues exceed more than TRY 4.8 billion with a growth rate around 14.7%. As you know, this growth rate also includes the impact of non-confectionery sales and apples-to-apples growth rate for confectionery business is around 16.7%. And in terms of profitability, we have generated more than TRY 700 million EBITDA, and our EBITDA margin has been concluded with 14.6%, with an improvement around 90 basis points compared to 2016. Our net income, [ if you totaled of the parent ], I mean, of the total of has increased by 40%, which reached to the highest level in our history. And cash is one of our most important priorities and KPIs. In 2017, we have generated around TRY 700 million cash from our operation, which is 21% higher than last year, and with this success, our net debt to EBITDA is still very healthy with a ratio of 1.6.

I'm sure as you know very well, starting from 2012 with the restructuring of our business, we have improved our operational efficiencies throughout, creating niche synergies between our businesses. And in line with our clear strategy, finalizing our acquisitions in the region enables us to show sustainable growth and profitability. In fact, over the past year, our volume has grown with the CAGR of 5%. We have delivered double-digit compound annual growth in EBITDA with 26% and net sales -- in net sales around 15%. Our 2012 EBITDA margin was 9.3%, and currently in 2017, we reached very, very close to around 15% levels. Actually, this page clearly shows our efforts for long-term value creation, and our clear strategy is guided by the belief of delivering sustainable growth on both operational and financial perspective.

If we are moving to the financial results on quarter and year-to-date. Business at first, I would like to start first with quarter results. Our total confectionery volume has grown by 1%, and our total revenues has grown by 12%. And if we are making the apples-to-apples -- I mean, if we are looking to the confectionery growth, the confectionery revenues have grown by 14% compared to previous period.

Another important thing is our gross profit. Our gross profit has grown by 14% in the last quarter, and our gross profit margin has increased by 70 basis points compared to previous year and reached to 77% levels. And another important thing is our EBITDA margin. EBITDA margin has also increased by 19%, and the expansion in EBITDA margin is much higher than our gross profit and which clearly shows our proper OpEx management, and our last quarter EBITDA margin has reached to the highest level in our history, which is around 14.3%.

One, another fantastic result is in terms of net income. Our net income, 2016-- in 2016 was around TRY 8 million, and in 2017, it has increased to more than TRY 110 million, and we have -- observing a growth around more than 1,000%.

Actually, I have also covered in my presentation our cumulative figures. So as you might see that, our gross profit margin has increased by 90 basis points, and in line with this increase, our EBITDA margin has improved 90 basis points and reached to 14.6%, which shows that we are very close to 15% EBITDA margin levels. And our total net income has reached to the highest levels in our history and has been ended up with TRY 430 million, which is 51% higher than last year. If we are moving to the sales volumes for confectionery businesses, the total consolidated confectionery sales volume was increased by 1% for the third -- fourth quarter and 3% on a cumulative basis. And the consolidated biscuit sales volume jumped by 4% in the last quarter and expanded by 7% in 2017. As you know that, our branded business is quite important for us. We are delisting our -- the prior and secondary products so that's why the branded business growth is much higher than the -- our total growth, and the branded volume for biscuits has grown by 4% in the last quarter and around 9% on cumulative basis.

The consolidated chocolate sales volume was contracted by 2% in the last quarter, which is due to the -- some of the delistings in the regions and remains flat in cumulative basis. And while branded chocolate volume slightly improved by 1%; in 2017, branded chocolate volume increased around 4%. And the consolidated fixed operation was down by around 3% in the last quarter and also 3.8% on cumulative basis, which is mainly due to the unprofitable product that we have delisted in 2017. So now I would like to move to the domestic operations. So as you know, at Ülker, we are clear #1 in total Turkish confectionery market, and our market share is around 36%. And in chocolate, we are very dominant, and our market share is around 37%. And if we are looking to the market share improvements compared to previous quarter, we see that our chocolate market share has increased by 10 basis points and reached to the 36.7%, which is around 4x higher than #2.

