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

Okay. Everybody, this is Mehmet Kozlu, IR Director at Anadolu Grubu Holding. Welcome to our first health financial results team live event. Thank you for joining us today. I have here with me Mr. Hursit Zorlu, our CEO; and Mr. Onur Çevikel. We will first listen to Mr. Zorlu for the key highlights of the first half and his general overview. And then later on, Mr. Çevikel will provide brief analysis on segmental performance. [Operator Instructions] Okay. I will leave the floor now to Mr. Hursit Zorlu.

Thank you. Thank you very much. Good morning, and good afternoon to everyone. Once again, welcome to our 2021 webcast and conference call. I hope that you and your families are in good health and enjoying the last weeks of the summer. More than a year past since the pandemic started, and there's still uncertainty as new Delta COVID variant continues to spread across the globe. Still, I must say that we are in much better shape compared to 6 months ago as vaccination both in Turkey and across the world is accelerating at terrific pace. The Turkey entered normalization process and most of the lockdowns ended in June, especially with the acceleration in vaccination. As such, we are cautiously positive and expect economic activity to gain momentum in the coming periods. Talking about Anadolu Group. During this quite challenging period, we continued to take the necessary measures to protect the health of our employees and sustainability of our operations. While going through this challenging period, we also managed to grow our business and at the same time, avoided interaction to our operations. Our revenues and EBITDA were up by 31% revenue and 44% EBITDA, respectively, in the first half '21. Also, as we always underline, proactive balance sheet and risk management have continued to be our top financial priority throughout first half. And once again, we have improved our balance sheet position in the first half with a positive free cash flow. Also happy to see that some of our businesses that were most negatively impacted from COVID are recovering as well. As export markets are opening up, and restaurants business is back, I am glad to see positive results from automotive and QSR business as well. And finally, before going into sector specifics, as you already likely know, our Soft Drinks business has won the tender of -- for the bottling business of Uzbekistan, which will further strengthen our position in Central Asia. Now briefly, touching on our core business lines. First, I will touch on beer. Volume growth in first half continued despite a number of restrictions in different countries. Turkey especially, with easy base recorded double-digit volume growth. We see some pressure on beer margins mostly because of commodity prices, excise tax, high base of last year. Still overall, we continue to grow our beer top line and EBITDA in a quite challenging period. On soft drinks, again, the results are very strong across both. Our quality growth continued with revenue growth outpacing volume growth and EBITDA growth exceeding revenue growth. Strong free cash flow continued on strong operational performance and disciplined working capital management. As a result, we have raised our volume and revenue guidance for the full year on the back of strong first half results. On Migros, sales were strong throughout the first half, despite a number of restrictions and lockdowns. Strong online shopping demand and our investments in digitalization continue to pay-off and support to the top line growth of Migros in this quite challenging periods. Migros also continued to deliver rapidly, and the company has no short FX position left. So our core businesses, Beer, Soft Drink and Migros, despite many challenges have again done a very good job, and we have completed first half 2021 on a solid footing on the back of our balanced geographical and sectoral breakdown and successful operational performance. Now moving on to our financial results of first off. We have managed to grow our top line by 31.1% in the first half driven primarily by Soft Drink segment and partly by Beer, Migros and Automotive business. Soft Drinks segment recorded nearly 54% revenue growth in the first half. Consolidated group EBITDA was up by 44% year-on-year in the first half 2021, ahead of the revenue growth, again, mostly driven by Soft Drinks but also new contribution coming from our QSR and Auto business as well. Our Energy and Industrial segment has seen EBITDA increase from TRY 27 -- TRY 27 million in first half 2020 to TRY 160 million this first half, playing a positive role in our margin expansion in the first half of the year. Looking at the bottom line, net income in the first half post-COVID TRY 882 million. Tipping out the one-offs, the sale of Anadolu [indiscernible] and Migros Macedonia operations. Bottom line was still TRY 294 million profit compared to last year's TRY 483 million. This comes on the back of our very successful operational performance of our companies, but also driven by our proactive balance sheet management, lower short FX position, decline in leverage ratios, improved operational performance, focused to use of derivatives and lira financing. Through these measures, despite the sharp depreciation in Turkish lira throughout the year, we have managed to record a better net income versus last year. Free cash flow is also a key focus area for us. We have generated TRY 2.4 billion free cash flow on strong operations, further CapEx, working capital discipline. Likewise, we have managed to bring our leverage ratio to lower levels despite TL depreciation. Net debt to EBITDA at the end of first half was 1.4x. 3 years ago, at end of half 2018, net debt-to-EBITDA was 3.6x. At the end of first half '19, net debt to EBITDA was 2.7. Last year, first half was 2.1x. So clearly, we are on the right path to bring our leverage ratios lower despite fluctuations in TL. Next slide shows our consolidated results in graphics, which I have mentioned earlier. 31% revenue growth, 44% EBITDA growth and the bottom line performance that continues to improve despite the depreciation in Turkish lira. This slide shows our segmental sales, EBITDA breakdown and our international exposures. Migros had the highest share in revenues at 45% followed by structuring segment share of 25% and Beer share of 20%. In EBITDA, Soft Drinks had the highest contribution with 41%, Migros and Beer for Q2 27% and 21% of EBITDA, respectively. As you can see, our 3 main operations, Beer, Soft Drinks and Migros accounted to around 90% of our EBITDA. Chart on the right-hand side shows our international exposure, while 30% of our consolidated sales revenue were from abroad in 2020. This cost should increase to 32.3%, thanks to strong soft drink international performance, this first half. On the other hand, the share of international EBITDA increased from 41.1% in 2020 to 42.4% in the first half of 2021 on the back of stock performance in international soft drink business. These charts have nicely showed our balanced geographical and sector breakdown as well as our focus in international markets and our diversification across the region. Now I would like to hand over to Onur who will give you overview regarding the performance of our segments.

