Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2019-Q4

[Verda Tasar, executive]

Hello, everyone. This is Beste. Welcome to our fourth quarter and 2019 full year operational and financial webcast. Now I hand over the ground to our CFO, Mr. Cenker Uçan, in order to evaluate our results. Cenker [Foreign Language]?

[Cenker Uçan, executive]

Thank you, and good afternoon, everyone. So before I get into the details of our results, I would like to take a moment to reflect on our 75th anniversary that we are celebrating this year.

It is an incredible privilege to be part of this company that remains as relevant with consumers today as we were almost a century ago. Everyone here at Ülker has tremendous pride in our incredible portfolio of brands. Our job is to deliver on consumers' expectation each and every day. We are also entrusted to make strategic decisions to ensure that Ülker is well positioned in the long term. Earlier today, we sent out our press release and presentation slides, which are available on our website.

Now turning to the business. 2019 was a great year for Ülker. We finished 2019 in a really good shape. We delivered strong results on the top and bottom line, while generating significant free cash flow and also strategic and financial commitments for the year.

Our solid execution and targeted investments in both our global and local brands enables us to meet or exceed all our financial targets for the year. These results give us increasing conviction that our strategy will create a sustained momentum in our business, allowing us to deliver on our long-term financial targets in the years to come.

With the strategy we implemented in 2016, we have strengthened our global footprint, we have strengthened our leader position in Saudi and increased the gap with #2.

In Egypt, for those who were with us in our third quarter call, we mentioned that we become the volume leader. And today, we are both volume and value leader in biscuit category in Egypt. Our McVitie's brand continues to pave the way for company growth in our international markets in Kazakhstan, star brands like, Halley, McVitie's, Biskrem sales growth affected profitability positively.

In our anchor market, Turkey, we demonstrated a robust financial performance with excellent top line growth. We have strengthened our leadership position in confectionery market with our new and successful launches in all categories and strong innovation product line.

Last but not least, as you are all monitoring closely, we have received the dividend income from the sales of Godiva's Asian assets, and we closed the year with another record of net debt-to-EBITDA ratio of 0.3x. Without any derivative impact, our net FX position was realized as TRY 158 million, and we generated TRY 665 million free cash.

Before starting our presentation, I will go over the macro figures and provide market insights, and then I will provide you with the set of financial results, and then we will have Q&A.

Let's take a look at macro indicators. Seasonal and calendar-adjusted retail sales volume with constant prices increased by 1% in December '19 compared with previous month. As of December '19, industrial production index realized as 128. And manufacture of food products increased by 9% compared with same month previous year.

Consumer confidence index in Turkey realized as 58.8 in December '19. Compared to previous months, contracted by 2%. A rise in general index was realized in CPI on the previous month by 0.74% in December '19. And food inflation realized as 10.9% in December.

If we are looking to the market dynamics, confectionary market dynamics in Turkey, actually, due to the downsizing activities, total confectionery market decreased by 3.5% in volume terms and in value terms, the confectionery market grew by 20.5%, which we are here seeing that due to the price increases and downsizing activities, the revenue growth is much, much higher than the volume growth.

Total biscuit market was down by 3.6% in volume and increased by 25% in value terms. And total chocolate market contracted by 3.2% in volume and grew by 21% in value terms. And total cake market shrank by 9.6% in volume and increased by 15% in value terms.

So if we are looking to our Ülker domestic volume and revenue growth, we can clearly confirm that our growth has been much, much higher than the normal market conditions.

As I mentioned, that at Ülker, we are operating in Turkey, around 75 years. And in 4 countries, we have 10 facilities and our total capacity exceeds more than 1 million tons. And we are largest -- we have largest capacity in the region with strategically located plants.

On Page 7, actually, I am very pleased and proud to present this slide, which clearly proves that at Ülker, we have increased our revenue. And much higher growth rate in our EBITDA in the last 7 years, with a sustainable rate.

As you might see that in 2012, at Ülker, our revenues were TRY 2.3 billion, with EBITDA margin of 9.3%. Currently, as of 2019, our revenue reached to TRY 7.8 billion, with an EBITDA margin of 16.7%. So in the last 7 years, our net sales has grown by 18.8% on a CAGR basis, however, EBITDA growth has been 29% in the last 7 years on a CAGR basis. We believe that this momentum will continue in 2020 as well.

