Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to Ülker Bisküvi Q4 2018 Financial Results Announcement, Conference Call and Webcast. I will now hand over your host, Mrs. Beste Tasar. Madame, please go ahead.

[Beste Tasar, executive]

Good day, and welcome to Ülker Bisküvi's Fourth Quarter and Full Year 2018 Earnings Conference Call. Today, our call is scheduled to last about one hour including remarks by our CFO, Cenker U?an, and it's going to be followed by a question-and-answer session.

I would like to now to turn the call over to Cenker U?an. Cenker?

[Cenker Uçan, executive]

Thank you. Good day, everybody, and welcome to the Ülker Bisküvi's 2018 fourth quarter call. First of all, I am so glad again to announce rock solid figures in all metrics in the last quarter 2018. As you know, the year 2018 has been challenging due to the macroeconomically difficult environment. And also after growing 7% in Q1 and 5% in Q2, the Turkish economy expanded just 1.6% in Q3 due to the depreciation in Turkish lira. The government announced the new economic program that will serve as the road map for the Turkish economy between 2019 and '21. The full scale fight against inflation program was launched. Nevertheless, in the face of this fragile environment in the world and in Turkey, Ülker Bisküvi continued to grow in last quarter with increasing contributions from exports and overseas operations. As we mentioned, in all platforms, it stood out amongst the companies with rising profits and revenues in the food and beverage industry.

We are pleased to be able to deliver again stunning profit figures that are in line with our guidance. We exceeded our financial and strategic commitments, we continued to break our own EBITDA margin records and posted a cumulative basis 15.8% EBITDA margin. In the last quarter, our domestic EBITDA margin realized as 12.7%, and our EBITDA margin generated from exports and international operations realized by 19.1%.

As we have spoken out in all platforms, we have seen the positive impact of our strategic investments out of Turkey. During period 2018, we have been monitoring this sustainable growth not only in our international revenue and also in market sales as well. We solidified our position as one of the leading confectionary players not only in Turkey, but also in Middle East and North Africa. In Saudi, which is our second largest market, we have sustained our leading position by reaching highest revenue and adding 3.2 percentage point market share compared to last year.

Finally, in last quarter, our international revenues makes 44% of our total revenue, which creates a natural hedge and an important advantage, has enabled our total business to become more robust and more versatile, and more than 50% of our EBITDA is being contributed through our international operations. Mostly important, too, we have surpassed our targets and successfully applied what we have committed to our investors.

Before starting my presentation, I will go over the macro figures and provide market insight, and then we will provide the details of financial results, and then we will have Q&A. Let's take a look at macro indicators.

In terms of macroeconomic developments in Turkey, calendar-adjusted retail sales volume with constant prices decreased by 1% in December 2018 compared with previous months. Based on the Turkey stats restated data as of December 2018, industrial production realized as 117, decreased by 10%, compared with same month of previous year. And manufacture of food products decreased by 11% compared with December 2017. Consumer confidence index realized as 58.7%, reflecting a decrease by 10% compared to December 2017. Consumer price index decreased by 0.4% in December compared to previous month, and food inflation was realized as 25.1% in December.

Now an update on the business. Total confectionery market grew by 4.3% in volume and 21.8% in value terms. And the biscuit market grew by 2.2% in volume and 20% in value terms. And chocolate market grew by 8% in volume and 22% in value terms. And cake market grew by 2.8% in volume and 21.1% in value terms. And as you might see in the market, the market is growing in terms of volume and value. And as we said, we are growing in line with market dynamics and maintaining our strong position in Turkish market.

At Ülker, we are operating in Turkey over 70 years, and we are the leading confectionery company in Turkey. And 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. And in the last 3 years, we have invested around more than TRY 800 million for CapEx in order to increase our capacity and efficiencies, which enables us to decrease the fixed cost. After the finalization of IBC acquisition, the number of facilities reached to 10 in 4 countries. And as of 2018 year end, our capacity exceeded more than 1 million tons, which is the largest production capacity in the region.

As you remember in 2012, we have defined our strategy and decided to focus on confectionery businesses and divested our noncore subsidiaries and performed SKU optimization in Turkey. And delisted less profitable SKUs. And starting from '13 -- 2013, the restructuring process has been started and the plan was finally completed in 2018.

