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

Hello, everybody. This is Mehmet Colakoglu, I am Director at Anadolu Grubu Holding. Welcome to our 2023 Financial Results Webcast and Conference Call. Thank you for joining us today. I have here with me Mr. Hursit Zorlu, our CEO; Mr. Onur Çevikel, our CFO. We will first listen to Mr. Zorlu for the key highlights of 2023 and his general overview. And later on, Mr. Çevikel will provide brief analysis on segmental performance. I'd like to remind you that this is a Team's Live Event, meaning that you will be in listen-only mode for the entire session. [Operator Instructions] Before we begin, please kindly be advised that accordance with the decree of Capital Markets Board our 2023 financial reports are reported using TAS 29 financial reporting in hyperinflation economies. The financial figures in this presentation, all comparative amounts for previous periods have been adjusted according to the changes in the general purchasing power of Turkish lira in accordance with TAS 29, and are finally expressed in terms of the purchasing power of Turkish lira as of December 31, 2023. And however, to supplement the information we have been provided in the first 3 quarters of 2023, which were reported without inflation accounting and to offer insights into our performance, we will also present certain items from our financials without inflation adjustment. These unaudited historical figures are clearly identified as such. Any financial figures lacking such clear clarification are reported in accordance with TAS 29. Okay. I will now leave the floor to Mr. Hursit Zorlu, and please don't forget to write your questions as you listen to us.

