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

Hello, everybody. This is Mehmet, IR Director at Anadolu Grubu Holding. Welcome to our 2020 Financial Results Teams Live Event. 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 2020 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 the Teams Live Event, meaning that you will be in listen-only mode for the entire session, yet we will be more than happy to answer your related questions at the end of our presentation. Also, I'd like to remind you about some points regarding financials for better comparison with last year results. 2019 results includes fully consolidated Migros financial results. 2019 net income is adjusted for one-off gains of TRY 862 million related to the consolidation scope of change of Migros. And all figures in this presentation included IFRS 16 impacts. I will now leave the floor to Mr. Hursit Zorlu.

Thank you, Mehmet. Good morning, and good afternoon to everyone. Once again, welcome to our 2020 year-end results webcast and conference call. I hope that you and your families are in good health. Yes, 2020 has been unlike any other year. COVID-19 pandemic, which we faced in the first quarter of 2020, had deeply affected over and almost a year went and still continues to impact all of us. As an Anadolu Group, 2020 has been a year where we have reassessed everything and developed action plans for different alternative scenarios. Actually we had a quite positive start to 2020 in the first quarter of the year, but second quarter has been quite complicated and challenging. However, we had a recovery starting with the third quarter. And despite many difficulties in 2020, as a group, we have completed the year in line with our expectations. During this unusual period, where going back to our old normals is not expected in a short period of time, our priority is in order to protect the health of our employees and all stakeholders, or in other words, protect our ecosystem on the both personal and business level, and as such, overcome these difficult times all together. During this period, which also coincides with our 17th year, we have taken immediate actions in order to avoid interruption to our operations. As such, there has been no disruption to our production facilities. Despite the challenges in 2020, we have managed to grow our business as well, thanks to our dedicated efforts, with 21.5% revenue and 21.4% EBITDA growth in 2020. As we always underline, proactive balance sheet and risk management have continued to be our top financial priority throughout the year. And once again, we have improved our balance sheet position in 2020 with a strong free cash flow. Also, as Anadolu Group, we have included in sustainability index for the first time as of December 2020. On this side, we remain in the market leader positions across all of our operations. We have delivered solid volume growth in Russia, which is our biggest beer markets. Once again, we have focused on free cash flow and cost discipline throughout the year, recorded solid free cash flow in the Beer segment, particularly driven by our successful international operations. On Soft Drinks, the results were very strong across the market. Our quality growth continued with revenue growth outpacing volume growth and EBITDA growth exceeding revenue growth. Our EBITDA margin was at record high level, thanks to the strong market execution and growing share of sparkling beverages. On Soft Drinks, we have also generated, again, a record high TRY 2 billion free cash flow on the back of record high margins, tight working capital management and prudent CapEx. Our Migros sales were strong throughout the year and further accelerated towards the year-end with lockdown measures during the last part of the year. Strong online shopping demand and our investments in digitization paid off and supported the top line growth of Migros in this quite challenging period. Migros also continued to be deleveraged rapidly, and the company has no short FX position as of February 2021. So our core businesses, Beer, Soft Drink and Migros, despite many challenges, have done an extremely good job, and we have completed 2020 on a solid footing and back of our balanced geographical and sectoral breakdown and successful operational performance. Now moving on to our financial results for 2020. We have managed to grow our top line by 21.5% in 2020, driven primarily by Migros and Soft Drinks segments, which recorded solid 26% and 20% revenue growth, respectively, in this period. EBITDA was up by 21.4% year-on-year in 2020, in line with our revenue growth, as cost discipline was a key theme for us, particularly in Soft Drinks and Beer segments in this period. We are particularly pleased with our Soft Drinks operations, which recorded all-time high EBITDA margin in 2020. Looking at our bottom line, net loss for 2020 was TRY 280 million versus last year's TRY 297 million before the Migros acquisition-related adjustments. We have managed to record a better net income versus last year despite sharp depreciation in TL in 2020, as we continued to reduce our short-term FX position, leveraged ratios, improved our operational performance, focused on use of derivatives and lira financing. Free cash flow was also a key focus area for us. We have generated record high TRY 5.4 billion free cash flow in 2020, up by 62% year-on-year on strong operations, prudent CapEx and tight working capital management. Likewise, we have managed to bring our leverage ratios to lower levels despite TL depreciation. Net debt-to-EBITDA at the end of 2020 was 1.5x. At the end of 2019, net debt-to-EBITDA was 2.1. 3 years ago, at the end of 2018, it was 3.1x. On top of Soft Drinks, Beer and Migros, Automotive segment also clearly positively contributed to this positive performance in deleveraging, as our net debt in this segment dropped from a high TRY 2.2 billion to less than TRY 5 million levels -- TRY 500 million over the last 2 years as we continue with our fleet optimization. So clearly, we are on the right path to bring our leverage ratios lower despite fluctuations in TL and we start 2021 with a strong balance sheet. Next slide shows our consolidated results in graphics, which I mentioned earlier. 21.5% revenue growth, 21.4% EBITDA growth and bottom line performance that continues to improve despite the depreciation in Turkish lira. Also, I have to underline that our last quarter revenue growth was 30% and EBITDA growth was 50%. This slide shows our segmental sales, EBITDA breakdown and our international exposures. Migros had the highest share in revenues at 46%, followed by Soft Drinks segment share of 23%, Beer segment share of 20% and Automotive sector share of 9%. In EBITDA, Soft Drinks had the highest contribution with 37%. Migros and Beer constituted 28% and 23% of EBITDA, respectively. As you can see, our 3 main operations, Beer, Soft Drinks and Migros accounted for 88% of our EBITDA. Charts on the right-hand side show our international exposure. While nearly 31% of our consolidated sales revenue were from abroad in 2019, this portion declined to 30% due to strong Migros domestic performance in 2020. On the other hand, the share of international EBITDA increased from 36.8% in 2019 to 41% in 2020 on the back of strong performance in international Soft Drink and international Beer segments. This EBITDA increase is a good indicator of our focus in international markets, and we can confidently say we are a geographically diversified group. Now I would like to hand over to Onur, who will give you an overview regarding the performance of our each segment.