Thank you, Hursit. Ladies and gentlemen, good morning and good afternoon. Welcome to our first half 2021 financial results conference call. It's a pleasure to welcome all of you today. As usual, I will first give a brief about our segment performances and we'll start with the Beer Group. Our total Beer Group volumes going further to be at 18.2 million hectoliters in the first half of 2021, with a 4.2% increase compared with the same period of the prior year. Beer Group net sales showed a very solid growth of around 30% reaching to TRY 6,976.3 million in the first half of 2021. This increase is mostly attributable to price increases, favorable product mix, discount management as well as fixed movements. Beer group EBITDA BNRI reached to TRY 665.3 million in the first half 2021 with around 14% of growth. Income for the Beer Group reached to TRY 505 million in the first half of 2021. As you all know, strong free cash flow is one of our growth priorities. Free cash flow for the Beer Group was at TRY 1,084.2 million in the first half of 2021, a solid growth compared to TRY 243 million of free cash flow generation in the first half of 2020. Talking about our Soft Drink segment, while volumes in the Soft Drink segment was recorded at 674 million unit days in the first half of 2021 with a very strong growth of 18.9% compared to the same period of prior year and solid growth both in Turkey as well as our international operations. Net revenues on the other side has reached TRY 9,571 million, with a very strong growth of 53.5% in which is the result of mainly volume increase, revenue growth management initiations as well as positive FX over impact coming from our international operations. EBITDA for our soft drink segment was at TRY 2,119 million in the first half of 2021 with a very strong growth of 74.6% compared with the same period of the prior year. Supported by the strong operational performance, our net profit was at TRY 1,124 million, with a strong growth of 133%. As mentioned in the Beer Group results, it's a major priority item for us, which is the free cash flow was at a strong TRY 839 million in the first half of 2021, which shows us a better performance compared to TRY 625 million in the first half 2020, which was also a very strong performance. Coming to the Migros results. We managed to grow our number of stores to 2,405 and also increased our online service stores to 826. Net sales was recorded at TRY 16,104 million, with a strong growth of 22% despite the strong pace of first half 2020. We also managed to grow our EBITDA up to TRY 1,340 million with a strong growth of 24%. Finally, we managed to generate TRY 211 million of net income, a significant change when compared with prior year's loss of TRY 276 million. Continuing with the automotive segment, our total consolidated net sales for the Automotive segment was recorded at TRY 2,902 million, with a strong 35% growth compared with the prior year. The growth is mostly attributable to both Anadolu Group result as well as on Anadolu Motor sales, increasing by 107% and 85%, respectively. EBITDA for the consolidated automotive segment was TRY 250 million, with a strong growth of 29%. This growth is again sort of strong performance of Anadolu Isuzu and Anadolu Motor, which respective EBITDA growth rates of 219% and 317%. So you can note on the other side, optimizing fleet size and changing the business model has produced lower EBITDA due to less sales of used cars. However, evolving to more -- have the business model in the car rental business. Our consolidated net income for the automotive business was TRY 148 million for the first half 2021 versus a TRY 4 million loss in the first half of 2020. Finally, about our Energy & Industry segment, our total net revenues were TRY 856 million with 7% of growth compared to the same period in 2020. As you will remember, our Energy and Industrial segment includes both McDonald's and Adel, which is our stationary business, which were the most negatively impacted segments, a number of work year through COVID-19. We see a strong result in the McDonald's business in the first half 2021 results. Our EBITDA is TRY 160 million with a strong growth of 486%. This improvement is most attributable to better performance of McDonald's and Energy business as well as accelerated sales of our Kartal residence Project in Kartal. Thanks to these performances, net income was at a slight negative for TRY 13 million compared with TRY 266 million of the prior year. Coming to our financial priorities and balance sheet management, as Hursit bay mentioned, I would like to emphasize again. Talking about our consolidated debt, as you will know, lowering indebtedness on a consolidated level has been one of our priorities. It has been another quarter where we managed to lower our consolidated net debt. Our total consolidated net debt was TRY 13.5 billion as it was TRY 17.4 billion in the first half 2018, TRY 17.3 billion in the first half 2019 and TRY 14.5 billion in first half 2020, which shows a decline in non-TL basis despite sharply weaking TL. Our net debt-to-EBITDA ratio was at 1.4x in the first half 2021, the lowest in the recent years. Let me remind you that our net debt-to-EBITDA, as mentioned as mentioned by Hursit bay was at 3.6x in first half 2018, 2.7x in first half 2019, 2.1x in first half 2020. And now we are at 1.4x significantly lower than its peak in 2018. Strong operational performance, priority of free cash flow generation, tight balance sheet management, together with proactive risk mitigation tools as well as ideal asset optimizations are the main contributors to the decline. Continuing with our financial priorities, we see debt reduction and deleveraging as of one of our main priorities. And we can see that we managed to lower our net debt-to-EBITDA ratio across almost all segments and reached to a halt of 1.4x by the end of first half 2021. We are also happy to lower our risk and lower our FX positions, eliminating the FX [indiscernible] open positions for the holding stand-alone Migros financials to the proactive risk mitigation tools. And finally, talking about our financial priorities for the remainder of the year. Cell type balance sheet management as well as strong free cash flow generation remains unchanged priorities. Profitability and efficiency improvements, which leads to better EBITDA results, proactive risk management and deleveraging the financial priorities that remains unchanged for the rest of 2021. So I would like to hand over to Hursit bay 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 2021 and onwards. Despite many challenges, we maintain our key focus on consumer and changing trends at the FMCG sector as lockdowns and increasing online shopping open many new opportunities for the players in the sector. Our first half results indicate that we have recorded strong top line and EBITDA performance despite COVID-19 restrictions which, obviously, had negative impact on many of the sectors we operate. Also free cash flow, proactive balance sheet management and lowering our FX risk been have our key focus, which have resulted with lower leverage levels and the bottom line that's less vulnerable to sudden moves in FX. Looking ahead, we will continue with our consumer-centric approach in our old business. Digitalization and innovation will remain our key focus and we aim to be a pioneer in all segments we operate. The 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 the post-COVID growth as vaccinations are increasing on a rapid pace and this new area brings many new 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 us. And now we will be glad to answer your written questions. Thank you.