Thank you, Mehmet. Good morning, and good afternoon to everyone. Once again, welcome to our 2023 Full Year Webcast and Conference Call. Now before I start with fixed feelings today, I shall inform you that this webcast is my last update on behalf of Anadolu Group Holding. As you know, and we announced earlier, after 40 years at Anadolu Group, I will be retiring as of April 1 and Mr. Burak Basarir will move on to Anadolu Group Holdings as the new CEO of the company. Burak Basarir having more than 25 years in the group, who was the CEO of Coca-Cola Icecek for more than 10 years before moving on to Anadolu Group Holding, and he will bring once the amount of experience in FMCG to Anadolu Group Holding. I wish him success in his new position. For me, I have been with the group since 1984, started at marketing department as a marketing specialist at Anadolu Efes, having 24 years in different positions, including Business Development, Director and CFO Anadolu Efes. I moved to the holding as a CFO. At the holding level, I became the Deputy CEO. And since February '17, I have been the CEO of Anadolu Group. So in summary, a great journey with this amazing group, I must say. I will still remain around not at sea level, but will remain at the Board of all Anadolu Group companies. Once again, I sincerely thank our people, my colleagues who are having a positive mindset being highly motivated as we strive to realize our vision to be the best FMCG Holding in Turkey and in our geography. I would also like to thank our investment community and all stakeholders for sharing and supporting our vision of the future as well. Now moving into business. Looking at 2023, Again, it was a year with many important events both in Turkey and in the world, including economic difficulties, natural disasters and geopolitical tension that set the global agenda. Obviously, we still keep the memories of the earthquake, which deeply impacted just almost a year ago. Geopolitics, on the other hand, is unfortunately not improving and continues to create many uncertainties. On the inflation front, we have seen some improvement, but still, there is a long way to go. All these are having a direct impact to our operations from energy cost to commodity prices inflation to high risk rates and cost of doing business to consumer prices. Still, despite all this, I can say that we have completed another successful year where we met our goals and actually on certain fronts, we did better than expectations. And our guidance driven by effective financial and operational strategies that we have implementing, especially in the last couple of years. So moving on to our presentation. Operational snapshot up for the year. Despite all these uncertainties, I just mentioned, we have recorded strong 2023 results. On the back of successful operational performance, diversified operations, strong market positioning, execution and proactive balance sheet management. Results exceeding expectations in 2023 with upward guidance revisions on multiple segments throughout the year, especially bigger in auto segments finished the year better figures that we have expected. Also, strong Soft Drinks margins was again a nice positive surprise for us and investors. Deleveraging continues on strong balance sheet management and solid cash generation. Net debt down to as low as 0.6x at the end of 2023 versus 0.9x at end of 2022. Purely Financial side, I must also say that our team has also done an excellent job, as always, with its consumer-oriented approach, focusing on right product mix, pricing strategies, quality growth, disciplined OpEx which have supported our operational performance at the end of the day. The automotive segment, obviously, a historic year on domestic and international sales with the segment increasing its shares in the overall business of Anadolu Group, and some exciting news in terms of new opportunities as well. We completed Bangladesh acquisition on the Coca-Cola side. We are growing with new formats, new innovations with Migros and TOGG now on the road since March 2023. Slide 3. Now briefly touching on our core business lines. Starting with Beer. Despite a very challenging geography, results once again exceeded expectations. Remarkable growth significantly outpacing our initial expectations on the back of right product mix, pricing strategies and excellence in execution. Beer volumes are better than expected, driving mostly by Turkey, but also on recovery in volumes in Russia as well. Despite a very strong pace of 2022, margin expansion continued in 2023. We have generated strong free cash flow with strong probability and effective working capital management. On Soft Drinks, exceeded $4 billion mark revenues for the first time and margin expansion in 2023 was significantly above our guidance at the beginning of the year. Volumes are unfortunately impacted by natural disasters, economic challenges and political unrest in the neighboring countries. But the key thing here is we continue to focus on quality growth with an eye on product mix and operational efficiencies. And as such, on a positive, EBITDA margin in dollar net revenue per unit case and dollar earnings per share without impact of inflation accounting reach decade high levels. We also completed the acquisition of the Coca-Cola Bangladesh Beverages. In the -- which has this 12th country in our operations, making CCI's operating region, the third largest population served by a Coke bottler. Also, I would like to underline the very strong performance of Uzbekistan, the newest country for CCI and the champion for delivering the fastest growth among all CCI countries with 26% volume growth in 2023, driven by our improving distributor structure, consistent cooler investments and better execution capabilities. Now on Migros, solid growth continues. Competitive pricing strategy, increased consumer traffic in online and physical stores and new openings supporting top line growth. We continue to gain market share and managed to successfully compete against discounters. Focused on balance sheet, financial discipline continued and deleveraging is paying off. Migros is a net cash position and very recently announced a sizable increase in dividends versus last year. On the Automotive sector, impressive results, I can say, driven by positive sector dynamics in both domestic and international markets. Improvement in leverage ratios in the Auto segment as well from revenue to bottom line deleverage. It has been an excellent 2023 for the Auto segment while bottom line in the auto segment almost tripled even under inflation accounted numbers. So on the overall, despite many challenges, we have, again, done a very good job, and we have completed 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. Slide 4. Now moving on to our financial results of 2023. We have managed to grow our top line by 17.5% in 2023, led by Migros and Automotive segments, which have recorded a solid 29.3% and 40.2% revenue growth, respectively. Consolidated EBITDA was up by 10.9% year-on-year in 2023. This time led by Auto and Soft Drinks segments. Looking at our bottom line, net income in 2023 at a combined level was TRY 49 billion level versus TRY 37 billion a year ago. At the parent consolidated level, net income was TRY 19.6 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 losses on beer operations and McDondald’s sales last year. Bottom line was still a solid TRY 19 billion in 2023 versus TRY 14.7 billion in 2022. 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 declining leverage ratios. Through these measures, despite the depreciation in TL throughout the year, we have managed to record significantly better net income versus last year. Free cash flow is also a key focus area for us as always. We have generated TRY 16.7 billion free cash flow in 2023 versus TRY 12.4 billion in 2022. On strong operational performance, free cash flow and successful balance sheet management. Likewise, we have managed to bring our leverage ratios to lower levels despite TL depreciation. Net debt to EBITDA is at 0.6x as end of 2023 on the back of strong free cash flow, proactive balance sheet versus 0.9x at the end of 2022. So clearly, we continue to achieve very strong results on this front. Our balance sheet is at its lowest and strongest levels for the last year. This slide shows our consolidated results in graphics. In this slide, we show financial presented in TAS 29, and also without the impact of TAS 29 to ensure comparability with previous years and to facilitate analysis of our performance relative to our 2023 guidance. As we have discussed in the previous slide, on a consolidated basis with inflation accounting, as we have recorded 17.5% revenue. 10.9% EBITDA and adjusted 25.6% net income growth. Without the impact of TAS 29, we have recorded 80.3% revenue growth, 82.4% (sic) [ 82.2% ] EBITDA growth and 130% net income growth. So without the impact of TAS 29, we have met and exceeded expectations and with TAS 29, obviously, some new numbers for the investment community as well, but the trends, as you can see, a solid top line growth, operational performance and strong balance sheet. This slide shows our segmental sales, EBITDA breakdown and our international exposures. Migros had the highest share in revenues at 48% followed by Soft Drinks segment share of 27% and Beer share of 15%. In EBITDA, Soft Drinks had the highest contribution with 80% (sic) [ 50% ]. Beer and Migros constituted 29% and 11% of EBITDA, respectively. As you can see, our 3 main operations, Beer, Soft Drinks and Migros accounted for around 90% of our EBITDA. Chart on the right-hand side also shows our international exposure. While 33% of our consolidated revenues were from a brought in 2022, this portion decreased to 25.7% in 2023 due to strong Migros and Auto segments performance in Turkey. On the other hand, the share of international EBITDA also declined from 70% in 2022 to 62% in 2023. The share of international net income increased from 25% in 2022 to 29% in 2023. Now there are a couple of things worth highlighting here to better understand the breakdown among revenues, EBITDA and net income in inflation accounting. Firstly as a result of implementation of TAS 29, only in domestic operations, as you know, the EBITDA margins of our domestic operations decreased according to reporting without inflation accounting, but there are no effect on international business EBITDA margins. Secondly, the net profit margins of our domestic operations increased as a result of monetary gain reported under inflation accounting, while net income margins our international business did not change. And as a result of this, the share of domestic operations in total EBITDA decreased, but domestic share in the total net profit increased. Now at this stage, I would like to hand over to Onur, who will give you overview regarding the performance of our business segments.