Thank you, Hursit bey. Good morning, and good afternoon, ladies and gentlemen. I would like to welcome all of you to our 2020 financial year results call. As Hursit bey mentioned, I hope all of you and your families are safe during the pandemic times. As usual, I would like to start with the segment summary, starting with the Beer segment. Our total Beer segment sales were at 36.2 million hectoliters, a slight growth of 0.2%. Out of total sales, 87% were of international business sales. Despite the headwinds of COVID-19, our international beer business grew by 2.6% and reached to stood 31.6 million hectoliters. Impacted by COVID-19, our Turkey beer business had declined by 13.6% and was at 4.6 million hectoliters. On a consolidated Beer segment performance, we were able to grow our revenues by 11.6%, reaching to TRY 12,352 million in 2020. Most of the growth is attributable to our international business with a 14% growth. Beer Group consolidated EBITDA has reached TRY 1,961 million with a growth of 10%. Our international EBITDA was at TRY 1,635 million with a 14.1% growth. Consolidated EBITDA margin was at 15.9% for the Beer Group. Net income, on the other hand, was at TRY 320 million for the consolidated period. As you all well know, one of the major priorities for us is the free cash flow generation for almost all of our operations. In 2020, our free cash flow generation for the Beer Group was TRY 793.4 million, both Turkey and international segments positively contributing to free cash flow generation. Continuing with the Soft Drinks segment. CCI has performed exceptional well in 2020 despite the challenges of COVID-19 across the geographies. Consolidated volumes of CCI was at 1,184 million unit case in 2020, which represents a 1.9% decline compared with the previous year. Turkey operations were [indiscernible], especially in the first half of the year and closed the year with a better performance compared with the first half of the year. Our international business, on the other hand, closed the year with 672 million unit case sales with a 2.8% growth despite the challenges. Our consolidated net sales revenue was with a 19.8% strong growth recorded to be TRY 14,391 million. Both Turkey operations and international operations contributed positively to the growth of sales revenue in 2020. EBITDA, on the other hand, for our Soft Drinks operations, performed very well and reached to TRY 3,137 million, with a 37.7% growth compared with the prior year. This also corresponds to a 21.8% EBITDA margin with a 280 basis points margin improvement. The quality growth algorithm of growing net sales ahead of sales, volume growth and growing EBITDA ahead of sales revenue growth has performed well this year. Proactive and efficient expense control has also helped us grow our profitability. As we mentioned, one of our major priorities is free cash flow generation. CCI in 2020 was able to generate a very strong free cash flow of TRY 2 billion on the base of tight balance sheet management, which have brought CCI to a very strong net debt-to-EBITDA level of 0.5x. Continuing with our Migros operations. Migros has completed 2020 successfully, both operationally and financially. Total number of stores increased to 2,319 in 2020 from 2,198 in 2019. Online service stores had significantly increased to 529 from 193, increase that has been triggered mostly by COVID-19. Net sales revenues has reached to TRY 28,790 million in 2020, which showed a solid growth of 26%. Online sales increases contributed to this growth. Migros EBITDA was accounted for TRY 2,352 million in 2020, which corresponds to year-on-year growth of 5.4% and an EBITDA margin of 8.2%. On the other hand, when we exclude IFRS 16 effects and neutralizing total interest rates, then the EBITDA growth corresponds to a more strong 26%. Migros has performed exceptional well on the debt reduction priority. Net debt-to-EBITDA was at 1.5x by the end of 2020, with a significant improvement compared to 2019 where the number was of 2x. On the other hand, when we look at the net debt-to-EBITDA, excluding the IFRS 16 effects, the net debt-to-EBITDA for 2020 is at 0.4x, whereas in 2019, this was around 1.4x. Talking about the Automotive segment. Total Auto segment revenues are accounted for TRY 5,741 million, which represents a 38% of growth. Anadolu Isuzu net sales revenue for 2020 was at TRY 1,241 million, which represents a decline of 23% compared to the