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 2022 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 Cevikel, our CFO. We will first listen to Mr. Zorlu for the key highlights of 2022 and his general overview, and later on, Mr. Cevikel will provide brief analysis on segmental performance. [Operator Instructions] So I leave now the floor to Mr. Hursit Zorlu. Thank you.

Thank you, Mehmet. Good morning, and good afternoon to everyone. Once again, welcome to our 2022 full year webcast and conference call. Before we begin, let me start with saying the earthquakes that took place in 10 cities of Turkiye and Syria on February 6, causing extraordinary losses and damage in many of our cities and affected us all very deeply. First of all, I would like to express my condolence to our country for this great disaster. Immediately after the news of the disaster first came, all Anadolu Group companies focused on reaching their employees in the region. At the same time, our Group companies took actions to support our people. Our Group companies are carrying out many aid activities with the support of their volunteer employees and stakeholders, including in-kind and cash donations. We are helping with trucks, food, water, beverages and supplies. We have dedicated one water factories, 100% capacity only for the earthquake zone. We have allocated containers and tanks for more than 3,000 people in our factories, farms, dealers and distributors warehouses. We have delivered ready meals to 20,000 people. We have also supported search and rescue efforts with our staff and many others, we can continue to list here. But obviously, a very tragic event, and we will continue to help earthquake recovery in the best way possible as Anadolu Group. Now moving into our business. We leave behind another strong year, managed to grow our top line, EBITDA and net income by triple digits above inflation and recorded strong growth figures even in dollar terms as well. This is mostly driven by our solid operational performance, diversified operations, successful investments and proactive balance sheet management, I can say. We have our 2022 guidances throughout the year multiple times and exceeded expectations on a very strong for the Group. On the balance sheet deleveraging continued at full pace on strong cash flow and asset sales, and we have also recorded a record high bottom line in 2022. Just operationally, price adjustments, strong channel product mix and disciplined OpEx have been the key pillars of this successful performance. Obviously, it's also been a very challenging year, where we had some -- we have some many challenges, including cost pressures on commodity prices, higher energy expenses, weaker local currencies and inflationary pressures. But we have been able to mitigate these cost pressures and still improved our consolidated margins in the year. Also a few words on the Auto sector, we have seen an impressive turnaround over the last 3 years, operational and financial wise. This year, positive sector dynamics, both in Turkiye and international markets further supported the results, and we are extremely happy with how much to this segment have achieved in the last few years. So just overall, despite a very -- quite challenging environment, we have seen very strong operational performance, thanks to our balanced country and sector breakdown. Now briefly touching on our core business slides. Beer, despite a very challenging geography, results far exceeded expectations, highest consolidated EBITDA margin in the last 10 years. Despite cost pressures, we have managed to significantly improve our margins on price adjustments, strong channel product mix and OpEx control. We have raised our margin guidance 3 times in the year and still recorded margin above those levels. We have started the year '22 guiding for 100 basis [ points ] margin contraction in the Beer segment, but we finished the year with more than 60 basis [ points ] EBITDA margin expansion. So quite an impressive performance there. Also, we are gradually starting production in Ukraine as we have announced before. On Soft Drinks, strong volume growth on the overall, particularly international markets, 15% consolidated Soft Drink volumes growth in 2022. Continued improvement in -- on the on-premise channel sales, positive channel product mix and our investments are clearly supporting our business. We are also investing in capacity in the international countries mainly to support the strong demand where we are seeing in these markets. The newest member of the operations, Uzbekistan, continued