If we are looking to the full year consolidated financial highlights. So we have announced the revenue as TRY 7.8 billion with a growth of 31%. And our gross profit has grown by 38%. And our gross profit margin has improved by 120 basis and reached to 27.4%. We have EBITDA growth around 38%, with a margin improvement of 90 basis. And so our consolidated full year EBITDA margin has been realized as 16.7%.

So if -- as I mentioned at the beginning of my speech, we have a very healthy balance sheet structure and with the dividend income of Godiva Japan operations, our net debt-to-EBITDA declined to 0.3x, which is very -- at tiny level. And as we have already committed to create more cash in our previous meetings, we clearly say that we are announcing a fantastic result of free cash flow generation by TRY 665 million as of 2019. As you might see that the previous year, free cash flow amount was minus TRY 137 million. So we are very happy to deliver this free cash flow result and we'll continue to create and focus more to the cash going forward.

So if we are looking to the last quarter -- fourth quarter financial results. So our volume growth was 4.3%, and we have a revenue growth around 20%. And the gross profit margin improvement has been done again in the last quarter as well. And our EBITDA margin has been conducted with 15.8%, which is 30 basis points higher compared to previous quarter. Since I have covered the year-end results, so I am continuing with the sales results.

So in the last quarter, total confectionery volume increased by 4.3%, mainly driven by the new launches and changes in product mix. And we have a total revenue increase around 20% in the last quarter. And our biscuit volume up by 0.4%, thanks to the successful launches in Turkey. And we have a revenue growth in biscuit category around 13.7%. And our chocolate volume has been -- has strongly grown in the last quarter, which a -- with a growth rate of 11%. And the revenue contribution in the last quarter is 25%. And cake volume has been grown by 3.6% with new launches in cake category. And our revenues have grown by 13% in the last quarter.

So for the full year financial, if we are looking to the total consolidated sales results, we have a volume growth around 4% and our revenue growth is around 31%. And we have a solid growth rate in all categories in terms of revenue.

So on the back of our successful implementation of our strategy, so -- the share of the international operations are increasing. So in 2018, in terms of revenue, the share of international and export operations revenue was 38%, and it has increased to 39.4%. However, in terms of EBITDA, the share of international operations are continuing to increase from 47% to 48%.

Now I would like to cover our anchor market results. So I am starting with Turkey. In Turkey, we are continuing to maintain our strong position. In terms of market share, we have a 37% market share, which we are dominant in the market. As you know, that in biscuit, we already became #1, and we were able to increase our market share in biscuit category by 0.3 percentage points, and currently, our biscuit market share is 40.4%.

We are continuing to maintain our undisputable leadership in chocolate and we continue to gain market share. In 2019, our market share reached to around 41%, which is around 1.8 percentage points higher than last year. And in cake, we maintained our position and our market share in cake was 23% as of 2019.

On Page 15, on the left side, we are seeing the pictures of the synergy products. As you know that after Pladis, we have started to produce these synergy products, which we are calling McVitie's and Godiva. As you know, that we are acting as a production hub for Godiva in Turkey and producing in Turkey and exporting to all around the world. And the total contribution of the synergy products in 2018, it was around TRY 322 million, and it has increased to TRY 424 million in 2019. So as you might remember, in 2016, the total revenue was around TRY 100 million. So in each year, we are increasing our volume and revenue in these synergy products, which help us to increase our profitability and also having a strong presence in international markets and also in Turkey as well.

On the right side, we are seeing the pictures of the Ülker branded products. So we are paying huge attention to NPD processes, and it is helping us to increase our market share and also profitability in Turkey. So the total contribution of these Ülker branded NPDs is TRY 180 million. And with new launches, we are ready to launch these new products in 2020 going forward.

So I, actually skipping this last quarter, would like to cover the cumulative yearly figures. So in Turkey, we have a very strong and very successful financial results. As you might remember, despite shrinking market in Turkey in terms of volume, we have a volume growth around 3%, and our revenue growth is 28%. And we have a strong gross profit increased by 36%, and our gross profit margin has been realized as 21.6% and our yearly Turkey EBITDA has ended up with 14.3% with a margin improvement of 90 basis points.

