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

Hello, everybody. This is Mehmet Cem Kozlu. [Audio Gap] 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 will be in listen-only mode for the entire session, but please write your questions as you listen to the presentation. So no need to wait to the very end. So you can just write your questions at any time, and we will answer your questions right after the end of the presentation.

Thank you very much. Good morning and good afternoon to everyone. Once again, welcome to our 2022 First Half Webcast and Conference Call. We are happy to announce very strong results in the first half of 2022. Despite a quite challenging environment, we have seen very strong operational performance across all segments in the first half, supported by our diversified country and sector breakdown. As COVID restrictions are lifted, increased mobility recovery in HoReCA, positive channel and products mix are supporting our businesses particularly on the Beer and Soft Drink segments. On the profitability side, there is no question that commodity prices, higher energy expenses, weaker local currencies and inflationary pressures are putting pressure on our cost base. Happy to see that we have managed to improve our consolidated margins in first half on the back of strong operational performance. Automotive business is also performing well. This segment has transitioned to a much more stable operation with lower leverage and even now paying a dividend to the holding. Remember that Auto segment, net debt-to-EBITDA, just 3 years ago was about 5x. Now it's down to 1.5x. Also, as you are also probably following, another positive, we have made upward revisions for our 2022 guidance for our beer, food retail and automotive segments, our strong first half performances. So this is, again, a quite achievement given a lot of the challenges within the regions we are operating. Just before moving on to details, please keep in mind that rapid rising inflation and exchange rates are making an impact on both our operations and our reported financials. Now briefly touching on our core business slides. First, on Beer, strong first half numbers in general, probably fair to say that results are exceeding expectations in a geography that's extremely challenging. Very strong performance in top line growth and margins where managing costs and expenses are more challenging than ever. Price adjustments, strong channel and products mix, the segment OpEx resulted with sharp improvement in margins in first half for the Beer Group. As such, we have revised our Beer EBITDA margin guidance higher on the back of improvements in Beer EBITDA margin in first half. On Soft Drinks, again, strong volume growth across both Turkey and international markets, 22% consolidated Soft Drink volume growth in first half. Continued improvement in the on-premise channel sales and positive channel and product mix are clearly supporting our business. The newest member of our operations, Uzbekistan, continued its integration at full speed and recorded a very 29% volume growth in the second quarter. We are seeing increasing inflationary pressures across commodity, transportation and labor costs. And strong volumes, favorable mix, hedging initiatives and controlled OpEx are partly mitigating these cost pressures. Coming to Migros, again, solid growth continues. Inflation is having an impact on our numbers, but competitive pricing, recovery in large stores and positive new stores performance have also supported our strong top line growth. Migros continued with deleveraging and the company is in net cash position excluding IFRS 16 changes and has no short FX position. Also, the bottom line is now black as years of deleveraging are finally paying off and our operational performance continues to improve. 