In biscuit, in line with our strategy, we still aim to be #1 in biscuit category. As you might see, there is a decline in biscuit market share, however, as you know, the product label business is growing in biscuit so that's why the share of the product label business is growing. However, at Ülker, we are gaining market share as the gap between main competitor has declined by 2.3 percentage point compared to previous period. And one, another update is, in January 2018, as Ülker, we became #1 in terms of volume in biscuit category in all around Turkey. So I believe that we will see the positive contribution of the market share turn in the first quarter of 2018. And on the cake side, we are still focusing on value-added products, and with the new launches, we are aiming to increase our profitability, and we have a slightly decreasing market share. On Page 12, you are seeing the pictures of the products, and as Ülker, for Ülker-branded products, we launched a lot of products in different categories, and the total contribution of the new launches in 2017 reached to TRY 130 million, and in 2018, we will still focus on this new NPDs, and we will introduce new taste to the market.

The synergy product, I'm sure you are very familiar and [ often glad ], we are still focusing into the synergy products, and in 2016, the total contribution of these products was around TRY 75 million. And in 2017, we have generated more than TRY 150 million, and also in 2018, we have budgeted to reach more than TRY 200 million levels from this synergy product as a contribution. And in Turkey, starting from April, we have launched a Godiva new tablet bar chocolate and which we are also seeing positive impact to our market share in chocolate premium category. Now I would like to cover some of the financial results on a quarter and cumulative basis. I am sure you know that all these figures set out in the table are prepared based on the products sold in the region. So that's why the domestic and international operations have been separated and calculated in that respect. And the last quarter's volume was flat for Turkey, and the total revenue has increased around 8%, and the branded revenue has grown more than 8.7%. Another important thing is our gross profit margin and our gross profit margin has been normalized in Turkey, and we increased around 9% compared to previous quarter, and the gross profit margin has increased by 20 basis points.

And with the support of brand investment, we have spent a little bit much higher ATL and BTL marketing investment through our brand. And so that's why our EBITDA margin has declined around 40 basis points due to the -- this brand investment. On a cumulative basis, with total overall volume increase around 3.8%, and the branded volume continues to grow, and we have observed more than 6% thanks to the new product launches and the active market investments. And the total revenue in Turkey has increased around by 12%, however, the branded growth -- the branded revenue growth is much higher than the total growth and which is around 14%. And our gross profit has increased around 8% compared to previous year. And our EBITDA margin has been ended up with 13.7% as a cumulative basis, 2017.

And in line with our strategy, we are focusing on branded product sales, and the share of the branded business is still increasing. In terms of volume, the share of the branded business was 90% and it increased to 92% in 2017, and in terms of revenue, the sale of the branded business is 95% on a cumulative basis. At Ülker, we have completed all the acquisitions in the MENA as we committed to our investors. In 2016, we have completed the Hi-Food and FMC acquisitions. And starting from 2017, we have finalized the Hamle acquisition. And in the last month of the year, we have closed the UI MENA deal. And we have signed the share purchase agreement of IBC, and currently, we are waiting SAGIA approval for IBC and which we are very close, and we believe that we are going to finalize all this procedures in this month, and we hope to consolidate IBC starting from 2018 in our financial statement.

Now I would like to start with Saudi operations. Saudi operations is quite important for us due to the market size of the confectionery. And since we have finalized the UI MENA acquisition, I mean, which we have already acquired the production and distribution rights of McVitie's. Now currently, we are going to distribute McVitie's, and we are going to produce McVitie's in our regions. And in all MENA countries, this will help us to increase our cost to share and also increase our market share.

And in Saudi, as Ülker, our market share was around 13.5% and which 6% will come from McVitie's side. And as you know, before these acquisitions, we were very strong #2. But after the acquisition, as Ülker, we became #1 in Saudi, and our market share reached around 70%.