Thank you, Hursit. Good morning, and good afternoon, ladies and gentlemen. Once again, welcome to Anadolu Group's Financial year 2023 financial results conference call. As always, it's a pleasure to host you today. First, I would like to go to briefly our segment results. And then talk about overall financial position of the consolidated group and finally, talk about our financial priority. Before starting, it's important to mention that the financial results that we have announced are in compliance with the reporting standards of IFRS, including IAS of TAS 29 standard, which regulates strongly so-called inflation accounting. In this presentation, I will refer to these results mostly, but I also will refer to our numbers, excluding inflationary accounting standards in order to give better comparability since our 9 months results were reported excluding inflationary accounting standards. Starting with our segment results. As usual, I will start with the Beer segment. Beer Group consolidated revenue reached -- consolidatedly reached 35.7 million hectoliters with a growth of 5% compared to the same period of prior year. Both international operations as well as Turkey operations contributed to this call. Beer Group net sales was TRY 58,003 million for the financial year 2023, which represents a decline of 6.3% compared to prior year. It's important to mention that our international revenues were down by 14.7% for this period, which is attributable to mismatch between the inflation rate in Turkey and the devaluation appreciation rate of international operations report in currencies against Turkish lira. Our net revenue, excluding the TAS 29 was recorded to be TRY 55,501 million with a 50.2% growth. Our EBITDA for the Beer group was TRY 10,671 million with a decline of 3.6%. On the other side, EBITDA excluding TAS 29 was at TRY 11,688 million with a growth of 59.7%. Beer Group net revenue was recorded at TRY 12,293 million with a strong growth of 35%. The increase was most attributable to high monetary gain as a result of inflation accounting. Excluding inflation accounting FX, net income was recorded at TRY 3,698 million. Continuing with Soft Drinks segments, even though volumes were impacted by natural disasters, economic challenges and political unrest in neighboring countries focused on quality growth count. Our net sales has reached to TRY 101,042 million with a growth of 8.4% in financial year 2023. We are proud to have exceeded the TRY 4 billion mark in consolidated revenue for the first time. Revenue represents a 70% growth, excluding TAS 29 inflation accounting adjustments. EBITDA for the Soft Drink segment was recorded to be TRY 18,127 million with a strong growth of 13.7%, in financial year 2023. Timely price increases, disciplinized cost control, mix impacts, hedges positively contributed to profitability. EBITDA without TAS 29 was recorded at TRY 18,944 million with a strong growth of 85%. Our net income was recorded at TRY 20,580 million with a very strong growth of 48.3%. Without inflationary accounting, net income was at TRY 8,306 million with an increase of 91.8%. As you all know, both balance sheet management and free cash flow is a major priority for our group companies. We are happy to continue positive free cash flow generation in the segment with TRY 3,900 million in financial year 2023. Well, continuing with Migros, Migros delivered a strong operation performance in 2023, achieving its new store opening targets. The total number of stores reached 3,363 stores with an increase of 455. Total online service stores reached 1093 stores. Migros also managed to increase its market share in FMG. Net sales revenue for Migros was at TRY 181,674 million with a strong growth of 29.3%. Excluding the inflation accounting adjustment, net revenue was at TRY 145,801 million (sic) [ TRY 145,810 million ] with a strong growth of 95.7%. EBITDA for the year '23 for Migros was TRY 3,873 million, with a decline of 11.5%. Excluding TAS 29 adjustments, EBITDA was TRY 10,371 million with a growth rate of 65%. Net income was recorded at TRY 8,829 million, with a slight decline of 3.4% compared with the same period of prior year. Excluding TAS 29, our net income was at TRY 5,905 million with a strong growth of 129.7%. As you well know, we are better focused on balance sheet management. Financial recipient framework continues for Migros. We are particularly happy to have a net cash position in Migros by the end of 2023. Net cash position for Migros was at TRY 10,798 million, excluding the IFRS-16 impact. Continuing with the Automotive segment. 2023 was a very successful year for our Automotive segment. Our net sales grew by a strong 40.2% reaching up to TRY 36,993 million in financial year 2023. A successful operational performance of both Anadolu Isuzu and Çelik Motor were the main contributors to this performance. Excluding TAS 29, the sales revenue was recorded at TRY 30,064 million, with a very strong growth of 113%. Automotive segment also continued contributing to the overall consolidated profitability of the book. EBITDA for the segment reached to TRY 3,131 million with a very strong growth of 172.6%. Anadolu Isuzu EBITDA growth was at very strong 290.5% and Çelik Motor EBITDA growth was at 155.6%. On the other side, EBITDA was at TRY 4,588 billion, excluding the TAS 29 adjustments with an even stronger growth of 193%. Net profit for the Automotive segment reached TRY 3,243 million with a very strong growth of 196.4%. Excluding TAS, net profit was TRY 3,031 million. Briefly on the Agri, Energy & Industry segment. As you well know, the segment consists of Adel Energy and Etap Tarim. In 2023, net sales value of the segment was at TRY 3,524 million with a strong growth of 69.5%. Both Adel and Energy segment positively contributed to this growth. EBITDA of the segment reached to TRY 568 million with a strong growth of 35.8%. Very strong contribution of Adel was the main contributor. Net profit for the segment was recorded at TRY 893 million. Talking about the balance sheet and financing. As you well know, balance sheet management, free cash flow management and deleveraging are the major priorities for us. We are very happy to announce that our net debt to EBITDA has been recorded at 0.6x by the end of 2023. Excluding TAS 29, this ratio was at 0.5x. As you might remember, by the end of 2018, this ratio was at 2.8x with the priorities that have been set, we were able to decrease it down to 0.5x gradually. Operating performance, free cash flow generation, balance sheet management, proactive risk management, idle asset optimizations were the key actions taken during this period. Our consolidated net debt for the group was TRY 23,211 million and in Euro term, EUR 711 million. Our free cash flow generation on a consolidated basis was TRY 16,700 million which is the highest ever free cash flow generation, which helped us improve our net indebtedness and have healthy debt ratios across all the segments that we operate. And finally, our 2024 financial priorities. They mostly remain unchanged, being tight balance sheet management. obviously, positive free cash flow generation focus, profitability and efficiency improvements, proactive risk management and as a result, deleveraging. So these are going to be continuing our major financial priorities. So this basically concludes my presentation. I will pass the floor to Hursit then for his closing remarks.