its integration at full speed and recorded a really 32% volume growth in 2022. Still we believe to see increasing inflationary pressures across commodity, transportation and labor costs. But strong volumes, price adjustments, favorable mix, well-managed hedging initiatives and successful OpEx management are partly mitigating these cost pressures. On Migros, solid growth continues. Inflation is having an impact on our numbers, but competitive pricing recovery in large stores, positive new stores performance have also supported our strong top line growth. We have also gained market share in the year, where we have managed to successfully compete against discounters. Migros continued with deleveraging and companies is in net cash position and has no short FX position. Also a very strong bottom line in 2022 as of the [ deleveraging ] and finally paying off and our operational performance continues to improve. On Automotive sector, impressive turnaround, as I mentioned, with positive sector dynamics both in Turkey and international markets and a very sharp improvement in leverage ratios in Auto segment as well. So our core businesses, Beer, Soft Drink and Migros as well as Auto, despite many challenges, have again done a very good job, and we have completed 2022 on a solid footing on the back of our balanced geographical and sectoral breakdown and successful operational performance and also our correct investments in the right countries and sectors. Now moving on to our financial results of 2022. We have managed to grow our top line by nearly 119% in 2022, led by Soft Drinks segment, which has recorded a solid 144% revenue growth in this year. Our balanced operations in different geographies and sectors mitigates country-specific risk, and we have seen contribution from all segments. Consolidated EBITDA was up by 133% year-on-year in 2022, this time, led by Beer segment as our consolidated EBITDA margin sharply improved throughout the year. Looking at our bottom line. Net income in 2022 at a combined level was TRY 10 billion versus TRY 3.5 billion a year ago. At the parent consolidated level, net income was TRY 3.8 billion. And looking at our adjusted net profit number, which we include the one-offs gains from AND Gayrimenkul Migros Macedonia operations and also impairment losses on Beer operations, bottom line was still a solid TRY 3 billion in 2022, more than 4x as high as the adjusted bottom line of last year. 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, focused use of derivatives and lira financing. Through these measures, despite the 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, as we always mentioned. We have generated TRY 12.8 billion free cash flow in 2022 versus TRY 6.7 billion as of last year with very strong operational performance and successful balance sheet management. Likewise, we have managed to bring our leverage ratios to lower levels despite TL depreciation. Net debt to EBITDA at the end of 2022 is 0.7x. These ratios were probably you can remember, 2.8x at 2018, 1.1x (sic) [ 2.1x ] at '19, 1.5x at '20 and 1.7x at 2021. So clearly, we remain on the right path to bring our leverage ratios lower despite fluctuations in Turkish lira. Slide 4 shows consolidated results in graphics, which I have mentioned earlier. On a consolidated basis in 2022, as we have just discussed, 119% revenue growth. EBITDA, again, a very strong performance and moving ahead of the top line growth in 2022 despite substantial cost pressures. And then bottom line, we see a significant rebound there as well. Slide 5 shows our segmental sales, EBITDA breakdown and our international exposures. Migros had the highest share in revenues at 42%, followed by Soft Drinks segment share of 30%, and Beer shares of 21%. In EBITDA, Soft Drinks had the highest contribution with 40%, Migros and Beer constituted 25% and 28% of EBITDA, respectively. As you can see, our 3 main operations, Beer, Soft Drinks and Migros account for more than 90% of our EBITDA and revenues. Chart on the right-hand side shows our international exposures. While nearly 34% of our consolidated sales revenue were from abroad in 2021, this portion increased to nearly 37% in 2022, thanks to strong Soft Drink international performance and moves in currency. On the other hand, the share of international EBITDA increased from 37.3% in 2021 to 44.7% in 2022, a higher increase, thanks to more profitability of Beer operations. These charts here clearly 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, who will give you overview regarding the performance of our segments.

