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

Hello, everybody. This is Mehmet Cem Kozlu, IR Director at Anadolu Grubu Holding. Welcome to our first half financial results webcast and conference call. Thank you for joining us today. I have here with me Mr. Hursit Zorlu, our CEO; and Mr. Onur Çevikel, our CFO. We will first listen to Mr. Zorlu for the key highlights of the first half and his general overview. And later on, Mr. Çevikel will provide brief analysis on segmental performance. I would like to remind you that this is a Teams live event, meaning that you'll be in listen-only mode for the entire session. It we will be more than happy to answer your written questions at the end of our presentation. Also, I would like to remind you about some points regarding financials for a better comparison with the last year results. First half 2019 results include fully consolidated Migros financials. First half 2019 net income is adjusted for one-off gains of TRY 711 million related to the consolidation scope change of Migros. And all figures in this percentage include the IFRS 16 impacts. I will now leave the floor to Mr. Hursit Zorlu. Thank you.

Thank you very much. Good morning, and good afternoon to everyone. Once again, welcome to our first half 2020 webcast and conference call. I hope that you and your families are in good health. The world is going through unprecedented and challenging times that we have never experienced anything similar before in the past. And this is affecting every person, every country and every sector in the world. During this extraordinary period, which will likely last for some time, our top focus continues to be protecting the health of our employees, customers, consumers and suppliers, in general, all our stakeholders. We believe that, as a group, we have also done a good job in taking immediate proactive actions in order to abate interruptions to our operations. As such, there has been no disruption to our production facilities. It is fair to say that we have successfully mitigated the negative impact of COVID-19 to the highest extent possible. Despite all these challenges, we have managed to increase our top line by 15% and protect our EBITDA both in first and second quarter and managed to complete first half 2020 with 1% growth at EBITDA level. Now briefly touching on our core business lines. On this slide, despite the volume contraction in Turkey, international volumes continued to grow in first half as beer demand in Russia remained positive. We have also focused on our operational expenses and partially offset the input cost pressures, which was particularly visible in the second quarter of the year. Free cash flow on Beer was again a very key focus area for us, and we have managed to generate free cash flow, both in Turkey and international markets. On Soft Drinks, we have benefited from our strong brand portfolio and our strong position in the markets, but the demand environment across all our markets remained challenging. On the positive, we have managed to improve our margins on Soft Drinks in first half despite a very strong pace of last year and input cost pressures. Just like Beer, free cash flow was a key focus area for us on Soft Drinks, and we have again generated positive free cash flow in the first half of the year. Migros market share gains in both total and modern FMCG led our top line growth, with a solid 25% revenue in the first half of the year. Strong online shopping demand and our investments in digitalization paid off and supported the top line growth in these quite challenging periods. Migros also continues its debt reduction program, as you are likely following us there. In general, we can say that we are benefiting from being a holding company, which has a very balanced diversified portfolio, mainly focusing on fast-moving consumer goods and retail. Now moving on to our financial results of first half 2020. We have managed to grow our top line by 15% in first half '20, driven primarily by Migros, which has recorded a solid 25% growth in this period. Our balanced operation in different geographies and sectors also caused the negative impact of COVID-19. EBITDA was up by 1% year-on-year in first half 2020 as cost discipline was a key theme for us, particularly in Soft Drinks and Beer segments in this period. Also positive performance on International Beer, Soft Drinks and Automotive segments were primarily behind this EBITDA performance in the first half of the year. Looking at our bottom line, net loss for the first half was TRY 478 million, almost flattish compared to TRY 472 million recorded in 2019 first half, before the Migros acquisition-related adjustments despite the challenges. While our top line is negatively impacted from the recent move in foreign exchange, the impact compared to the last year has been milder as we continued to reduce our short FX position and leverage ratios. Despite a much sharper weakness in TL in the first half 2020 versus last year, our bottom line was almost flat versus last year, thanks to our use of derivatives and increasing share of Turkish lira financing in the overall debt mix. We have managed to bring our leverage ratios to lower levels over the last years despite TL depreciation. Net debt to EBITDA at the first half 2020 was 2.2x; 1 year ago at June 9, 2019, net debt to EBITDA was 2.7x; and 2 years ago at June 2018, it was 3.6x. So clearly, we are on the right path to bring our leverage ratios lower despite fluctuations in Turkish lira. Finally, free cash flow remains positive and a key focus area for all our companies, and have been supporting our deleveraging efforts. Slide 4 shows our consolidated results in graphics, which I have mentioned earlier. On a consolidated basis, in the first quarter of 2020, we made a very good start to the year, with a very strong 24% revenue growth. On the other hand, second quarter was the most challenging period across all operations and revenue growth was around 8%. As you can see from EBITDA chart, we reached TRY 3.2 billion EBITDA by the end of the first half, with a 1% growth. This slide shows our segmental sales, EBITDA breakdown and our international exposures. Migros had the highest share in revenues at 47%, followed by Soft Drinks segment share of 23% and Beer segment share of 21%. In EBITDA, Soft Drinks had the highest contribution by 34%; Beer and Migros contributed 25% and 32%, respectively. As you can see, our 3 main operations, Beer, Soft Drinks, Migros, collectively account over 91% of our EBITDA. Charts on the right-hand side show our international exposures. While 31.9% of our consolidated sales revenue were from abroad in 2019, this portion declined to 30.4% in 2020 due to strong domestic Migros performance. On the other hand, the share of international EBITDA increased from 38.8% in 2019 to 40.8% in the first half of 2020 on the back of strong performance in International Soft Drinks and International Beer segments. This EBITDA increase is a good indicator of our focus in the international markets, and we can confidently say we are a geographically diversified group. Ladies and gentlemen, now I would like to hand over to Onur, who will give you overview regarding the performance of our segments.