And in terms of financial statements of our acquired company, FMC, the total volume has increased by 40% and the total revenues has increased around 50%, and the total EBITDA has increased in line with this growth, around 40%. As you know, these figures -- 2017 figures include also the impact of the distribution of the McVitie's and Rana businesses in Saudi, but if we are excluding this impact, our business growth in FMC companies would be around 10% compared to 2016. Egypt is also another important region and country for us and, as Ülker, our market share is around 13.7%, and we are #3, and we are very close to the #2. And as you might see, we have a very tiny market share in McVitie's because, due to the import and volatility in the market, there has been some difficulties for import business of McVitie's. But since we have signed the UI MENA the agreement, now we will be able to produce McVitie's in our facility, and we believe that we have already started production of McVitie's in Egypt. And starting from 2018, we will also see the positive contribution of McVitie's in our financial statements and, also, will help us to increase our market share in Egypt. And we aim to be clear #2 in Egypt in terms of market share. And the total volume has increased around 1.4%, and the total revenues has increased by 70%, which is due to the price increases that we did quarterly. And the total EBITDA has increased around 30%. And I mean, another OpEx for you is, after the acquisition of UI MENA, which the company is also the owner of Ülker Egypt, and this Ülker Egypt company is the sales company of Hi-Food. And in order to give you a better understanding for Egypt result, we have consolidated Hi-Food and Ülker Egypt together, and we have presented to you to give you consolidated figures of our Egypt business.

And it's been a company, new baby, UI MENA. And now we have already started the process of UI MENA and have consolidated in our 2017 financial results. And after this acquisition, as Ülker, in all MENA countries, we will be -- we have been #1 or #2 in all MENA countries. And the total volume of UI MENA has declined by 8%, and the total revenues have increased by 16.3%, and the total EBITDA has increased around [ 51% ]. One, another important thing is the EBITDA margin, as you might see, the total EBITDA margin of the new acquired company is around [ 30% ] and which is contributing a lot to increase our EBITDA margin, and with the benefit of synergies in the region, we are expected to increase our international and our consolidated EBITDA margin going forward. In Kazakhstan, our market share is around 9%, and we are #3, and after the acquisition, we have invested to our Kazakhstan facility in order to increase our capacity and also make efficiencies. And the total investment was around EUR 70 million, and we believe that we are going to finalize this CapEx process in the first quarter of 2018 and then we will be able to produce McVitie's and Halley for Kazakhstan and for the other neighboring countries, such as Russia and also Urumqi. And the total volume has declined around 10%, which is mainly due to the SKU optimization activities. We have done a lot of products in Kazakhstan. So that's why the total volume has declined. And the total EBITDA margin in Kazakhstan is around 6.7%.

So I have covered this market share, but just to give you a trend of this market share, in Egypt, with the support of the marketing investment, we have seen positive contribution of our market share, and our market share in Egypt has increased from 13.2% to 14% in 2017. So we gained market share in Egypt. And in Saudi, now we are very strong #1, and our market share in Saudi has increased from 19% to 19.6%. And with the support of new launches, such as Albeni campaign, our market share in Kazakhstan in [ countline ] business has increased from 8.7% to 8.9%.

So on Page 23, we are seeing the wide range of our new launches in these regions, and now we have already started producing McVitie's in our facilities, in Saudi and Egypt. And in Kazakhstan, we have launched Godiva tablet bar. And in 2018, we will increase our range of new products portfolio going forward. In terms of financial statements for international operations for the last quarter, the total volume has increased around 2.7%, and the branded sales volume has increased by 7.6%, and the total revenues -- our international business revenues have increased around 25%. However, the growth in branded business was more than 25%, which was 28% compared to last quarter, and our gross profit has increased around 20%, and the gross profit margin has increased by 80 basis point and reached to 36.5%. And our EBITDA margin for international operation is more than 18%.

And in terms of the cumulative figures, for the total volume of the confectionery, sales has increased around 2%, and the growth in branded business has increased more than 7%. And the total revenues has increased by 27%, and as you might see, the growth in branded business is much higher, which is more than 30%. And like the quarter results, our gross profit margin and EBITDA margin is increasing very rapidly. And as of 2017, our EBITDA margin is 16.3%, which is 3.5 percentage points higher than last year. And like in Turkey, we are continuing to produce more branded business, and we are focusing more on the branded side. So the share of the branded business is also increasing in international operations and in terms of revenue, the share of the branded business has increased from 78% to 81% as of year-end 2017. As I mentioned to you before, the net working capital management and cash flow management is quite important for us, and now we are seeing the positive impact of our tight management, and our net working capital has -- ratio has declined. And the total net working capital balance has declined around 10% compared to previous year. And the needs of the net working -- the ratio over the sales has declined from 13.7% to 10%. And in terms of operating cash flow, we have generated more than TRY 700 million, which is 21% higher than last year.