Thank you, Hursit. Good morning, and good afternoon, ladies and gentlemen. Welcome to Anadolu Group financial year 2022 results conference call. Before starting, I would like to express how [ fully ] and saddened we all are with the destruction created by Kahramanmaras earthquakes. I would like to express our condolences to lives lost, and on behalf of our company, on our teams and hope for a quick recovery for survivors. As usual, I would like to start our operational performance review with our Beer segment. Our total sales volume in Beer operations were at 34 million hectoliters with a decline of 10.4% in financial year 2022. This decline is mostly attributable to the situation in our Ukrainian operation, if we compare our volumes, excluding our Ukraine operation, we can say that we were flattish compared to the prior year. Net sales revenue had a strong growth of 113%, which is up to TRY 36,976 million in 2022. Operational performance, pricing and exchange rates were the main drivers of the strong growth. EBITDA on the other side grew even stronger than our revenue with a strong 211% increase, reaching to TRY 7,318 million. Price adjustments, strong mix, OpEx controls and FX were the main contributors. Net income for the Beer Group reached TRY 1,571 million with a strong growth of 462%. As you well know, free cash flow is one of our major priority in all our operations. Beer Group free cash flow was at TRY 3.7 billion, which particularly pleased us with the performance. Continuing with our Soft Drink business, our total sales volume was at 1,577 million unit case with a strong growth of 14.6% compared to the same period last year in financial year 2022. Main driver of this growth was mainly international business. However, Turkey also registered a positive growth. Net sales revenues -- net sales revenues for the financial year 2022 was at TRY 53,530 million with a strong growth of 144%. Good operational performance, price adjustments and mix improvements were main contributors. Our EBITDA was at TRY 10,097 million with a strong growth of 116% in financial year 2022. It's worth mentioning that our EBITDA had been under pressure due to raw materials inflation, higher energy and transport costs as well as FX. Our net income was registered at TRY 4,331 million with a 91% growth. And finally, our free cash flow was at [ TRY 2,629 million ] despite the headwinds we have. This performance with the free cash flow has made us particularly happy. So continuing with our Migros operations, our total number of stores reached to 2,908 with an additional of 343 stores in 2022. Online service stores on the other hand reached to 956 stores. Our market share in total FMCG grew by 50 basis points and reached to 8.9% and our market share in modern FMCG grew by 20 basis points and reached to 15.8%. Our net sales reached to TRY 74,502 million with a strong 105% growth. The main drivers of growth were online business, store expansion, competitive pricing, market share gains, successful performance of new stores as well as inflation. EBITDA also grew with a strong 106%, in line with revenue growth, reaching to TRY 6,286 million. Our net profit was at TRY 2,570 million with a very solid growth. It's worth noting that TRY 993,000 of this net profit was the deferred tax income. Migros also contributed its strong balance sheet performance and managed to be in TRY 5.4 billion net cash position, excluding IFRS 16 as end of '22. And going further with our Automotive segment, our total net sales reached to TRY 14,113 million with a very solid growth of 132%. Anadolu Isuzu contributed with a 134% growth and Celik Motor contributed with 137% to this growth. Our segment EBITDA was at TRY 1,567 million with a strong growth of 180%. Despite the supply chain issue both Anadolu Isuzu, Celik Motor and Anadolu Motor were able to positively and strongly contribute to this growth. Our net income for the segment was at TRY 1,052 million with a almost 100% growth in financial year 2022. Finally, our balance sheet was in a very good shape for the segment, finishing the year with 0.2x net debt to EBITDA compared with 1.4x for the year 2020 and 0.6x for the year 2021. So a couple of words about our balance sheet performance. For the last 4 years, we always kept on prioritizing our balance sheet management and financial discipline principles across the whole Group as you might well remember. With the financial discipline and framework created, we were able to significantly lower our leverage ratios in the past 4 years. Our consolidated net debt to EBITDA was at 0.7x by the end of 2022. You can see our positive progress on the indebtedness ratios, our net debt to EBITDA ratio, and you can see the positive progress. Our net debt to EBITDA ratio was 2.8x by the end of 2018. We have almost each year improved and reached to 0.7x by the end of 2022, mainly financial discipline in the form of operational performance, strong free cash flow generation, tight balance sheet management, active usage of risk mitigation tools, idle asset sales were the main drivers behind the significant improvement. Our consolidated net debt is TRY 17.2 billion and EUR0.9 billion by the end of 2022. It's worth to mention that there is no open FX position at the holding level. Our net debt on euro terms is EUR900 million. So in this perspective, when we analyze the net debt to EBITDA ratio movements in the sectors, we also can see that all of our operating companies were able to improve this ratio in the positive direction that particularly makes us happy. So finally, talking about our financial priorities for the year 2023, we will be continuing our tight balance sheet management. We will be targeting, again, positive free cash flow generation. We will also target profitability and efficiency improvements. Proactive risk management is going to be one of our top priorities, and we want to continue our financial discipline and continue deleveraging in year 2023. So this concludes my presentation. I would like to hand over the word to Hursit for his final 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 2023 and onwards. First of all, we will continue to support our communities post the earthquake. Financial contributions and current contributions, employee enrollment and voluntarism and product donations, we will help post the earthquake recovery in the best way possible. On to more business, again, we are proactively managing our businesses through the inflationary headwinds and already completed a large part of our commodity hedges. We have raised our guidance and exceeded expectations multiple times throughout 2022, and our Group companies already shared this in 2023 guidances. It was a year, again, where we recorded strong operational performance with focus on cost and profitability. Strong free cash flow generation, utilization of idle assets, deleveraging and tight balance sheet management were again the key themes of 2022, and we are able to show strong numbers on all of these measures. And finally, we have again been focused on managing risk proactively and completed with a very strong balance despite the volatilities in financial markets. As the key focus areas going forward, as I mentioned, we will continue to support post earthquake efforts, continue with our consumer-centric approach in all our business lines, digitalization and innovation will remain our key focus, and we aim to be a pioneer in all the segments we operate. One of the key area going forward will also be sustainability. Free cash flow will be key priority as well despite some planned CapEx and investments in the year. 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.

