AG Anadolu Grubu Holding A.S. (AGHOL.IS) Earnings Call Transcript & Summary

Good morning, and good afternoon, everyone, and welcome to the Anadolu Grubu Holding's First Half Earnings Conference Call. I am Mehmet Colakoglu, Investor Relations Director at Anadolu Grubu Holding. We have Mr. Burak Basarir, our CEO; and Mr. Onur Çevikel, our CFO, on the call here as well. As usual, we will first listen to Mr. Burak Basarir, for the key highlights of first half and his general overview. And later on, Mr. Çevikel will provide brief analysis on segmental performance. [Operator Instructions] In addition, in accordance with the decree of the Capital Markets Board, our financials are reported using TAS 29 financial reporting and hyperinflation economy standards. Accordingly, financial figures in this presentation and all comparative amounts for previous periods have been adjusted according to the changes in purchasing power of the Turkish lira in accordance with TAS 29 and are finally expressed in terms of the purchasing power of the Turkish lira as of June 30, 2025. However, certain items from our financials are also presented without inflation adjustment for information purposes. These unaudited figures are clearly identified as such. And with that, I'll now turn the call over to Mr. Burak Basarir.

Thank you, Mehmet. Good morning and good afternoon, everyone. Welcome to our first half 2025 webcast and conference call. Let me first start with a brief snapshot of our performance in the following 2 slides. On the first slide, I will discuss the key points of the first half of the year. On the following slide, I will briefly touch base on our sector performances as well. I will also briefly discuss financials in the following slides before passing on to Onur who will be giving you more details on the financial statements. Before I begin, I want to share a few comments on the overall consumer spending environment in our geographies, in our operating environment. In the first half, 2025, we have seen a period marked by many challenges, including ongoing inflationary pressures, declines in consumer confidence in multiple markets, and geopolitical uncertainties. Turkey specifically has been -- has seen a minimum wage increase, less than inflation at the beginning of the year. Similarly, as in the last year, no midyear minimum wage increase in the June, July period, resulting in wage increases staying below inflation, as you all know. So that lowers the purchasing powers of Turkish households coupled with continuation of higher rental food, electricity and education costs that continue to eat into people's budgets and finally, disposable incomes. Consumer confidence also sharply dropped by 9% month-over-month in July, most likely due to the unmet wage expectations and uncertainty over the interest rate cuts. Unemployment at high single digits may seem reasonably okay, given its historical low levels. However when considering so-called broader unemployment rates which includes underemployment part-time workers and low labor force participation, that figure has risen around 30% and one of the highest levels in Turkey's history. Therefore, these numbers suggest the labor market is structurally weaker than what we -- what the down trend in unemployment rates alone might indicate. So moving on to our end. Despite macro challenges and geopolitical uncertainties, we still achieved top line growth in the first half, mainly due to volume in beer and soft engines and also segments. Our flexible and resilient business models, combined with geopolitical and sector diversification, played a key role in revenue growth in the first half of the year. especially driven by the strong performance of our Central Asia operations. Regarding profitability, as expected, margins were somewhat under pressure in the first half, especially in Turkiye as weaker purchasing power, I just mentioned, required higher promotions and lower price increases, while our cost base remains challenging during the period. Regarding our balance sheet, following the developments in Russia, we deconsolidated the Russian beer business starting from first quarter of the year and classified it as financial investments on our balance sheet. Clearly, this impacted our leverage ratios, which we will discuss in more detail in the upcoming slides, we continue to monitor the developments closely, and we'll keep the market informed once we get new updates. Regarding the investments, there are no changes at this time, consistent with our long-range 2035 plans. We continue investing as part of our proactive strategy to build capacity ahead of market demand and manage our costs. Additionally, on a positive note, we maintain our group's companies full year 2025 guidance indicating that we expect profitability to improve in the second half of the year. Let me move on to Slide 4 and let me briefly discuss our core sectors performances. In the beer segment, Anadolu Efes despite the volatility across our operating geographies. We've achieved positive second quarter performance driven by our diversified geographic presence, strong brand equity and agile operating business model. Our beer volumes on a pro forma basis grew by a solid 5.3% in the second quarter of the year and 3.1% in the first half of the year. We have seen some margin pressures in the beer segment compared to last year's, mainly due to high base from last year and an increase in G&A expenses. This was partially offset by strong performance across CIS operations. CIS EBITDA margin exceeded 30%, supported by a solid gross profitability and disciplined OpEx management. which helped maintain profitability despite margin pressures, especially in Turkiye. Despite these challenges, in the beer segment, our commitment to financial discipline remains strong through efficiency initiatives, increased focus on RGM initiatives and