So in line with our strategy, we are continuing to focus to produce more branded. So in terms of volume, the share of the branded portfolio was 90% as of '19, which equals to 93% in terms of revenue size. So -- I mean, we are continuing to see these ratios in terms of branded production.

Now I'm moving to the financial and market results of our export and international operations. So as you might remember, we have defined our strategy in 2015. And after that, we continue to make very successful acquisitions in Egypt, Saudi and Kazakhstan, and also with -- having production and distribution rights of McVitie's. And in order to use these production facilities as a production hub and to increase our international market presence, we did a great job here. And as you might recall that, currently, 39% of our revenues come from these export and international operations. And in terms of EBITDA, it is 48%, which help us to have a natural hedge mechanism on the balance sheet.

So now I would like to start with our second largest market, Saudi. So at Ülker, our market share is 16 -- around 16%. And we have also second brand in the region, McVitie's. And McVitie's brand is also very well-known brand in Saudi, and its market share is around 8.3%. So if we are adding our 2 brands' market shares, so the total Ülker's market share is reaching more than 24%. So if we are looking to the competitors, our main competitors, we can clearly say that we are very strong in Saudi, and our market -- market share is 10 percentage points higher compared to numbers -- our main competitor.

So if we are covering our financial results for FMC, we have a volume growth around 3.8%. And with the positive contrition of revenue growth and price increases, we have 12.5% revenue growth. And our EBITDA margin is similar to 2018. And we have 14.1% EBITDA margin in FMC.

So as you remember that we have acquired the IBC facility located in Riyad. And so we -- it is quite important acquisition for us because we have strong capabilities in Saudi, in order to increase our capacity and reducing our logistic and also marketing cost. And we have created huge synergies in the last 2 years in Saudi. And our business in IBC was flat in terms of volume and revenue. And we have a very strong EBITDA margin in IBC, which is more than 25% and similar to last year.

So if we are moving to Egypt. So as you might remember that we were very strong, #2 in Egypt. And we were volume leaders in Egypt. And in the last quarter, we became #1 in Egypt, having Ülker and McVitie's brands. And currently, our market share reached to 17%, and we became #1, and our business is doing very well in Egypt.

And if we are looking to the financial results of our facilities. We have a volume growth around 8%. And our revenues have grown 15%. And we have 60 basis EBITDA margin improvement in Egypt. And our EBITDA margin is 15.4%. So as you might remember, while we have acquired this facility in 2016, we had a 6% -- 7% EBITDA margin. And with the synergies and improvements in all areas in the facility, currently, we have a very strong EBITDA margin in Egypt. And we believe that this momentum will continue in 2020. So as you might remember -- I mean, we have acquired UI MENA operations at the end of 2017. This company is the owner of McVitie's distribution and production rights, located in Dubai. And we have a solid stable volume results in UI MENA and the revenue growth is around 1.3%. And our EBITDA margin is 30%, which is similar to 2018. And our latest facility, Kazakhstan Hamle Company, as you know that we have invested to Kazakhstan more than EUR 30 million for CapEx spending, and we are now seeing positive contribution of these investments, and we have a huge growth rate in Hamle. We -- our volume growth is more than 18%, and our revenue growth is 34%, and our EBITDA margin is similar to our consolidated EBITDA margin, which is 15.5%. And currently, as you also know that we are looking for some export opportunities from Kazakhstan facility to Russia and West China, and we believe that 2020 will be the year of our Kazakhstan facility. And at Ülker, we have 14% market share in chocolate category in Kazakhstan. So if we are looking to the market share development in each region, we are clearly seeing strong market share gains. In Saudi, our market share has increased from 23.4% to 24.2%. So we were able to increase our market share around 0.8 percentage points.

In Egypt, we became -- as I mentioned that we became #1. And currently, our market share is 17%, which is 1.5 percentage points higher than last year.