I believe this chart clearly shows us there are tremendous success in the last 6 years. At 2012, Ülker was a company with single digit EBITDA margin having revenue of around TRY 2.3 billion. And in the last 6 years, our net sales have grown by 16.8% CAGR. However, our profitability have grown much higher than top line with a CAGR of around 28% and our EBITDA has reached 15.8%, which is very close to 16%. I believe this momentum will continue in 2019 and this chart clearly proves our commitment to our business and confirms the success of our strategy in order to be a global player in confectionery business.

When we look at our cumulative consolidated yearly results, our consolidated revenues have increased by 25%, driven by both positive volume growth and solid pricing in domestic and international operations which positively affected also by FX rates. We are pleased to deliver again outstanding profitability ratios. Our gross profit has increased by 25% and our gross profit margin has improved by 30 basis points and reached to more than 26% levels.

On the other hand, our EBITDA has grown by 28% and our EBITDA margin has been realized as 15.8%, which is 60 basis points higher than last year. And finally, we have recorded TRY 700 million net profit, with an increase of 76% compared to previous years.

We are enjoying positive impacts of our hedging instruments we applied in April 2017. And one of our strongest muscle is our net-debt-to-EBITDA ratio, which has also declined and reported as 1.6.

Since we are moving to Page 9, so I have just covered yearly results and jumping to Q4-only results, the total volume have increased by 1.5%, and our revenues -- the volume has declined 1.8%. And our revenues have increased by 34% compared to last quarter. And our gross profit has increased by 34%, again, which is in line with our revenue growth. And we have increased our gross profit margin by 10 basis points, which is around 26%. And our EBITDA has increased by 37%. And our quarterly EBITDA has conducted as 15.5% in terms of net income, which is also higher than last year, 24% more than last quarter. So if we are moving to the sales figures. So the total -- let's start with last quarter only. And the consolidated confectionery volume decreased by 1.8%, mainly due to the downsizing. However, the confectionery revenue increased by 34%, and biscuit volume increased by 1.1% and the total revenue growth is around 40%, and chocolate volume remains flat. However the revenues have increased by 34%. And cake volume was contracted by 22%, and this revenue has increased by 9.8%. So as you might see, that is from the sales perspective. We were able to increase our revenues in last quarter as well again. And if we are covering the cumulative yearly results, the total -- our total confectionery business has grown by 1.5% in terms of volume and its revenue increase is around 25%. And our consolidated biscuits business has increased by 2%, and which represents around 28% revenue growth. And our chocolate business has grown up by 5%, which is mainly driven by new launches and successful synergy products especially for Godiva Asia. And the revenue have increased by 25%. Our relatively small business, cakes business, has -- was contracted by 11%. And in terms of revenue, it has grown by 10%.

So if we are moving to the Turkish domestic operation. So we are very strong, #1 in total confectionery business. Our market share is around 36%. As you might remember, we have an ambition to be #1 in biscuit category, and we have achieved to be #1 in terms of volume in biscuit. And in terms of value, we were able to increase our market share by 0.4 percentage point. And now, our market share is more than 40% as of 2018. And we are narrowing down our gap with #1, and we hope we will be also #1 in value terms. And we are still very prominent in chocolate. We are very strong #1. Our market share is flat, which is around 39%. But as you know that, we have -- our market share is around nearly 4x higher than #2. And our cake business, we are very strong #2, and our market share has slightly declined. And as of 2018, we have 25% market share in cakes business.

So after the establishment of Pladis, as you know, we have started to produce some of McVitie's and Godiva tablets in Turkey, and we are -- we were calling this category as a synergy product. And this synergy product is quite important category product. And as you might remember, the total contribution of the synergy products in terms of revenue was around TRY 156 million and we have doubled up this revenue. And now, as of 2018, the total contribution of synergy products reached more than TRY 320 million, and we believe that this momentum will continue in 2019.

And at Ülker, we will be producing these products in Turkish facilities and will export to all countries around the world in our geography and also other European countries as well. And we are paying utmost importance to new product launches, and the entry NPD contribution is around TRY 220 million, which is -- which represents 6% of our domestic sales. And we will continue to focus on NPD process going forward in order to increase our profitability and also market share.

So if we are moving to Page 15, I would like to now cover the domestic operation financial results for fourth quarter. And there is a slight decline in terms of volume, which is in line with our expectations. As you know, due to the downsizing, it is quite normal to observe volume declines. So therefore, it is more appropriate to focus on revenue growth. And our revenue has increased -- grown by 21% in the last quarter and our gross profit has increased by 19%. And we have an EBITDA margin around 12.7% in Turkey, which is 130 basis points higher than last quarter.