ongoing focus on cost and capital expenditures. Additionally, we continue to seek new opportunities that will enhance our portfolio and expand our presence across various categories and strengthen our position in both existing and in new markets. On the soft drinks side, the CCI, the solid volume growth continued in the second quarter, although at a slower pace. Second quarter volumes increased 4.7% on top of the 13.4% growth in the first quarter, resulting in a total volume growth of 8.5%. Uzbekistan, Kazakhstan and Iraq were the key drivers supporting our business in CCI. We also observed strong improvement in both gross profit and EBIT margins in the second quarter, driven by more balanced profitable and volume growth. As a result, without impact of inflation accounting Turkiye's year-on-year declining gross margin in the second quarter was nearly out compared to the decline in the first quarter. Therefore, we are confident in our progress and reaffirm our full year 2025 guidance of the mid-single-digit volume growth and a flat EBIT margin for Turkiye. And also, as a part of our proactive strategy to increase capacity ahead of the demand, our investments continued with greenfields in Azerbaijan and in -- also, we started production at our fourth production facility in Iraq, which is in Baghdad. On Migros, solid sales growth continued in the first half despite a somewhat weak consumer demand environment. effective execution, proactive pricing, tailored consumer promotions and a multi-format omnichannel approach drove this solid growth. Consequently, Migros continued to expand its market share in both overall FMCG sector and in the modern FMCG retail markets, with a total market share in modern food retail horizon up to 10.2%. The contribution from online channels to reach 20.7%, while the operating profitability of the online grocery business continued to improve in the first half of the year. Looking at Migros EBITDA, specifically, it grew by a solid 10.1% year-on-year in the second quarter of the year. OpEx pressures driven by wage hikes in the first quarter began to ease in the second quarter and are expected to decline further in the second half of the year. In the auto segment, despite market share gains in the auto sectors and solid top line growth, we have observed several factors impacting our profitability. The key challenges identified included a strong Turkish lira impact in competitiveness, especially in the export business, increasing market competition, elevated interest rates, reduced consumer purchasing power limited pricing flexibility, unchanged special consumption tax brackets in the first half of the year and then the requirement to comply the GSR global security standards in Turkey. Still, the auto segment the business remains a relatively small part of our overall business with revenues and EBITDA making only 9% and 3%, respectively, in the first half of the year. Let me move on to Slide 5. In the first half, after the TAS 29 inflation adjustments, we increased our revenue by 2.7%, mainly driven by retail and auto. Soft drinks, beer and retail made up about 90% of our total business. EBITDA for the first half of 2025 declined by 6.2%, primarily due to margin contraction in the soft drinks, beer automotive segments, as previously discussed. Looking at our bottom line, the net income for the first half was TRY 10 billion compared to TRY 17.2 billion in versus last year. At the parent level, the net income was TRY 1 billion in this year versus TRY 4.9 billion in the first half of 2024. The change in net income between first half of 2025 and then the first half of 2024 was driven by several factors. In Turkiye, ongoing macroeconomic challenges created margin pressures, prompting us to take measured pricing and promotional actions to safeguard our consumer base in a fragile market environment. In addition, monetary gains were lower in the first half compared to the prior year, in line with TAS 29 accounting standards as inflation trends moderated. Higher interest rates also increased financing costs while the performance of our equity accounted joint ventures further weighted on the net income. Looking at our balance sheet. We closed the second quarter of 2025 with a consolidated net debt-to-EBITDA ratio of 1.5x. This is broadly consistent with the pro forma 1.4x reported at the end of the quarter last year and only slightly above the 1.1x level at the year end of 2024. These results demonstrate our ability to maintain healthy leverage even while continuing to invest in growth manage seasonal working capital needs and navigate a challenging macroeconomic backdrop. Let me move on to Slide 6. We present our financials again, both with and without TAS 29 implementation to ensure comparability with previous years. Revenue increased by 40.5% without TAS 29 in the first half of '25. EBITDA was up by 9.5% in first half of the 2025 without TAS, mainly due to lower margins in domestic operations. Meanwhile, the bottom line surge thanks to cumulative translation adjustments resulting from the deconsolidation of the Russia business. Moving to Slide 7. Retail drives 56% of total sales with soft drinks at 28% and beer at 8%, underscoring our portfolio diversity and global reach. Soft drinks made up 53% of EBITDA with retail 33% and beer at 10%. Together, these 3 segments account about 96% of our total EBITDA. The chart illustrate our geographic diversification. International revenue fell to 19.7% in the first half of '25 from 22.3% in last year's first half, mainly due to the strong retail growth and favorable Turkish lira ForEx impact. International EBITDA was 45.1% in the first half, mentioned last year's and then driven solid results of the Central Asia operations. Now I would like to turn it over to Onur, who will provide you an overview of our segment performance and the financial details. Thank you.