And strong market share gains in Kazakhstan. We have launched on Eid, Albeni and also McVitie's categories in Kazakhstan. And currently, our market share reached 14%, where it was 9.4% in 2018. As we showed that, we are -- we have launched new products in, not only in Turkey, in also our anchor markets, Saudi, Egypt and Kazakhstan, and we are continuing to pay attention to launch new Ülker and McVitie's products.

So if we are looking to the financial results. So I am covering only yearly basis results. Our volume in international and export operations, we have a volume growth around 6.6%, and our revenues have grown by 36.9%. We have a gross profit improvement by 30 basis points, and our EBITDA margin has improved by 70 basis points. And currently, our yearly consolidated EBITDA margin is more than 20% for 2019.

Not only in Turkey, in -- also in our international operations, we are continuing to focus to produce more branded products in order to increase our revenues, market share and profitability. And the share of the branded products in international markets has been increased from 77% to 79% in terms of volume. And in terms of revenue, it is continuing to increase. And the share of the confectionery products has grown from 81% to 84% in terms of revenues.

So if we are moving to the balance sheet highlights. So first, I would like to cover our net debt financial results. So as you might remember that in 2018, our net debt-to-EBITDA ratio was 1.6x, with a huge free cash flow generation in 2019. And also getting dividend income from Godiva Japan sale, our net debt-to-EBITDA ratio declined to 0.3% multiple, which is very, very healthy level.

And as we have committed to our investors to pay more attention to reduce our net working capital days and ratios, so we can clearly say that our days are declining compared to September 19, and we will continue this momentum. And on the free cash flow side, as you might remember, our operating free cash flow was negative in 2018, which was minus TRY 137 million. And in 2019, we focused more to our net working capital ratios and push more for cash. And currently, as of 2019, our free cash flow amount was TRY 665 million.

And lastly, we have very outstanding FX position. As you know that in April '17, we have converted our net FX exposure into Turkish lira and at Ülker, we don't have any FX exposure on the balance sheet. But as of today, getting the dividend income from Godiva before these derivative transactions, at Ülker, we don't have any FX exposure. So before derivative transactions, we are in a long position by TRY 159 million as of 2019. So if we add the derivative transactions, our current long position is more than TRY 1 million as of 2019.

On the last slide, as you remember that our guidance for net sales was TRY 7.7 billion as of year-end, and we have achieved this target by TRY 100 million, and our EBITDA margin was, for a guidance, 16.5%, and we have over-performance by 20 basis points. And currently, we have announced that our EBITDA margin is 16.7%.

And lastly, as you noticed that we have announced that at Ülker, we are going to pay dividends. Our Board has decided to pay dividends by TRY 135 million, which is going to be approved by the general assembly on 30th of March.

Now I would like to open the call for the questions.

[Operator]

[Operator Instructions] We already have questions from Ece Mandaci from Unlu & Co.

[Ece Baysal, analyst]

I have 3 questions, if I may. Regarding your expectations -- the first 1 is regarding your expectations for 2020. Could you please provide some insight regarding potential volume growth, particularly in Turkey, and revenue growth and EBITDA margin level and the target CapEx over sales or working capital over sales for 2020? It would be really helpful.

And secondly, since you have reduced your net debt position or net debt over EBITDA ratio significantly, could you please elaborate on your strategy regarding any potential expansion in your operations? This is the second question.

And the third question is on your financial income, interest income you have generated. I think it was about TRY 200 million level. Could you please provide some details of this -- such an increase in your financial or interest income in the fourth quarter? And the impairment, I think you had one-off impairment on financial assets. Could you please provide some more details regarding those?

[Cenker Uçan, executive]

Thank you very much for your questions. So for guidance, as you know that, at Ülker, we are not giving a guidance at year-end call, which we'll be sharing in our first quarter results financial announcement. But I can clearly say that, at Ülker, we are continuing to increase our revenues and profitability as we did in the previous periods. So therefore, our momentum -- I can clearly say that our momentum will continue, but I will give you more proper guidance in our Q1 results.

So in terms of net debt-to-EBITDA ratio, as you know that we have 2 syndication facilities from 2017. And now we are in the process of renewing our -- these syndication facilities. Currently, we are working for -- on it and maybe we might reduce some -- our gross debt. And for the strategic perspective, as you know that at Ülker, we did very successful acquisitions in the last 3 years. And we always -- we are always open for possible acquisitions going forward, of course, if the market dynamics would be suitable and if we believe that the acquired entity would fit with our strategy. But as of today, there is not a defined strategy or plan for the acquisitions or our expansion plans. So therefore, I mean, our main focus is to focus our syndication facility.