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 on a solid footing on the back of our balanced geographical and sectoral breakdown and successful operational performance. Now moving on to our summary financial results of first half. We have managed to grow our top line by more than 100% in first half 2002 (sic) [ 2022 ], led by our Soft Drinks segment, which has recorded a solid 144% double-digit growth in this period. Our balanced operations in different geographies and sectors mitigates geographical, geopolitical and economic risk, and we have seen contribution from all segments. Consolidated EBITDA was up by 128% year-on-year in first half '22, this time leaded by the Beer segment as our consolidated EBITDA margin improved nicely 170 basis points to a solid 14.3% in first half. Looking at our bottom line, net income attributable to parent in the first half 2022 was [Technical Difficulty] billion. Stripping out the one-offs, the sale of AND Gayrimenkul, Migros Macedonia operations, impairment losses on Beer operations and most recently, McDonald's sales, bottom line was still a solid TRY 761 million in first half '22 compared to TRY 295 million net profit in the first half of 2021. This comes on the back of our successful operational performance of our companies, but also driven by our proactive balance sheet management, lower short FX position, decline in leverage ratios, focused use of derivatives and Lira financing. Through these measures, despite the sharp depreciation in TL throughout the year, we have managed to record a significantly better net income versus last year. Free cash flow is also a key focus area for us. We have generated TRY 6 billion free cash flow versus TRY 2.4 billion last year, mostly supported by our Beer and Migros segments. Likewise, we have managed to bring our leverage ratios to lower levels despite TL depreciation. Net debt to EBITDA at the end of first half was 1.2x, despite the Uzbekistan acquisition. 4 years ago, you can remember at the end of first half '18, net debt to EBITDA was 3.6x. At the end of first half '19, 2.7x; 2 years ago, 2.1x. So clearly, we remained on the right path to bring our leverage ratios lower despite fluctuations in TL. Yes, Slide 4 shows our consolidated results in graphics, which I've mentioned earlier. On a consolidated basis in the first half, as we just discussed, 101% revenue growth. Second quarter top line growth was a little better partially supported by FX moves and inflation. EBITDA, again, a very strong performance and moving ahead of the top line growth in the first half despite substantial cost pressures. And then bottom line, we see a significant improvement here as well, especially in the second quarter. This slide shows our segmental sales, EBITDA breakdown and our international exposures. As you can see, Migros had the highest share in revenues at 41%, followed by Soft Drinks segment's share of 30% and Beer's share of 22%. In EBITDA, Soft Drink at the highest contribution reached 44%. Migros and Beer constituted 26% and 23% of EBITDA, respectively. As you can see, our 3 main operations, Beer, Soft Drink and Migros accounted for more than 20% of our EBITDA and also our revenues. Charts on the right-hand side shows our international exposures. While 32.7% of our consolidated sales revenues were from abroad in the first half of 2001 (sic) [ 2021 ]. This portion increased to 38.4% in 2002 (sic) [ 2022 ], thanks to strong Soft Drink international performance and moves in currency. On the other hand, the share of international EBITDA increased from 42.9% in the first half 2001 (sic) [ 2021 ] to 45.5% in 2022. A slightly smaller increase due to the more positive probability of our domestic operations. These charts here nicely shows our balanced geographical and sectoral breakdown as well as our focus in international markets and our diversification across the region. Now at this stage, I would like to hand over to Onur, Onur will give you overview regarding the performance of our individual segments.