Net debt. So we are seeing this positive impact of this management so that's why our net debt has not increased so much. And currently, our net debt is around TRY 1.1 million, and our net debt-to-EBITDA ratio has increased from 1.2 to 1.6 levels, which is at very healthy levels. So as you know that, as Ülker, we have closed 2 syndication facilities in 2017, so which is around USD 825 million. And our 80% of our debt is through long-term finance. And our first syndication facility, which is around USD 375 million has been awarded as the best Turkish syndication deal of the year by Capital Global (sic) [ GlobalCapital ] in 2017 that I would like to also share with you as an update. I am sure you know very well, so as Ülker, we are one of the unique companies not having any FX exposure in our balance sheet. So starting from April 2017, using some derivative transactions, we have already closed our net FX exposure on our balance sheet. And currently, as of 2017, we are long in U.S. dollars amounting to USD 153 million and we are short in euro, which is amounting to EUR 88 million. And the total debt is 186 million long in terms of total FX exposure on the balance sheet side. So we currently, we don't have any FX exposure on the balance sheet, and it is already closed.

So I mean, to sum up, we have continued to make good progress by focusing in higher-branded product sales and lowering non-branded sales and private product in all markets, and this strategy has paid off. And through executing this strategy, we have enjoyed a rising effect, affecting us at sales point and while prioritizing our margins through keeping costs under control. And secondly, we have finalized the acquisitions of UI MENA.

We have increased our footprint in the fast-growing MENA region and being #1 in Saudi. We will increase our presence substantially in the rest of all MENA countries, and after the acquisition of IBC, I believe we are going to enjoy from the benefit synergies in Saudi. And having global region and local brands in our portfolio, we will match all of the price points in the market. And with the support of production of Pladis synergy products, our export revenues will continue increasing in 2018.

And as Ülker, we kept our promises to our shareholders and finalized we are better than the market consensus. So 2017 was the year of the cost we achieved in all metrics of financial status and ratios. So in conclusion, we remain fully committed and confident in achieving our underlying targets despite this current market dynamic that we are operating in all regions and countries. So in terms of 2018 guidance, we are expecting low double-digit growth in the top line, which is -- which will be higher than inflation, and in terms of EBITDA margin, we are aiming to maintain at least our 2017 EBITDA margins in 2018. Now I would like to open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Cemal Demirtas, Ata Invest.

[Cemal Demirtas, analyst]

My question is related to the [indiscernible] ebb-flow about Yildiz Holding. What's your perspective from the Ülker side? And we are hearing that there will be some agreements within the next 1, 2 weeks. Do you have any comment on that? My first question is related to that. And the second question is, are you planning any inorganic acquisition for 2018 except for the acquisition to be completed, the IBC acquisition?

[Cenker Uçan, executive]

Thank you, Cemal. Based on -- as you know, I'm sure, for the Yildiz Holding side, we made our public announcement in -- a couple of weeks ago. So as Ülker, we don't have any relationship with this bank. So we are -- that is -- started from multinational banks. So currently, we are not the part of this process. I think it's quite clear from your side as well. And as far as I know, I mean, they are very close to finalizing this process, and once it's going to be finished, they are going to announce to the public. Now everything is under control from Yildiz Holding's side because Yildiz Holding is larger conglomerate -- food conglomerate operating in Turkey and, currently not in Turkey, in all around the world. So we are not expecting any issue for this process, but as I mentioned you before, as Ülker, we are not part of these discussion or meetings, for sure. And regarding to the acquisitions we had, apart from IBC, we are not planning any acquisitions. I mean the inorganic growth. But as you know, during our investor meetings or during our meetings, we -- some of our investors are asking us what has been left from Yildiz' side, and the -- our answer is, as you know, a sale company and the procurement company and the governance kind of business. Currently, I would like to underline that we don't have any plan to acquire these entities. However, going forward, maybe, in terms of cost of governance, maybe we can acquire. But this is not going to help us to increase our EBITDA margin. Just, it is going to increase our sales momentum in Turkey and to make a more corporate governance perspective. So regarding to your question, for 2018, we are not planning any acquisition for Ülker. Is it clear?

[Operator]

[Operator Instructions] Dear participant, your line is open.

