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

Hello, everybody. This is Mehmet Colakoglu, IR Director at Anadolu Grubu Holdings. Welcome to our First Half Financial Results Webcast and Conference Call. Thank you for joining us today. I have here with me Mr. Burak Basarir, our CEO; and Mr. Onur Çevikel, our CFO. We will first listen to Mr. Basarir for the key highlights of first half 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 Teams live event, meaning that you will be in listen-only mode for the entire session. [Operator Instructions]. Just before we start as a disclaimer in accordance with the degree of Capital Markets Board, our first-half financial results are reported using TAS 29 financial reporting in hyperinflationary economies. The financial figures in this presentation and all compared to amounts for previous periods have been adjusted according to the changes in general purchasing power of Turkish lira in accordance with TAS 29, and are finally expressed in terms of purchasing power of Turkish lira as of June 30, 2024. However, certain items from our financials are also presented without inflation adjustment for information purposes. These unadjusted figures are clearly identified as such. Okay. I will now leave the floor to Mr. Burak Basarir, and please don't forget to write your questions as you listen to our presentation. Thank you.

Thank you, Mehmet. Good morning, and good afternoon to everyone. Welcome to our first half 2024 full year webcast and conference call. Before starting the presentation, maybe just a few words on the overall economy and general consumer space. We continue operating in a challenging environment in Turkey and most of our other markets. Most consumers feel the impact of high inflation, lower purchasing power and declining consumer confidence. In some of our markets, we have also experienced political headwinds as well. In Turkey, specifically, the cumulative impact of substantial inflation over the years, coupled with recent data on weakening consumer confidence and unemployment figures, further underlines, the challenges consumers face as they see increase strain on their budgets. Additionally, the absence of midyear minimum wage adjustments, a significant factor in consumer purchasing power is expected to lead a decrease in consumer spending towards the end of the year. Besides macroeconomic factors, geopolitical and domestic headwinds contribute to the challenging environment and impact consumer spending in many of our markets. In this exceptionally challenging environments, we will continue focusing on what we know the best and keep creating value for all of our stakeholders, including our consumers, customers, shareholders, community and obviously our people. Now let me briefly move on to our business performance. Looking at the first half on a positive note at the holding level still we managed to grow our business with the top line growth in purchase, while maintaining a healthy balance sheet structure as our balance sheet discipline continues. In addition to the top line growth we have delivered, which is in line with our expectations, we have seen some cost pressure on the employment cost line, impacting our operating expenses. Purchasing power-related challenges also affected our pricing decisions impacting our gross margin in some of our operations. And obviously, the tighter financial environment also impacted our bottom line figures. So about the margins is improving, is proving to be a challenging year. Despite all these uncertainties and challenges we have just mentioned, we have benefited from our diverse operations both in terms of sectors and geographies, relatively more defense business, strong market position, unmatched execution capabilities, frugal mindset and proactive balance sheet management. Our key focus in defensive FMCG category and delivered balance sheet put us in a better position for potential weakness in consumer sentiment and tighter financial conditions ahead in most of our markets. To remind you, our beer soft drink and retail businesses make up about 90% of our revenues, while our net debt to EBITDA stands at 0.7x as of the second quarter of 2024, which was as high as 3.6x during the 2019. So where we see the challenges ahead, we remain to be proactively ready for the further challenges. On Beer and Migros despite all these difficulties, we have raised our full year top line growth guidance for Beer and Migros, following a solid first half performance. In Migros, we have also increased our margin guidance. On CCI, despite a generally positive operational performance in first half 2024, we have revised our volume guidance and lowered in the second half of the year due to existing headwinds we see in some of our operations. I will be discussing these in more details in the coming slides. Our Auto segment was naturally affected negatively by slow in domestic automotive demand and macro headwinds while cycling a record high performance of last year. However, the Auto segment represents a relatively small part of our business, accounting for less than 10% of its revenues