So I mean, your other question was, I think, regarding to the interest income. So as you might remember that we are placing our cash in a bank, who manage our cash and cash equivalents and the returns of such placements in 2019 were higher than usual -- usually, particularly compared to previous period. So I mean, it is mainly coming from this placement that we gained in 2019. And for the impairment, which is coming from Godiva, New York fair value assessment. So let me clarify all these things. Actually, as you might remember that we did a great job for the sale of Godiva Japan assets. And now we also gained, hold our dividend income. And now Godiva team started to concentrate on Godiva America's new investment model, and our Board believes that in potential return of the new investment model and decided to attend this capital increase. So G.New fair value report is conducted by an independent worldwide consulting company. So since café business is in an initial investment period, so assumptions such as the risk rates used in valuation study are so high, or let me say, very prudent, we believe that this fair value amount will increase when the café business comes to stage with foreseeable future.

[Operator]

We have another question from Erdem Hafizoglu from BGC Partners.

[Erdem Hafizoglu;BGC Partners Inc.;Analyst, analyst]

I have 2 questions. First 1 is, as you mentioned, the working capital has improved significantly in the last quarter. Does it include any one-offs or any seasonal issues? And do you have any target for the year and in terms of days maybe or a level? This is the first question. And the second one is the proceeds from the Istanbul Godiva sales will be seen in the first quarter. Is it correct? And maybe another last question. You have improved your balance sheet significantly in terms of net debt position. Would you -- what are your plans going forward, anything maybe on the way of increasing dividend distribution out of 2020 earnings?

[Cenker Uçan, executive]

So on net working capital, there is not any one-off item. I mean this is mainly coming from our pushback to the market and to reduce our inventory days. So as you remember that we have committed to our investors and to you to have a better result and we believe that this picture will continue. So of course, it is related with the market and economical conditions in Turkey and also in the export market, and we are trying to do our best in order to reduce these days. Actually, in 2020, we expect lower days compared to '19.

So for the Istanbul Godiva proceeds, actually, it is not going to be collected -- in my personal view, it's not going to be collected in the first quarter, in line with the agreements. So the proceeds will be having a maturity of 1 year. So we believe that we are going to collect this money in 2020. So for net debt-EBITDA side, I have responded the questions before. Actually, now we have focused more to our syndication process. So once we are going to announce hopefully, inshallah, say, a successful syndication and then we are going to define our plans going forward.

[Operator]

[Operator Instructions] Our next question comes from Harry Whelpton from Vergent Asset Management.

[Unknown]

Congratulations on the results. I just had a few. The first one was related to the performance of IBC and what was the weakness due to? I know that the margins came down and the volumes are flat. The second one is related to, in Egypt, if you look at the market share, how much of that is coming from Ülker products versus McVitie's? What would be the stand-alone Ülker and McVitie's market share? And then thirdly, the growth in the unbranded segments. What was driving that? And if you could remind us what that pertains to and what products are within that segment?

[Cenker Uçan, executive]

Could you repeat your third question?

[Unknown]

Yes. Third question is, what drove the growth in the unbranded bit of the business? I think that increase in contribution...

[Cenker Uçan, executive]

Okay. So actually, the reason for IBC. As you might remember that, actually, we have started to produce McVitie's in our FMC facility and Ülker is in our IBC facility. So due to the start of this cross production, of course, I mean, to produce Ülker product in IBC has negatively impacted to our IBC P&L because Ülker EBITDA margin is lower than McVitie's. So the main reason is coming from this cross production. So therefore, as you know that we are looking at these facilities as one facility. So our business in Saudi is continuing to grow.

So for your second question, the market sales in Egypt. So we have a 17% market share in Egypt. And regarding to your question, 16.6% is coming from Ülker-branded products and 0.4% is coming from McVitie's product. So we have newly launched McVitie's in Egypt, and we believe that this split is continuing to increase in the coming period. And there are huge opportunities in the market for McVitie's product in Egypt.