[Unknown Analyst]

This is [ Metan ] from [ EnCap ]. I have a couple of questions. One of them is a follow-up actually. Given the news on parent company, is it fair to assume higher dividend payments from Ülker Bisküvi to the parent company going forward? This is my first question.

[Cenker Uçan, executive]

Sure, I think your question is about dividend payments.

[Unknown Analyst]

Yes, yes, dividend payments...

[Cenker Uçan, executive]

Yes, actually as you know, as Ülker, we have a clear dividend policy. So I mean -- and which we have already announced it, the policy. So during the General Assembly meeting, this is going to be decided by our shareholders. So I mean, regarding to the dividend and the, I mean, the Yildiz Holding bank discussion, there is no relationship. And currently, as you know, our main shareholder is Pladis, and Pladis is owned by Yildiz.

[Unknown Analyst]

Okay. The second question is on the effective tax rate, which is been hovering around 15% to 16% level over the last 2 years. Can you tell us what is the reason of this, I mean, why it is lower than 20%? And what's your expectation for the next 2 years maybe?

[Cenker Uçan, executive]

Yes, it is, as you know, in some geographies in Turkey, we have some incentives so that's why the effective tax rate is declining. And not only from the Turkey side, also in international operations, the tax rate is different so that's why the effective tax rate is less than 20%. And going forward, for 2018, the effective tax rate would be around 20% levels.

[Unknown Analyst]

Okay. And my third question is on donation numbers that we saw in the full year results, like TRY 17 million for the whole year. Could you tell us what is the donation policy of the group? And do we continue to see same trend going forward regarding donations?

[Cenker Uçan, executive]

Actually, the donation policy is -- I mean, as Ülker, so we are distributing donations from our net profit. And these donations are made to the, I mean, some foundations and some social responsibility enterprises. So that's why -- so it is stated, and it is approved in our general assembly. So if we are generating more profit as all entities operating in Turkey, of course, we are going to support these foundations and also other social responsibility projects going forward. But considering our net profit, so the ratio of donations is very tiny compared to other entities, I believe.

[Unknown Analyst]

My last question is on raw material cost. We saw that the cocoa prices are up, like 20% over the last couple of weeks. And could you tell us at what level you actually had your cocoa and palm oil raw material cost this year? Maybe you can -- and also if I can get your overview for the raw material cost inflation for 2018 in general maybe.

[Cenker Uçan, executive]

Actually, in sense of securing these raw material and cocoa prices, so I mean, it's a very strategic question and also confidential. So I don't want to give you this strategic answer. But as Ülker, I mean, we have positioned very well and in the favor of profitability. So we are going to see positive contribution of our actions in terms of this commodity price procurement procedure.

[Operator]

[Operator Instructions] We have a follow-up question Cemal Demirtas, Ata Invest.

[Cemal Demirtas, analyst]

My next question is about CapEx, what's your plants' CapEx for 2018? And second question is related to trends the first 2 months, January and February. How do you see the trends in domestic and international markets?

[Cenker Uçan, executive]

Thank you. The CapEx for 2018 -- so as I mentioned to you before, so starting from 2015, so as Ülker, we spend a lot on our CapEx, and now we have seen positive impacts of this CapEx. But considering our free cash flow, we are going to also continue this CapEx, but the total amounts would be very limited compared to previous year. So the total CapEx for 2018 would be around TRY 150 million, 1-5-0 million, in 2018 on a consolidated basis. And regarding 2 months' actuals, so we have a very clear result for January, so it's about in line with our budget. And February, it seems in terms of net sales, it is much higher than our budget. So I mean, Q1 for 2018 would be in line with our plan, so everything is pretty good, not only in Turkey, in international operation. And we have started to produce McVitie's. And in Turkey, as a consumer, you will see a lot of new launches in Turkey. We will launch new taste and new categories that I'm going to present to you during our Q1 call. And we are expecting positive contribution of this new launches in Turkey and also in international operation market.

[Operator]

We have no other questions. Dear speaker, back to you for the conclusion.

[Cenker Uçan, executive]

Okay, I would like to thank everyone for joining the call. We are very much enjoyed, and obviously, we look forward to updating everyone during Q1 result call in May. Wish you a good day.