And in terms of cumulative figures, our volume remained flat in Turkey. And the total revenues have increased by 17%, and we were able to increase also our gross profit with a growth rate of around 12% and our year-end yearly Turkish EBITDA or Turkish operations EBITDA has ended up with 13.4%, which is in line with last year. And as you know, that's in line with our strategy. We are focusing more branded business in Turkey and also in international sites. And our branded volume and revenues have been flat compared to 2017. The share of the branded sales was 92% in terms of volume and 95% in terms of value, which were in line with previous year.

Now let's move to export and international operations. So starting from 2016, we have finalized our acquisitions in international operations. So as you might remember that the main strategy of these acquisitions where we are going to create these specialties as a production hub and increase our efficiencies in new geography, extend our production capabilities, and also increase the export opportunities in the neighboring countries. And in 2018, as of May 2018, we have completed our last acquisition, which is IBC, located in Riyadh. And due to this acquisition, we have stated our previous year results in line with IFRS standards.

So Saudi is our second largest market. So although the market is shrinking, we have grown our business. And the volume has increased around 13.2% in our FMC facility. And our net sales have increased by 21%, which is much higher than the volume growth, and our profitability has also improved. The EBITDA margin was 12.9% in 2017, which increased to 14.5%. And also, we have -- we were able to increase our market share. Just as Ülker only, we are still #1, and our market share is 16.6%. And as you might remember, we have acquired the McVitie's production and distribution rights in MENA. So if we are adding our McVitie's brand, which is 7.5%, our company's market share in Saudi has reached more than 24%, which we became very dominant in Saudi.

And if we are moving to our last acquisition's financial results, IBC, the volume has grown by 20%, and we have similar growth rate in terms of revenues, which is around 21%. And one important and good news is regarding to the EBITDA margin. We were able to increase our EBITDA margin in IBC as well and our yearly EBITDA margin was 27% as of 2018, and we were able to increase our EBITDA margin by 300 basis points. And as we committed to our investors during our plan, we have started our synergy projects in Saudi, and most of these projects have been completed. And our business in Saudi is growing in terms of top line and also profitability. And we believe that this momentum will continue in 2019 in Saudi.

And as important business is in Egypt and in terms of market share, we became #2 in Egypt. And our volume has increased by 10%. And with the positive impact of pricing and also contribution of McVitie's, our revenues have increased by around 30%. And our EBITDA margin, which we are seeing positive impacts of SKU optimization activities and starting production of McVitie's in our facility, our EBITDA margin has now reached to more than 14%. And now, we believe that this EBITDA margin will continue in 2019 in our Egypt operation.

And lastly, I would like to also cover UI MENA operations. I mean, this company is located in Dubai and which having the production and distribution rights of McVitie's. The total volume has increased by 9%. So you might see that some decline in terms of revenue and in terms of EBITDA, but this is mainly due to the McVitie's Egypt business because we were -- switched our production to Hi-Food facilities. So therefore, if we are adding these figures to the financial statements, we will be seeing positive growth rates. And currently, the EBITDA margin of our Amir businesses, 33%, which is quite high-end at satisfactory levels.

And our last facility is in Kazakhstan. As you might remember, we have invested our Kazakhstan facility. And finally, the CapEx investment process was completed. And now, we have started the production. And we are confident that 2019 will be the year of Kazakhstan. And we are aiming to reach double-digit EBITDA margin in Kazakhstan in 2019. But as of 2018, our volume has increased by 8%, and we have here also a positive growth rate in terms of revenue, which is around 20%, and our EBITDA margin is 2 -- 3 percentage points higher than last year, which is very close to 9%. And as I told you, we are aiming to have double-digit EBITDA margin in Kazakhstan in 2019.

So if we are moving to the market shares in these geographies. So in all -- in Egypt and in Saudi, we did a great job. And our market share in Egypt has improved by 2.1 percentage points. And currently, our market share is 15.7%. And our market share in Saudi has -- it has grown by 3.2 percentage points, and which is currently around 24%. And also, we were able to increase our chocolate market share in Kazakhstan, which is around 11% as of 2018.