Thank you, Hursit bey. Good morning, and good afternoon, ladies and gentlemen, welcome to Anadolu Grubu First Half 2022 Financial Results Conference Call. Today, as usual, I will briefly take you through our financial results and we'll first start with the segments, starting, as usual, with the Beer segment. Despite a very challenging geography, our results in the Beer segment for the first half 2022 entirely exceeded expectations. Our net sales revenue in Beer operations grew by a strong 114.2%, reaching up to TRY 14,946 million in the first half of 2022 for international operations as well as our Turkish operations contributed positively to the strong growth. Price increases, efficient discount management, positive product mix as well as FX movements helped to reach the strong growth. On the other side, Beer Group EBITDA in first half 2022 was recorded to be TRY 2,442 million with a very strong 267% growth compared to the prior year. Both volume increase and efficient cost and expense controls and strong revenue growth helped this strong growth. Our net income in the first half 2022 was TRY 668 million for the first half of 2022. If we were to exclude the impairment charges and greater losses, the net income for Beer Group would be around TRY 1.1 billion. As you will remember, free cash flow generation is a major priority for all our segments. Beer Group segment, free cash flow performance in the first half of 2022 was exceptional, reaching up TRY 8 billion, thanks to improvement in margins and profitability, strong improvement in working capital and FX moves. We expect the free cash flow generation to normalize later in the year. Talking about our Soft Drinks segment, our Soft Drinks segment showed solid results in the first half 2022. Our volumes were recorded to be at 824 million unit days, reaching up to highest volume of first half of all times with a 22% growth. Our sales revenues grew by 144% in first half 2022, reaching up to TRY 23.359 million. We are happy to say that both Turkish and international operations contributed positively to this growth. Our EBITDA was recorded to be TRY 4,763 million with a strong 125% growth compared to the same period of the prior year. Again, we are happy to see that both Turkey and international operations positively contributed to this growth. Our net income for our Soft Drinks operations was at TRY 1,863 million despite the headwinds. Continuing with our Migros operations, the number of stores of Migros have reached up to 2,600 advanced stores with an increase of 276 stores in the first half 2022. We managed to increase the online service stores and to reach up to 955 stores across all advanced cities. Net sales of Migros reached to TRY 28,235 million with a strong growth of 75% in the first half 2022. This solid top line growth was driven by inflation, online business growth, store expansions, competitive pricing, strong recovery of large stores in malls and successful performance of new stores. The percentage of online sales, excluding tobacco and alcohol, has been 16%. We were able to grow our EBITDA ahead of the revenue growth and grew by 97%, reaching up to TRY 2,645 million. Our net income on the other hand, in the first half of 2022, was a strong TRY 599 million. We are also happy to see that excluding IFRS 16, Migros is in the cash position of TRY 1.9 billion and including IFRS 16, our net debt-to-EBITDA is at a very healthy 0.4x. It is also important to note that Migros has no longer had currency exposure. Continuing with our automotive segment. Our total automotive segment net sales were recorded to be at TRY 5,198 million with an increase of 79% compared with the same period of the prior year. This growth was mostly attributable to Anadolu Isuzu, which thanks to both abroad and local sales increases rose its net revenue by a strong 168%. Both Anadolu Motor and Çelik Motor were also positive contributors to the strong revenue growth. EBITDA for the automotive segment also grew by a strong 135.5%, reaching up to TRY 589 million in the first half of 2022. Again, Anadolu Isuzu and Anadolu Motor were the main contributors to this growth. Also Çelik Motor contributed positively to the growth. Finally, net income of the automotive segment was at TRY 443 million, with a strong almost 200% growth. If you're talking about the Energy & Industrial segment, as Hursit bey mentioned, the most important development in this segment was the completion of sales of Anadolu Restaurant shares, which operated the franchise management of McDonald's restaurants in Turkey for USD 54.5 million. Now the segment constitutes of Adel stationery business and Energy business. Our net sales for the segment was at TRY 424 million with 8% of growth in first half 2022. Our EBITDA has reached to TRY 159 million with a 61% growth compared to the same period of prior year. Net income for the segment was recorded to be TRY 149 million. Talking about our balance sheet, balance sheet management and debt position. We are happy to say that the consolidated net debt to EBITDA was at 1.2x in first half 2022, coming down from 2.7x in first half of 2019, 2.1x in first half of 2020, 1.4x in first half of 2021. If we were to exclude theoretically the Uzbekistan acquisition of CCI, this number theoretically would be less than 1, 0.9x. This significant improvement in indebtedness ratio was thanks to strong operational performance, strong free cash flow generation, tighter proactive balance sheet management, proactive risk management and better use of idle assets. Our consolidated net debt is at EUR 1.1 billion by the end of first half 2022, coming down from EUR 2.6 billion in the first half of 2019. We are also happy to mention that there is no FX debt at the holding-only level by the end of first half 2022. And finally, talking about our financial priorities. Our financial priorities remain unchanged for the rest of the year. Positive free cash flow, tight and proactive balance sheet management, proactive risk management, profitability and efficiency improvements, and of course, continuous deleveraging will continue to be our financial priorities. This concludes my presentation. I will hand over 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 rest of 2022 and onwards. We are proactively managing our business through the inflationary headwinds and already doing commodity hedges for 2023, depending on the market conditions. We are closely monitoring the recent developments in Russia and Ukraine as such in the light of general evaluations, which are still being conducted, we have decided that the operations of our Chumakov brewery in Ukraine would be resumed. Respectable triple-digit top line growth, way above the inflation levels and TL depreciation. Margins continue to improve on a consolidated basis with successful cost discipline and improving product and channel mix. Operational and financial priorities are defined and disciplined. Also strong free cash flow driven by strong operational performance and disciplined proactive balance sheet management. Looking ahead, we will continue with our consumer-centric approach in all our businesses. Digitalization and innovation will remain our key focus and we aim to be a pioneer in all the segments we operate. The key area going forward will also be sustainability. As Onur mentioned, free cash flow will be at the top of our financial priority. Also, at the same time, we will focus on growth opportunities while still keeping an eye on our balance sheet. Ladies and gentlemen, thank you for listening us. And now we will be glad to answer your written questions. Thank you.

