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

Hello, everybody. This is Mehmet Colakoglu, IR Director at Anadolu Grubu Holding. Welcome to our 2023 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 Cevikel, our CFO. We will first listen to Mr. Zorlu for the key highlights and his general overview. And later on, Mr. Cevikel will provide a brief analysis on and segmental performance for the first half. I'd like to remind you that this is a Team slide event, meaning that you will be in listen-only mode for the entire session. [ Operator Instructions ] Okay. I will now leave the floor to Mr. Hursit Zorlu. Thank you.

Thank you, Mehmet. Good morning, and good afternoon to everyone. Once again, welcome to our First Half 2023 Full Year Webcast and Conference Call. The elections that took place in Turkey, uncertainties in global economies, increasing global interest rates, exchange rate movements and inflationary pressures are still making 2023 another challenging year. However, on a positive, there is potential for increasing foreign investors interest in Turkey with a new strong economy team, normalization of monetary policy, which had a positive impact on the risk perception of the country and [ CBS ] premiums. Now moving on to our business slides. Another strong set of results. We managed to grow our top line and EBITDA close to 90% levels above inflation and recorded strong growth figures, even in dollar terms as well. Again, this performance is, again, mostly driven by our solid operational performance, diversified operations, strong market positioning, timely investments, defensive business lines and proactive balance sheet management. We have, once again, exceeded expectations. And our Beer, Auto and stationery segments raised their guidance while CCI and Migros mostly maintained their EBITDA guidances. And that is in a period where in Turkey, we had probably one of our worst natural disasters of our lifetime. The bottom line is close to TRY 3.7 billion for the first half of the year in comparison to TRY 1.5 billion in the same period of last year. On the balance sheet, deleveraging continues on solid free cash flow, successful balance sheet management and asset sales. Operationally, our consumer-oriented approach, price adjustments, strong channel products mix, disciplined OpEx continued to support our operational performance. Obviously, last but not least, Auto segment is doing an excellent job, which recorded results on the back of successful turnaround and positive sector dynamics, both in Turkey and international markets. So just on the overall, again, very strong results in first half 2023, despite a very, very challenging environment. Now briefly touching on our core business slides. On Beer, despite a very challenging geography, results once again exceeded expectations. We have raised our full Beer guidance across the board, volumes, EBITDA and margins. Sixth consecutive quarter with margin expansion on easing cost pressures disciplined OpEx. So quite a solid performance on the margin front. Beer volumes are better than expected, driven mostly by Turkey, but also on recovery in volumes in Russia. Russia include a low single-digit decline in the second quarter from a high single-digit decline in the first quarter and high-teens decline in fourth quarter of 2022. Also, Beer balance sheet is looking better. Net debt-to-EBITDA significantly improved to 0.4x as of second quarter 2023 versus 1.2x at second quarter of 2012 on solid free cash flow. On Soft Drinks, talking about revenue and EBITDA, things are still looking quite solid, driven by timely price adjustments, improving packaging mix and prudent OpEx management. Having said that, there are some volume pressures in Turkey and Pakistan due to economy, base impact, temperatures, price hikes and decline in consumption appetite. We are still doing quite okay in Central Asia, which is partially offsetting weakness elsewhere. Our newest country, Uzbekistan, recorded 25% volume growth in the first half on top of a 30% growth in 2022 and quickly transformed into becoming our fastest country driven by our improving distributor structure, consistent cooler investments and better execution capabilities. Also, despite lower volumes in first half, let me remind you that our focus is also on real value generation. And as such, we have got [Audio Gap] and EBIT per unit case in dollar terms of domestic [ add ] in first half of this year. Coming to 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 continue to gain market share, where we have managed to successfully compete against discounters. Migros continued with deleveraging, and the company is in net cash position and has no short FX position. Migros also recorded solid bottom line in the first half, thanks to strong turnover growth, successful balance sheet management and one-off asset sales. Deleveraging is paying off, and our operational performance continues to remain positive. Also note that Migros paid a dividend for the first time in more than 10 years and has been something everyone has been eagerly waiting for some time. On Automotive sector, impressive turnout, with positive sector dynamics, both in Turkey and international markets, a very strong improvement in leverage ratios in the Auto segment as well. From revenue to bottom line and to leverage, it has been a very good first half for the Auto segment. So on the overall, despite many challenges, our teams have again, done a very good job, and we have completed first half 2023 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 first half 2023. We have managed to grow our top line by nearly 88% in the