So if we are now covering the financial results of international operations. So as of last quarter 2018, the total confectionery volume was up by 5%, and our revenue growth is 56%. But in terms of branded side, our business has grown around 70% and our gross profit was doubled up. And currently, our gross profit margin is 35%. And for the international side, our EBITDA margin is around 19.1% as of quarter 4. And on a cumulative basis, our business, confectionery business in terms of volume has increased by 5%. And we have a revenue growth around 41% and our EBITDA margin is 19.7%, which is higher than last year, around 130 basis points, which we are seeing also positive contribution to our consolidated figures. And we have still ambition and target to focus branded business in also international operations. And the share of branded business has grown from 72% to 77% in terms of volume. And in terms of revenue, this share has improved from 78% to 81%. And we are also continuing to focus more branded sites and business in 2019 as well.

So if we are moving to the -- some balance sheet highlights, so our net debt as of 2018 is around TRY 1.5 billion and our net-debt-to-EBITDA improved to TRY 1.6 billion, which we believe that we are at very healthy levels. And 91% of our debt is through long-term loans with syndication loans. And also our cash cycle of net working capital is around 52 days in 2018. And for the last slide, which I would like to present you our net FX position table. So as you might remember that, after the cross currencies swaps that we have implemented in April 2017, we have shortened our FX exposure in the balance sheet. And after the acquisition of IBC, we have very limited FX exposure on the balance sheet, which is around TRY 67 million, which is around USD 13 million. And with the support of export revenues, so we are going to minimize this level going forward.

So this is the end of my presentation. So in conclusion, although 2018 was a very challenging year, we remain fully committed and improved our financial and operational metrics. And as we are completing the integration in our overseas operation, we'll reap the benefits of synergies among our subsidiaries and we reached EBITDA margin around 15.8%, which is the highest level in our history. And we will continue to invest in our business and enhance our commercial capabilities further and improve efficiencies going forward. So I would like to highlight that our versatility, discipline, as combined with the effective opportunities in the regions which we operate in, will enable us to attain sustainable and profitable growth in coming years. And also, we have started the year off '19 very well, and we are confident 2019 will be another successful year for us.

So now, I would like to open the call for questions.

[Operator]

[Operator Instructions] We have a question from Kayahan Demirak, Is Investment..

[Kayahan Demirak, analyst]

[Foreign Language] I actually have 4 questions, if I may. So the first one is about the net working capital outlook for this year and in 2018. You have invested a lot to working capital, and operational cash flow was quite weak. I was wondering as for this year, are we going to see a normalization on that front? And partially related to that, if we see a normalization, you will end up with a significant free cash flow. So what are you going to do with the cash? I mean, pay down debt? Make another acquisition? Or just accumulate the cash and put it in a deposit account?

[Cenker Uçan, executive]

Okay. Thank you, Kayahan. So as you know, 2018 was very challenging in price in terms of market conditions. So as you said, we are paying utmost importance to our cash flow, and cash flow is our main priority. And as you might see that in the last quarter, we have generated TRY 140 million operating cash flow. And we believe that this momentum will go in coming quarters and these receivables balances, I mean, the net working capital balances will be normalized. So regarding to the significant -- I mean, question about if we will get this cash, what we are going to do. So we might be considering to reduce our net debt levels. But we will decide during the year and also the market and other financial dynamics.

[Kayahan Demirak, analyst]

Okay. So my second question is about expected sales of Godiva's Asia Pacific operations. I mean, if this asset sales goes through successfully, will there be any cash coming to Ülker in the form of dividends? And do you have any estimates of how much it would be -- how much it could be?

[Cenker Uçan, executive]

Okay. Thank you. As shareholder of Godiva, of course, we will be expecting dividends, but we are aware that Godiva will be paying its own debt first. And then some proceeds will be used for investment and net working capital needs of this company going forward. And due to this transaction, there will be tax and other transaction costs. So dividend amount will be calculated after these costs. And if the company pays dividends, 19.3% will flow out. But due to the process, which is now still ongoing, and due to the regulatory restrictions, currently, we are not sharing any amount of dividend amount. But of course, the dividend will be paid, as I told you, with this flow, I mean, after paying their debt, and some proceeds for bear investment and net working capital needs. And also after this transaction cost, they will be paying dividend us.

[Kayahan Demirak, analyst]

Okay. And my final question is that there was a sharp contraction in the domestic cake volumes in the last quarter. So is it fair to assume that you are making your portfolio restructuring on that side? And should we expect a similar trend continue to -- continue in this year?

[Cenker Uçan, executive]

It is due to the -- mainly due to this downsizing, so -- and also, we are also making other portfolio optimization. So as you know, cake business is smaller business for our portfolio, but also important business. So with the new launches and with the new taste, we will be covering this gap. And in 2019, we are not expecting any contraction in our cake business.