Thank you very much, Burak. Good morning and good afternoon, ladies and gentlemen. It's a big pleasure to be with you today in the first half 2025 financial results call of AG Anadolu Grubu Holding. I will briefly go to our business segments first. And as usual, I will start with the Beer Group. Before getting into numbers, I think it's important to mention that our results for first half 2025, like the first quarter 2025 are reported as our Russian beer operations deconsolidated and classified to financial investments in the balance sheet. For comparability purposes, our first half 2024 numbers are also pro forma numbers in this presentation, deconsolidating Russian beer operations. Our sales volume for the Beer Group added 6.4 million hectoliters in the first half 2025, representing a growth of 3.1% compared with the same period of prior year. The strong growth of 5.3% in the second quarter compensated the decline in the first quarter. And overall, we achieved a 3.1% growth. Both Turkiye and international operations contributed to the growth. Sales revenues for first half 2025 was recorded at TRY 23,939 million, with a 4.3% decline compared with the same period of last year. Despite the growth in volumes, the decline in revenues is mostly attributable to the lower devaluation of TL compared with both Turkish inflation and other international local currencies devaluation and discounts due to tough competition. Net revenues without TAS 29, inflation accounting was at TRY 24,110 million with a growth of 30.3% for the first half 2025. EBITDA, on the other hand, was at TRY 2,720 million for first half 2025 with a decline of 14.2%. The decline is mostly attributable to the TAS 29 impact. The devaluation of TL being longer than both inflation and local currency devaluations as well as strong base effect of prior year. EBITDA with our TAS 29 inflation accounting was at TRY 4,439 million, with a growth of 21.5%. Net profit for the Beer Group was recorded at TRY 4,074 million for the first half 2025. Free cash flow generation for the Beer Group was at minus TRY 3,842 million. As you well know, free cash flow generation is a major priority for us. and we are taking all the actions to improve our free cash flow generation. Continuing with our soft drinks segment, our sales volume for the first half 2025 has reached to 860 million units sales with a suspected growth of 8.5% compared to prior year same period. Strong momentum in Central Asia, mainly contributed to growth, along with other accounts. Net sales revenue was at TRY 86,472 million, with a slight decline of 3.2%. Turkish lira relatively being stronger compared to other local currencies is one of the reasons of the decline. Without TAS 29 inflation accounting, the growth of sales revenues reached to 1.8%. EBITDA for the segment was at TRY 14,094 million with a decline of 20.7% in first half 2025. Without TAS 29 inflation accounting, the EBITDA was at TRY 14,811 million with a growth of 5.7%. The decline in EBITDA slowed down in the second quarter of 2025. Net income for the soft drink segment was at TRY 6,403 million. Without TAS 29, net income was at TRY 4,450 million. Free cash flow generation, again, for the period was minus TRY 5,575 million for the segment. Again, we need to say that we are paying utmost attention to free cash flow generation and working capital management and obviously, overall balance sheet management. We obviously aim to improve free cash flow generation in the second half of the year. Continue with Migros. Starting with the number of stores, Migros continued its store openings in first half 2025 and reach to 3,683 stores by the end of first half 2025. Also, online servicing stores number reached 1,553 with a strong growth of 368 stores. Net sales for Migros in the first half 2025 was at TRY 174,844 million with a growth of 7%. We are also happy that both in total FMCG and modern FMCG segment, Migros continued to gain market share. The share of online sales in total sales, excluding alcohol and tobacco has reached to 20.7% in first half 2025. With TAS 29 inflation accounting, sales revenue was TRY 166,841 million with a growth of 47.1%. Continuing with EBITDA. EBITDA has reached to TRY 8,904 million with a strong growth of 63.3% in first half '25. EBITDA excluding TAS 29 inflation accounting was at TRY 13,390 million with a growth of 44.8%. Net profit was at TRY 1,321 million with a decline of 49.8%. The decline is most attributable to inflation accounting effect IFRS 16 effect increasing depreciation because of increased number of distribution centers more and the effect of higher personnel expenses in the first half 2025. Free cash flow for Migros was at TRY 692 million for the first half 2015. Continuing and briefly