previous year. The decline was mostly attributable to decline in export revenues due to COVID-19-related reasons. Çelik Motor revenues, on the other hand, grew by 62%, reaching to TRY 4,282 million. This strong increase was mostly due to increase in KIA car sales, second-hand car sales for our car rental business due to fleet optimization and increase in consigned sales. Anadolu Motor also had successfully completed the year with TRY 214 million of revenues, which corresponds to 130% of sales revenue increase. Consolidated EBITDA for the Automotive segment was at TRY 608 million in 2020 with an increase of 41%. Anadolu Isuzu EBITDA was at TRY 115 million with a decline of 23%. The decline is most attributable to decline in exports and exchange rate volatility in the working capital items. Çelik Motor EBITDA was at TRY 483 million with a significant increase of 71% in 2020. The decrease in EBITDA -- the increase in EBITDA is attributable to our increase in the KIA car sales and second-hand car sales due to fleet optimization in short- and long-term car rental business. Anadolu Motor also managed to generate TRY 12 million of EBITDA in 2020. Automotive segment also performed well in decreasing the indebtedness in the recent years. The total indebtedness for Çelik Motor was TRY 2.2 billion by the end of 2018, whereas it gradually declined to TRY 1.1 billion in 2019 and TRY 489 million by the end of 2020. The number of cars for Çelik Motor rental business was optimized to 2,400 cars by the end of 2020. Continuing with our Energy & Industry segment. As you know, this segment includes our stationary business, Adel; as well as quickservice restaurants of McDonald's; energy and the real estate business mostly. Adel stationery business and McDonald's business are the 2 major businesses that were mainly negatively impacted by the restrictions due to pandemic since schools are closed, and as you all well know, restaurants were operating very limited during this period. Our total net sales were recorded to be at TRY 1,687 million, which represents an 11% decline, mostly due to lockdowns. EBITDA on the other hand was recorded at TRY 300 million, which represents a growth of 9%. The main reason for this profitability increase is mainly sales of other land in Kartal, in line with our idle asset sale policy. Also, you should note that we announced a nonbinding agreement for one of our real estate company, AND Anadolu Gayrimenkul Yatirimlari, our share for 70 million recently. Continuing with the deleveraging and the balance sheet. We were able to significantly improve both our indebtedness and indebtedness ratios in 2020, as mentioned by Hursit bey. Total consolidated net debt was at TRY 17.2 billion by the end of 2018 gradually declining to TRY 14.6 billion by the end of 2019, and in fact, down to TRY 12.9 billion by the end of 2020. On the other hand, we are also happy to announce a net debt-to-EBITDA ratio of 1.53x. We had a significant improvement in the net debt-to-EBITDA ratio of [indiscernible]. As mentioned before, this ratio was 3.07x back in 2018, and it was 2.11x by the end of 2019. Significant improvement in indebtedness and net debt-to-EBITDA ratios were mainly attributable to successful operational performance, positive free cash flow generation over TRY 5 billion, tight balance sheet management, idle assets disposal and idle asset usage policy and strict financial discipline. Looking at the segment indebtedness. We can also see that we have improved indebtedness ratios in almost all segments in 2020. One of our priority items was also to derisk our balance sheet by lowering our hard currency loans, and 2020 was a year that we were successful in doing that partly. We also managed to decrease the share of FX at the holding-only level down to around 10% to 8% [indiscernible] participating swaps as well as converting our [indiscernible]. And finally, our financial priorities that mostly remain unchanged. As we have been mentioning in the recent years, the tight balance sheet management, our commitment to free cash flow generation, making sure that we continue our profitability and we continue doing our efficiency improvements, throughout proactive risk management, managing our businesses accordingly and continuing deleveraging and financial discipline across our growth companies. So this concludes my part of the presentation. I will leave the stage to Hursit bey for his closing remarks.