first half, led by Migros and Auto segments, which have recorded a solid 113% and 125% revenue growth, respectively. Consolidated EBITDA was up by 89% year-on-year in the first half 2023, this time led by Auto and Beer segments, while we protected our consolidated margin despite a number of challenges we just discussed. Looking at our bottom line, net income in the first half, at a combined level, was TRY 9.9 billion level versus TRY 3.7 billion a year ago. At the parent consolidated level, net income was TRY 3.7 billion. And looking at our adjusted net profit numbers, which we exclude the one-off gains from Anadolu Etap consolidation this year and also impairment closes on Beer operations and material sales last year, bottom line was still a solid TRY 3.4 billion in first half 2023, more than 3x 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 and decline in leverage ratios. 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 always a focus area for us. We have generated 8.2 billion free cash flow in the first half of this year versus 5.9 billion in the first half 2022 on strong operational performance, free cash flow and successful balance sheet management. Likewise, we have managed to bring our leverage ratios at lower levels, despite TL depreciation. Net debt-to-EBITDA is at 0.6x as at end of first half 2023 on the back of strong free cash flow, gain proactive balance sheet management and asset sales. As you can remember, these ratios were 2.7x at first half 2019, 2.1x at first half 2020, 1.4x in 2021 and 1.2x at first half 22. So clearly, with our colleagues, we have done a good job on this front. Our balance sheet is at its strongest levels of last year. Slide 4 shows our consolidated results in graphics, which I have mentioned earlier. On a consolidated basis, in the first half 2023, as we just discussed, 88% revenue growth. EBITDA, again, very strong performance and moving in line with our top line growth in the first half 2023 despite substantial cost pressures. And then bottom line, we see a significant rebound here as well. Slide [ 20 ] shows our segmental sales, EBITDA breakdown and our international exposures. Migros had the highest share in revenues at 44%, followed by Soft Drinks segment share of 29% and Beer segment share of 19%. In EBITDA, Soft Drinks had the highest contribution with 39%, Beer and Migros [ constituted ] 28% and 23% of EBITDA, respectively. As you can see, our 3 main operations, Beer, Soft Drinks and Migros, accounted for around 90% of our EBITDA. Charts on the right-hand side shows our international exposures. While nearly 39% of our consolidated sales revenues were from abroad in 2023, this portion decreased to 32% in 2023 due to strong Migros and Auto segments performance in Turkey. On the other hand, the share of international EBITDA also declined but at a much more smaller scale, from 45% to 44.9% in 2023, driven by our strong margins on international Beer and Soft Drinks. 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, 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 Grubu Holdings First Half 2023 Financial Results Conference Call. I'll briefly take you through our segment results. And as usual, I will start with the Beer segment. For the Beer segment, our sales revenue -- our sales volume was 17.3 million hectoliters, with a slight growth of 0.2% compared with the same period of the prior year. Our net sales was TRY 23,637 million, with a strong growth of 58.2% in the first half of 2023. Our EBITDA, on the other hand, grew faster than revenues, reached to TRY 4,726 million, with a strong growth of 93.5%. This increase in profitability is mostly attributable to price adjustments, strong product and channel mix and disciplined OpEx. Our net income of Beer operations were recorded at TRY 1,606 million, with a strong growth of 140.3%. Despite increasing finance cost, more operational profits and cash management supported the net income. As you all know, free cash flow is a major priority for us. Despite increased investments and taxes, we were particularly happy to generate over TRY [ 5 billion ] of free cash flow in our Beer operations in the first half of 2023. Continuing with our Soft Drinks segment, our total volumes were at 801 million unit case in first half 2023, with a slight decline of 2.8%. This decline is most attributable to the challenging first half boding Turkey and Pakistan due to earthquake, [ balance ] foundations and macroeconomic challenges. Our net sales reached to TRY 38,828 million, with a growth of 66% in first half 2023. Improving package mix and timely price adjustments contributed to this core. EBITDA for the segment was at TRY 7,971 million, with a strong growth of 67% in first half 2023, thanks to improved package mix, timely price adjustments and prudent OpEx management. Net income for the segment was at TRY 3,423 million, with a strong growth of 84% in first half 2023. On dealing with Migros, total number of stores reached to 3,100 stores, with an increase of 419 compared to the same period of 2022. Also, online service stores increased by 73 and reached to 1,028 stores. Migros was also able to increase its market share, both in total and modern FMCG. Net revenues in first half of 2023, reached to TRY 60,135 million, with a strong growth of 113%. Continued competitive pricing strategy, increased customer traffic in online and physical stores and accelerating new store openings were the main drivers of the [ robust ] growth in the first half. EBITDA for Migros has increased by 58%, reaching up to TRY 4,181 million in the first half of 2023. The growth has been relatively lower when compared with