Okay. We have a couple of questions on screen from [ Mustafa, HUC Investments ]. Thank you very much for the presentation. Could you please provide an update on Togg? Do you plan any dividend income from Migros given significant deleveraging and strong cash generation of Migros? And finally, any further assets or real estate sales plan at holding company or subsidies to accelerate deleveraging?

All right. Let me take the Togg question. As you know, Togg is the newest operation under Anadolu Group. We are investing to Togg. We are -- as you know, we have 23% shareholding in this, I can say, big and a wonderful company. And we are coming to the end of the, let's say, commercial sales plan this month, probably we will be starting for the preorder program of the sales. So very focused plans, we are planning for the end of March and early April for the commercial sales. We will have a preorder program for that sale. So it's going in the right direction. And I believe that personally, it will add good value to Anadolu Group in our Automotive division. For the Migros, Onur?

Thank you. And thank you for the question. Well, as Anadolu Group, I mean we are very supportive on our operating companies to be in a good financial position and to be technically capable of distributing dividends in this perspective, Migros has improved its financial statements in the last couple of years. Technically, by the end of 2022, Migros has its distributable profit by the end of 2022. But at the end of the day, this dividend distribution decision is going to be taken by the Annual General Assembly of the company, where the final decision will be taken. So this is the negotiation. What was the other question, [ Mehmet ]?

Any further assets or real estate sales at the holding company to accelerate deleveraging?

Well, I think this is also a very good question, because in the -- in 2022 as well as back in the last 3 years, 4 years, we have been talking about our core assets, Tier 1 and Tier 2 assets as well as any opportunities that might be rising on a Tier 3 assets, we might be considering selling them if a good opportunity comes, and we have done a couple of transactions. Yet there is not a major transaction on the Tier 3 side that is on our table. But if opportunities will arise, we will be taking those into our consideration. So anyhow, better use of assets and deleveraging is going to be still our priorities, but this is going to be on the Tier 3 companies, not on the Tier 1 or Tier 2 companies.

Okay. We have some questions as well from [indiscernible] Investments. Thanks for the presentation. Four questions, if I may, some of them are answered by the way. Should we accept any dividend payment from Migros? This was answered. Considering the deleveraging process, do you have any strategy to expand into a new business? Regarding -- the third question is regarding CCI, do you plan to enter into a new country? And finally, how the things are going for the top projects? And this was also partially answered as well. Any complete production target for this year and onwards for the projects will be appreciated?

For the CCI part, I can easily say that if an opportunity arises for a new territory, we will be in a position to invest. So CCI has that ability, has that balance sheet strength. So we may invest in new territories if an opportunity, of course, arise. It's not 100% under our control because this is a Coca-Cola controlled business in general. For the questions related with whether at the holding level, we are planning to enter a new business. For the time being, I can say that no. So -- so our focus is in our existing operations. Togg is coming. So as I mentioned, we are waiting for that to create value for the Group. And for the time being, no major things to invest for the foreseeable future.

Okay. This ends our call. Thanks for listening and see you at our next conference call.

Thank you for everyone. Bye-bye.

Thank you for participating. Thank you very much. Bye-bye.