Thank you, Onur. Coming to the last 2 slides of our presentation. There are a couple of points I want to underline for the 2020 and onwards. Despite many challenges, we maintained our key focus on consumer and change in trends within the FMCG sector, as lockdowns and increasing online shopping opened many new opportunities for the players in the sector. Our 2020 results indicated that we have recorded solid top line and EBITDA performance despite COVID-19 restrictions, which obviously had negative impact on many of the sectors. Also, free cash flow, proactive balance sheet management and lowering our FX risk have been our key focus, which have resulted with lower leverage levels and a bottom line that's less vulnerable to the sudden [indiscernible]. Looking ahead, we will continue with our consumer-centric approach in our businesses. We will follow and analyze changing consumer trends. Digitalization, data analytics and innovation will remain our key focus, and we are -- we aim to be a pioneer in all the segments we operate. A key area going forward will also be sustainability. Free cash flow will be at the top of our financial priority. We will also prepare for a post-COVID growth as vaccines are increasing on a rapid pace and this new area brings some opportunities. Also, at the same time, we will focus on balancing potential new growth opportunities on our core segments with the need to have a strong balance sheet amid many uncertainties. Ladies and gentlemen, thank you for listening to us. And now we will be glad to answer your written questions. Thank you.

Our first question comes from Metin Esendal. Do you have any company under other business unit that needs to be recapitalized, given losses over the last couple of years? Could you also please share your expectations on Turkish national car project in terms of production, capital requirements and free cash flow projections?

Well, thank you very much, Metin, for the question. Well, actually as you might remember, by the end of 2019, we have taken a decision to strengthen our balance sheet positions in some of our subsidiaries in order to make sure that their balance sheet became stronger. As of now, we haven't yet any plans to increase any capital in some of our subsidiaries. If in the due cause that will be the need, we will obviously let you know accordingly. And for the answer for the TOGG, I will leave the stage to Hursit bey.