Thank you very much, Hursit. Good morning, and good afternoon, ladies and gentlemen. Welcome to our first half 2020 results conference call. It's a great pleasure to host you today and hope all of you are well and holding up well with the global pandemic. As usual, I will briefly take you through our segment results, and I will start with the Beer segment. Our total beer volume for the first half of 2020 was recorded to be 17.4 million hectoliters, which is almost flattish with an only 0.2% decline, despite the challenges when compared with the same period of 2019. Our volumes were at 15.5 million hectoliters in the first half of 2020, with a 3% increase in international markets, whereas our Turkey beer operations were at 1.9 million hectoliters, with a 20% decline, mostly attributable to effects of COVID-19 since share of on trade in Turkey is relatively higher compared to other international markets. We managed to record a net sales revenue of TRY 5,350 million on a consolidated beer growth basis, which represents a growth of 6.6% compared with the same period of the prior year. The revenue growth is mostly attributable to our international business, which has grown around 10%. Talking about profitability, EBITDA (BNRI) for the first half of 2020 was recorded to be TRY 582 million, with a 7.9% of decline and EBITDA margin of 10.9%. EBITDA (BNRI) has been under pressure, especially in Turkey, due to lower volumes, high costs mostly because of higher fixed rates, which are partly balanced with operational expenses, focus and optimization. Net income for the Beer group for the period of first half 2020 was at TRY 120 million versus TRY 202 million for the first half of 2019. As you well know, and as mentioned by Hursit bey, positive free cash flow generation is a very important priority across all our segments. We are happy to generate a positive free cash flow of TRY 244 million, which both segments contributed positively in the first half of 2020 for our Beer group, despite the challenges of COVID-19 across the region. Continuing with our Soft Drinks segment. Our total volumes for first half 2020 was at 567 million unit case, which is 8.7% lower than the same period of the prior year. The decline in international operations was milder at 3.7%, while the on-trade exposure is limited compared with Turkey, similar to what we had discussed in our Beer operations. Our EBITDA for first half 2020 for Soft Drinks operations was at TRY 1,214 million with a 6.6% increase compared with the same period of the last year. The increase is mostly attributable to pricing, efficiency measures taken for production costs and raw materials and well-managed expense optimization. Also, termination of cash designation methodology affected profitability negatively compared with the prior year. Net income was recorded at TRY 539 million, which show the improvement compared to prior year. And finally, talking about the free cash flow, again, happy to report the free cash flow generation of TRY 585 million, which is mainly attributable to solid profitability, good management of working capital needs and lower capital expenditures. Continuing with Migros. Migros was able to gain market share, as mentioned by Hursit bey, both in total FMCG, reaching up to 8.8%, and in modern FMCG, where it also reached up to 16.9%. One of the highlights of the COVID-19 for Migros was a complex state of operations due to limitations as well as its exceptional growth in online business, which a number of online clients and customers who buy 2.5x. Net sales revenue of Migros was registered to be TRY 13,413 million, which represents a very strong growth of 25% compared with the same period of the prior year. Profitability -- I mean, EBITDA, on the other hand, was at TRY 1,092 million, which represents a goal of 1.4% compared with the prior year. Despite the strong growth in sales revenues, the growth in EBITDA was relatively limited due to additional costs attributable to COVID-19, lower sales performance in shopping malls, global rental income from the shopping centers and et cetera. Net income for Migros was at a loss of TRY 291 million, which showed a 24% improvement compared with the prior year, despite a faster move on both U.S. dollar and euro rates. The negative impact on the bottom line was contained to a certain extent, thanks to focus on financing in local currency and lowering debt and further lowering of a fixed portion of the debt in Migros. Shortly, an update on the Automotive segment. Our total net sales for Automotive segment was at TRY 2,154 million, with a 30% growth compared with the same period of prior year. Sales of second-hand cars, Çelik Motor fleet optimization, KIA sales and strong sales of Anadolu Motor were the main contributors, whereas Isuzu net revenues remained under pressure due to export limitations caused by