Thank you, Onur. Coming to the last slide of our presentation. There are a couple of points I want to underline. We are proactively managing our businesses through the inflationary headwinds and already completed a large part of our committed hedges for 2024. We are also closely monitoring the recent developments in Russia, especially after the recent events in Moscow. We have once again exceeded expectations and raised guidance on multiple segments that we operate in 2023. We once recorded strong top line growth, solid operational performance with focus on costs and probability. As Onur mentioned, free cash flow generation and tight balance sheet management were again the key themes of 2023, and we are -- we were able to show strong numbers on all these measures. And finally, we are again focused on managing risk proactively, which completed with a strong balance despite the volatilities in financial markets. And last but not least, we have announced a dividend payment of TRY 700 million yesterday, substantially higher than last year and more than 10x the dividend we paid just only 2 years ago. And finally, key areas going forward. We will continue with our consumer-centric approach in our businesses. Digitalization and innovation will remain our key focus, and we aim to be a pioneer in all segments we operate. A key area going forward will also be sustainability. Free cash flow will be the key financial priority. And also at the same time, 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 question from the floor. Consolidated EBITDA of [indiscernible] is realized at TRY 36 billion. Most EBITDA happens to decline sharply due to [indiscernible], net monetary position gains compensates debt loss. On the other hand, [indiscernible] consolidated EBITDA remains high, though debt declined in Migros EBITDA. What would be the norms for the fact to happen? What are the components of the consolidated EBITDA of the [indiscernible]?