Metin bey, thank you for the question. As you know, this Turkish electric EV car manufacturing project is ongoing project. Currently, the construction of the facility is continuing. So -- and at the end of 2020, the construction will be finalized. And the production will be at the end of 2022. So 2023 will be the production year for this business. And as a group, we believe that this business is a, let's say, value-added business for all parties, and it will be a good project for Turkey. And we believe that the growth is going to that direction, and this will bring some opportunities to the group in the future.

Our second question is, do you pay attention to holding's discount to some of the parts NAV?

Thank you very much for the question. Yes, we calculate and measure some of the parts of discount on the NAV as the holding in front of it closely. And we take the necessary actions to make sure that we come to the right levels of NAV discounts. Thank you.

And third question, should we expect more sales in Real Estate segment? And can you share if there are new developments about McDonald's sale?

Actually, the real estate, as you know, we had a project in Kartal. So that is an ongoing project that we are selling the flat. So a very small portion remains. So we are selling that flat. So at probably mid-2021, we will have no flats in that project. On the other hand, coming to the McDonald's, yes, we wait a lot for the Competition Board to finalize the deal. But at the end of the day, the Competition Board give the authority after 11 months. But purchaser, because of the pandemic, because of the closing down of the restaurants, decided to postpone or leave that, let's say, deal. So currently, we are focusing on our company. And currently, there isn't any, let's say, changes in our business model. So online business is going very fast on the McDonald's also. Now the restaurants are also starting to open. So looking to our first 2 months results, we are parallel to our [ budgets ] I can say.

And next question is from [indiscernible]. Congratulations, you had a great year. How much of the growth was pandemic related in 2020? Do you estimate to have a similar growth in 2021?

Actually, if we call pandemic-related growth, on the Migros side, yes, there is a positive pandemic-related growth, especially for the online sales. But the normal, let's say, shop sales are slightly decreased, but online sales covered that mostly. But on the other hand, in some of our businesses, pandemic affected negatively. So especially on the McDonald's business, on the beer side, because cafés, bars and restaurants were closed. So there is a negative effect. So we can say that, pluses and minuses probably cancel each other. So always, our aim is to grow our business lines, top line growth more than the inflation in the country. So we can say that we can reach the same growth levels on the revenue side.

And a follow-up question from [indiscernible]. I expect you to have a strong cash within 2 years. Do you have any plan to invest in a different sector besides your core business?

Well, thank you very much for the question. As Hursit bey mentioned, we have been very concentrated on our core businesses. We yet have not any plans that we can share that we will be investing into a different sector other than we have mentioned as of now. But if there will be any major opportunities, as mentioned by Hursit bey, then we will be sharing them accordingly.

In general, we can say that our focus areas, our existing operations in the existing business lines, we -- if we find feasible investment in the future, if it occurs, we will decide. But as a very different sector, currently, we can say that we will not have that kind of an intention.

And the other question is from [indiscernible]. Has the group debt come down to comfortable level? Or do you need to continue to divest noncore assets?

Well, thank you very much [indiscernible] bey for the question. As we have mentioned, the growth indebtedness has moved in the right direction in the recent years and has come down to around 1.52, 1.53 levels of net debt-to-EBITDA from those of where we were higher than 3. So looking at from this perspective, we think that net debt-to-EBITDA being lower than 2, 2.5x are the comfortable levels for Anadolu Group. And we will -- that's going to be our intention to keep the indebtedness level around the levels that I have mentioned. If there will be any other business of asset sales, we will obviously inform you accordingly on that front.

In general, I can also add that we are looking from the consolidated net debt-to-EBITDA and also looking individual sectors, individual company levels. So in each company, we want to come to this manageable levels, I can say.

Okay. I think it's time to end the call. Thank you all for your kind attention and being with us today. And bye. Have a good day.

Thank you. Thank you for joining us today.

Thank you very much for being with us today. Bye-bye.