Yes, we have a couple of questions. The first 3 comes from [ Cemal Demirtas, ] how do you foresee the consumption in the second half considering the impact of high inflation on demand? And the second one is also from [ Cemal ], considering that your leverage ratio is healthy, do you have any organic or inorganic growth areas to focus. And the third one is the share performance of Isuzu looks speculative, though it is a good company with improvement in its operations. How do you see the prospects of the company and shareholder structure ahead? And an additional question from [ Cemal ] as well. Migros had a very impressive second half results. Do you expect some dividends from Migros next year?

Maybe I can start from the first one related to that second half of the year. Of course, different segments are affecting differently from the inflation and from the devaluation, as we are mainly in the fast-moving consumer goods, we are less affected from the inflation, I can say. Of course, uncertainties are affecting all the industries in general. But because we are selling not a very high-priced product. So, we are less affected. But we can, in general, say that second half will be slightly more challenging for every player in the market, I can say. The second question related with the organic or inorganic growth. Currently, as Anadolu Group, we are focusing on our existing businesses. Beer, Soft Drink and Migros, as I mentioned, accounts slightly more than 90%. So these 3 segments and also addition on to that, the automotive segment is another focused area. So if there will be opportunities, especially on the soft drink and beer for the enlargement, we will be in a position to analyze them. But currently, there isn't any specific things to manage. For the -- one thing maybe for the first question, especially on the automotive side, Isuzu's side, export markets are improving. So that sector, especially bus exports are increasing. So that is one of the potential areas for Isuzu and also because of that Isuzu revised its targets for that. We cannot comment on the Isuzu share development in general, that is the market, let's say, evaluation, but we can say that the business is performing well. Exports are growing. Domestic market, commercial vehicle market is growing well. So we believe that Isuzu's performance will continue. On the Migros side for the dividend payments of the Migros on the mid- and long term, the company's, of course, debt position is getting lower and lower. And after closing the past, let's say, accumulated losses, the company will be in a position to pay dividends. And also as a group, we are also willing to get dividends from Migros. I don't know whether Onur will add something on that or not.

Well, I think Hursit bey you have given a satisfactory explanation, I think on the Migros dividend side, obviously, our mid- to long-term target and ambition for Migros is to make sure that Migros gets the rhythm of payment of dividends, like most of our major operations does like Anadolu Efes, like CCI Anadolu Isuzu has also come back to the dividend payment rhythm. That's one of our targets to make sure that all our companies are in a rhythm to make dividend payments. So Migros with its performance in the recent years has mostly overcame the debt situation as well as it's moving rightfully on the profitability side. So our expectation is, as I said, in the mid- to long run to make sure that Migros gets the rhythm of payment of dividends. You also should be rightfully explained the situation on Anadolu Efes. We are very much concentrated on the successful strategic moves on operations, managing profitability, efficiency, managing the supply chain gaps and everything else in the automotive side as well as our Anadolu Isuzu side. And obviously, the company is performing a lot better than it used to do in the past years. And we hope to continue its positive performance going forward.