COVID-19. Total EBITDA for the segment was at TRY 194 million, with a growth of 10%, mostly backed up with second-hand car sales and KIA sales as well as Anadolu Motor profitability. Isuzu profitability was under pressure, as mentioned, due to export sales volumes being under pressure and increased cost of production, one of the results of the COVID-19 impacts. Finally, net income for the segment was at a limited TRY 4 million loss. It's a significant improvement compared to the same period of the prior year. And finally, on our newly formed Energy and Industry segment. This newly formed segment consists of Adel, McDonald's, our Real Estate business, Efestur and Energy business. Talking about total performance of the segments. Total net sales revenue of the segment was at TRY 813 million, with a decline of 24%, while the decline is mostly attributable to McDonald's due to effects of COVID-19 and partly Real Estate in the first half of 2019. Since due to the measures, like limitations and car fuels in major cities of Turkey, like anywhere else in the world during the COVID period, restaurants of McDonald's had very limited operation for some period, mostly by the beginning of the second quarter. As normalization is going on, the business is recovering in the third quarter. The profitability of the segment was also negatively impacted. Net income of the segment was recorded at a loss of TRY 266 million, mostly due to quick-service restaurant business, since this part of our business was the most affected one across all our operations. Talking about our financial priorities. As you will remember, we have identified and shared our financial priorities by the beginning of 2019, and we are clearly following the financial discipline to improve our balance sheet health across the world. Thanks to tight balance sheet management, free cash flow generation priority, profitability and efficiency improvements, proactive risk management, we were able to close the first half of 2020 with a healthy 2.2x net debt-to-EBITDA ratio on a consolidated basis, including the IFRS 16 effects. This ratio would be 1.9x if we want to exclude the IFRS 16 impact. We are happy to deliver better net debt-to-EBITDA ratios in almost all of our segments that we operate when we compare with the same period of 2019. Our consolidated net debt to EBITDA was at 2.59x back in 2018 and was at 2.72x back in first half of 2019. And by the end of first half 2020, we are at 2.2x. Let me remind you that all the numbers including the IFRS 16 effects and excluding the hedging instruments. The improvement in the last 24 months is significant despite the challenging environment as well as devaluations of local currencies. We are also particularly happy to be able to lower our consolidated net debt to TRY 15.1 billion, thanks to better operational performance as well as better balance sheet management and risk mitigation tools and, obviously, as mentioned by Hursit bey, strong free cash flow generation. We also worked hard to convert our debt composition to be able to manage better the volatility in the markets. As you can see, the portion of local currency debts has increased to be very close to 50% in the total debt composition. I also would like to remind you that this chart excludes the hedging instruments. If we were to take into consideration the hedging tools as well, the TL part in the total gross, that would go up to 50% and local currency part would go up to 55%, which is a rather significant improvement compared with the same periods of the past, which, during this period of volatility, perhaps has better managed the volatility in the markets. As a note, the ratio of local currency debt, taking into consideration the hedging tools and cash at hand for holding only, has increased up to 80% in the first half of 2020, which also represents a significant improvement and a better tool for volatility management since this ratio was 17% back in year-end 2018. It's also important to mention that holding-only debt that we are talking by the end of the first half does not take into consideration dividends received from Anadolu Efes in July, which further improved the debt management for the holding-only debt. So going further, talking about our 2020 financial priorities. As we have been talking, our priorities remain unchanged, and we keep committed to our financial priorities in 2020. Our financial priorities remains unchanged, and they're mostly tight balance sheet management and better management of our balance sheets, strong free cash flow generation and commitment to manage better free cash flow, obviously, efficiency and profitability improvements, proactive risk management and, as a result, deleveraging remains to be our main priority for the rest of the year. So this concludes my part of the presentation. I will leave the stage back to Hursit bey.