[Operator]

Our next question comes from Akif Dasiran, TEB Investment.

[Mehmet Akif Dasiran, analyst]

I have 2 questions, please. First of all is your -- regarding your operating performance in the first 2 months. You mentioned that you have started the year on a strong basis. And can you elaborate more on this? Is this because of the domestic operations? I mean, the minimum wage increase might increase the demand for your products. Is this the case? Or is it more related with international operations? And my second question will be regarding the profitability outlook. How do you see the -- I mean, in the past, more than several years, you are increasing your EBITDA margin. And how do you see 2019 outlook in regards to profitability?

[Cenker Uçan, executive]

Thank you, Akif. So I mean -- so in the first 2 months for 2019, so our business is doing well, not only in Turkey, and also in international facilities as well. So we believe that this trend will continue. But as you know, I mean, 2019 will be also very interesting year for us because we aim to extend our business in Turkey, and we will -- we are aiming to be #1 in biscuit category. So, and in terms of profitability, so if your question is regarding to the 2019 guidance, as you know, that 38% of our sales come from export and international operations. So therefore, currently due to the -- some uncertainties in FX, we are not giving any guidance for 2019 at this stage. But we will announce our 2019 guidance during our Q1 earnings release, which will be held in May. But we are sure and we are committed that we will maintain our growth rate and also our profitability, which we have committed to our investors.

[Operator]

[Operator Instructions] We have a question from Conrad Scheurkogel, Artha Capital.

[Conrad Scheurkogel, analyst]

I just want to go back to Godiva. Being a large shareholder, you have a lot more insight into the Godiva entity than what we have. So maybe a first comment -- a comment first that if we can get greater disclosure as this process is unfolding, will be great for shareholders. Second question I have, you mentioned that they potentially may pay off debt. Can you give us, potentially, an indication of how much debt sits in the Godiva entity? And then the second question I have on Godiva, the new -- the valuation that was done, the TRY 1.23 billion, was that done prior to the announcement of the sale, or the after?

[Cenker Uçan, executive]

Okay. So I mean, so in our financial statement disclosure, so I think we have announced about the process of the Godiva Belgium. But in order to cover it, so as you know, that Godiva Belgium, which we have a 19% sales, signed a heads-up terms with MBK partners in the metro sales of operations in Japan, Korea, Australia and New Zealand, and along with indefinite rights of usage of Godiva brand within this territory. And also, it has been also -- the factory located in Belgium has been also sold including its machines and equipment. So since the legal process is continuing, so the sale amount is not given properly at this stage. And regarding to the -- their debt, once this deal will be finalized and approved from the regulatory, of course, we will be sharing all the details and giving more insight about the sale of this business. But we believe that currently, we are very at early stage, and the new, in terms of valuation. So as you know that our financial statements have been audited by PwC, and during this process, the independent experts are involved in the process of the evaluation. So we believe that our current carrying values will be relatively fair. And that will be in line with the sale of this business. We are not expecting any material deviations from the carrying value so far Godiva amount.

[Conrad Scheurkogel, analyst]

Okay. The second question I have, just on your P&L, I noticed -- maybe you can talk a little bit about COGS, what the expectation are for COGS? And I can understand that it could be fairly volatile because of the changes in currencies and so on. But maybe you can just talk us through the raw material inputs and hedging and so on, and how we can think about COGS going forward? And then there's another line item that showed a pretty big increase on the P&L, marketing and sales. How should we think about that going into 2019?

[Cenker Uçan, executive]

I mean, for the cost side, so I think of course, our revenues have grown, and also our cost of goods sold have grown. So -- but you know that as we have -- as I mentioned that 38% of our revenues come from export and international operations, so we have a natural mechanism in our financial statement. And for 2019, so it will be depending on the macroeconomic environmental position, but we believe we are confident that we will maintain our profitability in 2019. So if we are -- regarding to your question about marketing and sales expense, so I mean, we are not seeing any material increase in marketing and sales side. So I mean, maybe we can catch up your questions after this call during available time, but there is not any specific matters to raise here in terms of marketing and selling expenses.

[Operator]

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

[Beste Tasar, executive]

Thank you for joining our call today.

[Cenker Uçan, executive]

Thank you joining for the call. We will much enjoy it. And obviously, we look forward to updating everyone on our upcoming first 2019 results in May. I wish you a good day.

[Operator]

Ladies and gentlemen, this concludes our conference call. Thank you for participating. You may now disconnect.