And there are some questions from [ Behlul Katas ]. Thanks for the presentation. I have 3 questions. First, do you think about the recent Anadolu Isuzu TOGG? That's one you have answered. The second one is that do you expect any dividend payments from Migros in the foreseeable future? This one was answered as well. And third, could you please elaborate on the current situation for TOGG?

Of course, TOGG is one of the important investments that currently we are doing. And we believe that it will add a very good value for the mid- and long term to Anadolu Grubu in general. Currently, we are nearly coming to the end of the construction. So construction finalized the test is our operation currently. So that, let's say, the target for the commercial sales is in the next year's first quarter. So we are coming to the end, and that investment is continuing. And as I mentioned, it will add value to Turkey and also to our groups.

And next question -- a couple of questions from [ Ozgur Acikalin ]. Can you give an update on TOGG. How much have you invested so far? Do you think an IPO might be possible for a partial full exits in the medium term? Do you expect any dividend income from Migros in 2022? That was answered. Do you see any regulatory risks for Migros? We will earn any plans on a new investment considering the decrease in the solo net debt position? Or do you plan to maintain/improve the current net debt levels? And the last one was answered. It was about the share price of Isuzu.

Well, thank you very much for the questions. I think the update on TOGG has already been given. We hope that TOGG will be in operation by the end of first quarter 2023 in sales, and we expect a positive movement on that front on any IPO or anything like that in the strong future. There's no decision taken on that front. So there's nothing we can say as of now on that front. The total investment that has been made to TOGG is around EUR 90 million as of today. I think the Migros questions, we have already answered. New investment considering the decrease of the debt. Well, maybe we have been making new investments on our operations in the -- when those operations -- those investments are greater with our operations. So we tend to do those investments in our operating companies like Anadolu Efes, like CCI, like Migros. And we are constantly looking for any opportunities that might be coming on our desk, and we are looking for opportunities. However, there's nothing that we can talk about right now on those opportunities front. And as we said, our priority, especially on the holding-solo level, had been lowering down the debt, and that remains still our priority for the coming period. And I think on the Anadolu Isuzu side, we have already commented on our priorities.

And the next question is from [ Ozgur Tanriverdi ]. You have a very strong cash generation. What is your plan going forward? Do you plan to increase your dividend or have any acquisition? And the other questions, there are 2 follow-up questions from [ Cemal ] as well. Where are we on TOGG projects, timeline for the production and when new vehicle will be on the roads? And how do you see the general financing environment for Turkish companies?

Well, on the first question, I think for those ones that have been following our companies for long years, it has been quite a priority for us to make sure that the balance sheet management as well as positive free cash flow generation has been a significant priority for us. We are happy to see that we are now getting the results of this financial discipline and making sure that the strong financial discipline as well as the management of either assets as well as working capital requirements as well as improvements in the profitability and all the stuff, we are able to make sure that most of our operations continue to generate positive free cash flow. Well, on how to use the proceeds on the cash flows, I think we are already a little bit commented on that. Our major priority is to continue lowering down the debt. And as we said, our objective is to make sure that our companies as well as our holding comes back to the rhythm of payment of dividend. So we tend to continue payment of dividends as long as our balance sheets and income statements are continuing strongly. And on the new investment side, we tend to continue our investment size on our subsidiary levels, and you might be thinking of any new investment that if that would be very attractive on the holding side. But as we said, our priority is more on the lowering down the debt. So I think the last question was about the financing part and what's the financing situation in the Turkish market right now. Well, compared with the past, we see that the financing is a little bit tightening. So -- and we are managing our companies and cash flows accordingly. And you will see in the strong future how this financing is going to develop. But we see that the cost of financing is also going higher, which underlines how important the financial discipline of having positive free cash flow of the group pays off since the cost of borrowing tends to increase in the recent months.

Okay. It's time to end the call. Thank you for your kind attention and being with us today. Bye, and see you in the next conference call.

Thank you. Take care. Bye-bye.

Thank you very much. Bye-bye.