Thank you, Onur. Coming to the last slide of our presentation. There are a couple of points I want to underline for the second half of 2020 and onwards. Our results indicated that we have recorded respectable top line performance and slight growth in EBITDA despite COVID-19 restrictions, which obviously had substantial negative impact on many of the sectors we operate. Also, free cash flow, proactive balance sheet management and lowering our FX risks have been our key focus, which have resulted in lower leverage level and that bottom line that's less vulnerable to sudden moves in FX. Looking ahead, our key focus areas for the coming period will continue to be deleveraging, positive cash flow, operational profitability, productivity and digitalization. Ladies and gentlemen, thank you for listening to us. And now we will be glad to answer your questions. Thank you.

[Operator Instructions] Yes. We have a question. What is the percentage of hedging on your holding solo level compared to your solo FX debt?

Well, as I mentioned in the presentation -- thank you very much, by the way, for the question. As I mentioned during the presentation, the overall debt is taking into consideration the hedges as well as the cash at hand. The overall local debt part of the debt net FX position is around 80% in at a holding solo level. This represents around 75% of the total FX debt being linked to hedges as well as the cash at hand.

We have another question. Could you tell us about your dividend potential going forward? Do you expect any significant decline in your Automotive net debt to EBITDA this year?

Well, thank you for the question. Well, for the dividend policy that we have, our dividend potential is going to be, more or less, less limited until the time that we keep on deleveraging the holding solo level. However, we always want to keep up the rhythm of payment dividends. And then after the deleveraging, the potential of payment of higher dividends is going to be more on the side of the deleveraging on the Automotive side. As we have mentioned, we have been going to the optimization of the fleet on the Çelik Motor side, and we have been also going to a deleveraging and optimization of our debt as well as the net debt to EBITDA in the Anadolu Isuzu part. So you can see that our Automotive net debt to EBITDA has improved in the last 1 year to 18 months, and we will try to keep up these levels and manage to get to better levels when possible.

Yes, we have another question. Has the regulatory environment regarding Turkish beer been improving?

In general, we can say that there -- we are not, let's say, waiting any major change in the current regulatory environment, so no major change, I can say.

And the next question. Was McDonald's sale completed? Could you update about the issue?

Currently, as you know, we applied for the Competition Board. And still, we are awaiting the Competition Board approval for the McDonald's sales. So still, it's an ongoing process.

And the next question. Is there any capital increase plans on Paravani Energy or Real Estate segments?

Well, thank you very much for the question. In our plans, we don't have any capital increase plans in both of these companies for this year.

And another question. Are you looking to divest more assets to reduce debt? What level of debt is appropriate?

Well, thank you very much for the question. As mentioned during the presentation, we have made, basically, both free cash flow generation as well as deleveraging, one of our major priorities in the past quarters -- a couple of quarters. One of the major items that we are looking at for the last 18 months to 2 years is to get better use of any idle assets or divestiture of those idle assets if there is no use for them. And we will be keeping up this dynamic process. And if there will be any opportunities to divest or sell any idle assets or any other opportunities, we are going to be taking this action. We are now around 2.2x of net debt to EBITDA. We think that this is a healthy level. However, if there will be any opportunities to take this to lower levels, we are going to be taking those opportunities. Mind you that there's a very volatile economic environment right now, and we are going to be very cautious on our debt management as well as on our free cash flow management. And we will keep the priority of deleveraging and keeping up the levels of indebtedness. Thank you.

Okay. I think it's time to end the call. Thank you for your kind attention and being with us today. Bye.

Thank you. Bye-bye.

Thank you very much. Bye-bye.