There are currently no questions. [Operator Instructions] And we have a question from Metin Esendal, Renaissance Capital. Thanks for the presentation. Could you please comment on the financial income that you recorded after the maturity of derivative positions? Do you expect further similar financial income to be recorded in the upcoming quarters? And second question is, can you provide an update on top project after the change in shareholder structure? How much capital have you invested already? And how much more needs to be allocated by the end of 2022?

Thanks. Well, thank you very much for the question. Talking about first question, we have already mentioned in the last call that we were having on the hedging tools that we have been using in our balance sheet in order to make sure that we mitigate our FX risk positions. In this quarter, we have written around TRY 125 million of net income coming to this risk mitigation tools and hedges. So in the recent quarters, depending on the fixed move, you might be seeing some more income on our income statement, where the maturity of the hedges that we have made expense. Having said that, again, I would like to stress that the hedges are done for risk mitigation purposes that will fully depend on how the exchange rate is going to be behaving going further in order to make sure that whether there's going to be any income, net income coming on the income statement for the future period is going to be fully dependent on the movements on the FX. Well, talking about our TOGG investment that TOGG is an investment that -- we are especially happy to be in. And we do think that that's a very promising project going forward. Until today, we have invested around [ euros 40.5 million ] in the TOGG investments. And going further, we had already disclosed the total investment that we would be having until 2023. So this is part of this investment. So thank you very much for the question.

There are currently no questions. [Operator Instructions] Okay. We can end the call now. Thanks again joining the call, and hopefully, we will reach you at the next conference call. Thanks lot.

Thank you. Bye-bye.

Thank you very much.

Have a good day.

Bye-bye.