talking about auto segment, while total net sales for the segment has reached to TRY 29,529 million for the first half 2025, with a growth of 7.9%. The biggest contribution to the growth was from Celik Motor whose sales grew by a strong 29.5% whereas Anadolu Isuzu sales revenue was down by 15.6%, mostly due to prolonged GSR compliance period. EBITDA for the segment was at TRY 899 million with a decline of 37%, mostly competition, strong TL market dynamics, unchanged special consumption tax brackets, creating pressure on pricing and GSR compliance issues were the main reasons for the decline. EBITDA with our TAS 29 inflation accounting adjustment was TRY 2,211 million with a decline of 6.7%. Net income for the segment was TRY 267 million. Shortly on agri, energy and industry segment, the total net sales for the segment was at TRY 2,675 million with a decline of 4.2%. The stationery segment revenues were down by 4.6%. The energy segment revenues compensated the decline with a 77.7% increase. Also agricultural segment revenue grew by 37.6%. EBITDA for the segment was at TRY 300 million, and net income for the segment was at TRY 369 million. Well, a little bit talking about the consolidated balance sheet performance. We continue to concentrate and prioritize balance sheet management and indebtedness obviously. Our net debt to EBITDA for the period was at 1.5x. And this ratio is almost flattish with the first half 2024 ratio despite the pressures on the working capital management and free cash flow generation. It is also important to mention that the numbers are after the consolidation of Russian beer operations. Consolidated net debt for the group is at EUR 1,795 million for first half 2025. You can see in the graph on the right side of the page, the evolution of our net debt to EBITDA starting from 2019. I need to mention that 2019, 2022 figures include Russia, starting from 2023, pro forma numbers are reflected the consolidating shinier operations for comparability. As seeing the healthy levels of indebtedness are achieved, and we are committed to continue the trend. As you may know, free cash flow generation is a clear priority for us. We have faced challenges in the first half due to market and economic situation given the tight monetary policy mainly in Turkey. We expect to improve both working capital management and free cash flow generation in the second half of the year, which will help us improve our indebtedness management as well. And finally, talking about our financial priorities for the rest of the year. They mostly remain unchanged being obviously tight balance sheet management and concentrating on our balance sheet management. Concentration on free cash flow generation, optimizing core working capital and making it a prime priority for us. Profitability and efficiency improvements in all sales, proactive risk management, which is always a significant part of our management philosophy, and slight deleveraging are going to be continuing to be our financial priorities. So this concludes my part of the presentation. I will leave the stage to Burak for his closing remarks. Thank you.

Thank you, Onur. As we near to our presentation, I just want to underline a couple of the key points that I've already talked about, and then Onur also mentioned we will continue productivity and manage our business amid inflation and economic challenges, monitoring consumer trends in all of our markets. Our first half business expansion drove top line growth and market share gains with a clear operational and financial priorities at both holding and subsidiary levels, supported by strict financial discipline. Free cash flow generation, asset utilization and strong balance sheet management remain core KPIs, and we continue to risk management efforts. Group companies full year 2025 guidance is maintained and anticipating a recovery in the second half of the year. Our core focus areas going forward will be, we are committed to strengthening our core operations and pursuing expansion into new businesses and geographies, in line with our Vision 2035. Our priorities include scaling the business while maintaining and full focus on quality growth. Advancing sustainable agenda remains essential as we seek to create lasting value for people, communities and the planet. We will continue to drive digital transformation of our enterprise and maintain strong financial discipline. At the same time, ongoing investment in our people is central to our strategy and success. We aim to empower a diverse and future-ready workforce to support our continued and strong growth. I think we can now open the floor for the questions. And then once again, thank you for your attendance and your interest in the group and our group companies.