the sales revenue growth, main reason being [ global gross ] margin as price investments continue in the [ cost ]. With the contribution of one-off gains derived from an asset divestiture, Migros recorded a solid TRY 2,060 million net income, which represents a 244% growth compared to prior year. Finally, it's important to note that Migros has no hard currency exposure and is in a net cash position. Continuing with our Automotive segment, I think it's important to note that Automotive segment in first half 2023, has made a strong positive contribution, both operationally and financially, to our results. Our total sales revenue for the Automotive segment was at TRY 11,720 million, with a strong growth of 126%. Anadolu Isuzu net sales grew by 123%, reaching to TRY 5,024 million. And ﾇelik Motor sales grew by 132%, reaching to TRY 6,191 million. Our total EBITDA for the Automotive segment was TRY 1,987 million, with a strong goal of 238%. Anadolu Isuzu generated TRY 911 million EBITDA, with a 210% growth, and ﾇelik Motor generated TRY 984 million EBITDA, with a strong 291% growth. Our Anadolu Motor also contributed with TRY 94 million EBITDA, with 110% growth. Net income for the segment for first half 2023 was TRY 1,416 million, with a strong 220% cost. Talking about Agriculture, Energy & Industry segment. Before talking about the segment's performance, I believe it's important to mention a change in our reporting. Starting from beginning of May '23, Anadolu [ Etap ] started to be consolidated in this segment. There's no change in our Anadolu Grubu Holdings ownership in Etap [ Tarim ]. Therefore, there's no impact on the consolidated Anadolu Grubu's net income attributable to the parent besides the one-off [ revaluation ] income and taxes in the second quarter. Moving about to the segment's overall performance, our total net sales for the segment grew by 157%, reaching up to TRY 1,089 million here in first half 2020. This strong growth is most attributable to the strong performance of [ Adel ]. Our total EBITDA for the segment reached to TRY 358 million, with a strong growth of 125%. The strong growth is again attributable mostly to Adel with pricing initiatives, cost efficiencies and strong orders. Our net income was at TRY 57 million in first half 2023. Decline in the net income is mostly attributable to one-off taxes to sales of shares of Etap I軻cek to [ Kafkasya ]. Excluding the one-offs, our net income for the segment would be around TRY 180 million. The net profit would be TRY 205 million, if we want to exclude Anadolu Etap [ Tarim ] just for [ contracts ] and purchases. Well, talking a little bit about the balance sheet, as you well know, we, for the last years, are very concentrated and focused on tight balance sheet management, strong free cash flow generation, deleveraging and working capital optimization. It was another quarter for us that we could improve our indebtedness ratios despite the market economic challenges as well as investments, thanks to strong operational performance, positive free cash flow generation, tight balance sheet management and usage of risk mitigation tools. And as [ Hursit ] says, we were able to lower our consolidated net debt-to-EBITDA ratio down to 0.6x. Let me remind you that this range was at 2.7x in first half of 2019 and 2.1x in first half of 2020. Our total consolidated net debt for the group in first half 2023 was at TRY 0.7 billion, down from TRY 2.6 billion back in first half 2019. It is also worth mentioning that there are no FX debt on the holding-only debt level. Continuing with the ratios, we can see that almost all our company's net debt-to-EBITDA ratios either moved in the right direction or remain the same despite macroeconomic challenges and investments, which makes us particularly happy. And finally, as usual, talking about our financial priorities, but our financial priorities mostly remains unchanged and keep on being as focusing on tight balance sheet management, profitability and the efficiency improvements, positive free cash flow generation, derisking our balance sheet and proactively managing our risks and finally, deleveraging. So this concludes my part of the presentation. I will hand over to Hursit 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 2023 and onwards. We are proactively managing our businesses through the inflationary headwinds and already completed a large part of our commodity hedges for 2023 and already doing the hedges for 2024. We have once again exceeded expectation and [ trade ] guidance on multiple segments that we operate. We recorded strong operational performance, with focus on cost and profitability. Free cash flow generation, utilization of idle assets, deleveraging and as Onur mentioned, tight balance sheet management, we -- are, again, the key themes teams looking for 2023, and we are able to show strong numbers on all these measures. We have again been focused on managing risks proactively and completed with a very strong balance fleet despite the volatilities in financial markets, and we will continue to support our communities post earthquake with financial and [ income ] contributions, volunteerism and product donations. Coming to the key focus areas. Going forward, we will continue with our consumer-centric approach in our businesses. The [indiscernible] and innovation will remain our key focus, and we aim to be a pioneer in all segments we operate. Another key area, going forward, will also be sustainability. Free cash flow will be a key financial 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 to us. And now, we will be glad to answer your written questions. Thank you.