And what was your last question? I mean it was from nonbranded side.

[Unknown]

Yes. Just looking in the presentation, the nonbranded contribution increased from 8% to 10%.

[Cenker Uçan, executive]

So for international side, right?

[Unknown]

This is for Turkey.

[Cenker Uçan, executive]

For Turkey, I mean, as you know that, I mean, it is very -- at high level. So I mean, the share was 95%. So I mean, 2% decline is nothing. Of course, we are producing some products for our choc company and bean company. I mean, considering the, I mean, gifting in Ramadan period, so there might be a 2 percentage point decline, which is nothing considering the total branded portfolio in Turkey.

[Unknown]

Got it. That makes sense. And just a follow-up on the question regarding IBC. I understand that the margins have come down because of the increase in contribution from Ülker product...

[Cenker Uçan, executive]

Yes.

[Unknown]

Is that also explain the flat volume and the flat sales? I'm just wondering, I would have thought that it would increase the volume if you were producing the Ülker product?

[Cenker Uçan, executive]

I mean we are shifting the product portfolio in order to reduce our logistic costs and increase our efficiencies. So it is better to look our Saudi business on a consolidated basis because we are looking these 2 entities as a 1 entity. So for us, the most important thing is, we -- our business in Saudi is growing, and currently, our EBITDA margin has improved compared to last year. So I mean, it's not going to be efficient to look company to company basis.

[Operator]

Our next question comes from Kayahan Demirak from IS Investment.

[Kayahan Demirak, analyst]

Actually, most of my questions have been answered, but I have still 2. The first one, could you give us some color on the drivers of the market share gains in chocolate category in Turkey? I mean this quarter was particularly strong with 15% year-over-year growth. So maybe you can give us some color on the pricing and the competitive dynamics in the market?

[Cenker Uçan, executive]

Okay. So actually, for chocolate category in Turkey, we are very strong. And as you know that our market share is 3x higher than #2. And in the last quarter and also in the third quarter, we launched a lot of products in chocolate category with a new flavor. So I'm sure, I don't know if you have tasted before, Dido Trio and also other products in the chocolate category. Of course, it is coming from strong innovation pipeline and also improvement in our distribution points.

[Kayahan Demirak, analyst]

Well, and my second question is about your balance sheet. Now you don't have any fixed exposure with your current balance sheet, USD long and euro short and with the recent events, the euro-USD parity went up quite sharply. So do you have any plans to balance this euro-USD long-short position going forward?

[Cenker Uçan, executive]

Yes. We are monitoring the market very closely. So as you know that the -- currently the parity is very volatile. So we are continuing to monitor, but we are not planning to take any action in order to fix these euro to USD parity.

[Operator]

[Operator Instructions] We have another question from Ece Mandaci from Unlu & Co., again.

[Ece Baysal, analyst]

I had 1 more question on the synergy products. Could you please provide the revenue figure for the synergy products on a combined basis?

[Cenker Uçan, executive]

So you are asking the value, right?

[Ece Baysal, analyst]

The revenue or the value, yes?

[Cenker Uçan, executive]

Yes. In 2018, the total contribution was TRY 322 million, and as of 2019, it has increased to TRY 424 million. So we believe that the impact of the synergy products will grow -- continue to grow in 2020.

[Ece Baysal, analyst]

So in 2020, should we expect higher growth than your headline revenue growth, right?

[Cenker Uçan, executive]

Yes, higher. So of course, it is also dependent with the position of FX. So as I mentioned before that, we are main producer of Godiva. So Turkey is acting as a production hub for Godiva. So it is also related with this export market. So we can say that it's going to be around TRY 500 million for considering also the position of FX. We are expecting to create TRY 500 million revenue in 2020.

[Operator]

So it seems that we have no further questions for the moment. So dear speakers, back to you for the conclusion.

[Cenker Uçan, executive]

Okay. Thank you very much for joining the call. We are already so excited to reach here and with successful results and share this success with our shareholders and partners. To recap, we remain confident in our strategies and in our ability to deliver our financial commitments for 2020, and we will look forward to updating everyone in our upcoming first quarter results. I wish you good day. Thank you.