Well, let me briefly go to the answer of the question. Obviously, when we look at the numbers, excluding the inflationary accounting, we do see that Migro's EBITDA is also in a growth trend. However, due to the reported standards, we are reporting on the inflationary accounting side, and this has different impacts in different companies and in different industries. Having said this, having a diversified portfolio has its also advantages while other segments like the Soft Drink segment, like the Automotive segment, like the Beer segment, their profitability, both on the EBITDA side as well as on the net income side, has been very strong. Also our geographical diversification helps us have a strong international EBITDA numbers, which also helps us compensate the softness that has been set due to the inflationary accounting on the EBITDA of Migros. So basically, this diversified portfolio both geographically and segmentally has enabled us to overcome any softness that happens in some part of the segments due to some reasons.

And we have a second question, what is the period and ratio metrics of cash flow payments to [indiscernible] for purchasing their 50% share in Anadolu Efes?

Well, thank you for the question. Well, as was mentioned in the conference call of Anadolu Efes. Right now, we are in the approval process of the regulatory bodies for the transaction that we have mentioned in [indiscernible]. So having said this, we had disclosed in our last announcement, that there will not be any immediate cash flows and the payments are going to be dependent on the performance of the business segments that are under question under the deal. So that's why yet, we are not able to give some more detailed information since the agreement is just in the approval process, we hope to answer and give some more details after the approval of the process.

I have a question from Mr Murat. I have three questions. Will there be additional cash outflows related to TOGG in 2024? And how much amount is that to fulfill the commitment? What level do you target for the volume sold on net debt in 2024? Could you give information about the process regarding the acquisition of [indiscernible], the last question was answered I think.

Okay. Coming to the TOGG question, I will answer that. We fulfilled our obligations for TOGG. So we paid all the capital that belongs to us and all the other shareholders also paid all the capital. So there will be no new cash outflow from the shareholders to the TOGG business.

And the other question was on the [indiscernible]?

Targets for 2024?

Well, I mean we don't necessarily disclose a target number for the [indiscernible]. However, we do reiterate our aim to make sure that the, in the mid- to long run, we get rid of the debt on the Anadolu Holding level and become cash positive on the Anadolu Holding stand-alone numbers. Thank you.

We have a question from [indiscernible]. Could you please see give some color on TOGG valuation metrics, if possible?

Currently, on the TOGG side, because it's a joint venture, we cannot disclose the details or the valuation metrics, but we can say that all the parties are happy with the investment and the cars are on the road. So probably, this is the only thing that we can say as a valuation metric at this time being. Thank you.

And [indiscernible] says that Mr. Zorlu. Thank you so much for everything that you did for the company and its shareholders, especially in recent and prolonged turbulent times.

Thank you very much for your kind words. So having 40 years in the group, spending 24 years at Beer and more than 15 years in the Holding level, it's my company. So I will be around. So I will be at the board levels and trying to give you my contribution in that way. Thank you for your kind words.

It's time to end the call now. Thank you for all your kind attention and being with us today, thanks, bye.

Thank you. Bye-bye.