We have a couple of questions on the floor. The first one is, can you give more information about CCI's Bangladesh investment? The second one is, could you talk about the latest developments regarding [ ABI ] acquisition in Russia? The third question is do you -- as holding, do you consider entering new business areas? And the final question is any IPO plans for the [ farm ]?

Let me take the first question related with Bangladesh. As a group and as CCI, we are engaged in continuous discussions with Coca-Cola Company for value-enhancing geographical expansion opportunities in this geography that we operate Accordingly, primary discussions have been initiated with the Coca-Cola Company regarding the potential acquisition of Bangladesh. And still, we are discussing with the company for this opportunity, and we believe that it will add value for CCI system.

Well, let me take the second question about the ABI deal. We are focused on closing the transaction and closing the deal. The discussions are still ongoing, and we will let everyone know once they are all concluded and signed. Thank you.

Coming to the question related to the new business lines, whether we are thinking about. Currently, as the holding, our first priority is to continue our deleveraging, becoming a net cash position at the holding entity. So for the time being, there is no specific future to about the new investment areas I can say. We are focusing on our free cash flow in order to minimize or get net cash position at the holding levels, which we are in that [ multi-gen ] stage. Coming to the top question, as you know, we started production this year in April. Now we have top cars on the road. So for the time being, there isn't any specific talks about an IPO for talk. But in the future, of course, the shareholders can talk about that. But currently, there isn't any discussions for that.

We have a follow-up question from [ Ozgur Achikalen ]. What is the total amount invested in [ TOGG ]?

Well, thank you, [ Ozgur ], for the question. The total amount by the end of first half 2023 that our group has invested in [ TOGG ] is around EUR 26 million. And our total capital commitment to [ TOGG ] project is, in overall, EUR [ 115 ] million. Thank you.

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

Thank you, bye-bye.