and EBITDA. So let's move on to the next slide and then maybe briefly touch base on our core businesses. On Beer, despite a very challenging geography, we have delivered solid results compared to the last year. Remarkable volume growth supported by the right product mix, pricing initiatives and excellence in execution. Beer volumes are better than what we have expected driven mainly by Russian operations. In Russia, we have benefited from market volume growth and also gained market share along the way. On the other hand, cost challenges were primarily driven by the logistic costs, which created pressure on our margins, but OpEx and cost management minimized the overall impact on our bottom line. In line with our year-to-date performance and second half expectations, we have increased our volume guidance while maintaining our margin guidance and expect a higher absolute EBITDA from our initial guidance that we have shared with you. On soft drinks, we saw better volume performance in the second quarter than in the first quarter, and volume continues to grow despite macro challenges that we have seen but the volume growth was generally lower than expected primarily due to international operations in the first half. Our continued focus on revenue growth management and our emphasis on OpEx management have supported our results. Despite the significant headwinds we faced and our strong base, we have recorded margin expansion in the first half of the year. Without TAS 29, the EBITDA margin reached to 20.4%, the highest second quarter's margin of the last decade, a focus on top line growth and operational efficiencies. We also see some potential risks in further increasing prices while maintaining our consumer base. So we have revised our volume and margin guidance. We are cautious about second half due to lower purchasing power expectations, continued high inflationary account environment and potentially limited pricing opportunities in our geographies. On Migros, solid growth continues. A competitive pricing strategy increased customer traffic in online and physical stores and new store openings support our top line growth. We continue to gain market share from both organized and traditional channels. On financials, net income decreased in the first half due to increased employment costs, interest rates and due debt charges. However, we are more optimistic about second half margins as we expect employment cost pressure to ease on the financial statements. At the same time, a deceleration in inflation will gradually decrease the gap between the margins of TAS 29 adjusted and nonadjusted financials. We also continue to work on various efficiency measures to support our gross margin. We have raised our full year margin guidance for Migros in line with our initiatives. We are maintaining financial discipline and focus on our balance sheet. Deleveraging has been successful. Migros now has a positive net cash position and pays dividends. So Migros' overall story remains unchanged, and the company has undergone a remarkable transformation in the past 5 years. On the automotive side, it is impacted, as you all know, by the slowdown in domestic demand and increased competition in different segments following the last year's strong performance. Revenue and EBITDA were down in first half, cycling a record high 2023 figures. Despite the industry's overall challenges, our business have performed in line with our expectations in the first half, supported by our balanced geographical and sectoral breakdown, operational performance and disciplined financial management. Moving on to Slide 6. Now let me talk about the first half results. As you can see, we have grown our top line by 4.4% in the first half, led by our retail and beer businesses. Excluding TAS 29, revenue was up by 77.5%. EBITDA for the first half was down by 9.2 percentage points. Excluding the TAS 29, EBITDA was up by 72.5%. Looking at our bottom line, net income at the combined level in first half was TRY 14.6 billion versus TRY 24.3 billion a year ago. At a payment consolidated level, net income was TRY 4 billion in the first half. And excluding TAS 29 accounting and one-off gains, net income increased by 1.9% on a year-on-year basis to TRY 3.1 billion. Net debt to EBITDA is at 0.7x at first half on a proactive balance sheet management versus 0.6x at the end of 2023. Again, it is worth underlining that excludes the effect of TAS 29, our net debt-to-EBITDA ratio, which was 3.6x in 2018 decreased to 0.5x by the end of second quarter of 2024. So it is quite a turnaround that we see here. So let me move on to the next slide, which I'll talk about the key financial indicators. This slide basically shows 3 financial indicators presented in both TAS 29 and without TAS 29 for comparison purposes against last year. As we have discussed in previous slides, on a consolidated basis with TAS 29, we have recorded 4.4% revenue growth, but have also seen our EBITDA net income contract by 9.2% and 58.3%, respectively. Without the TAS 29 impact, we have reported 7.5% revenue growth, 72.5% EBITDA growth and 1.9% net income growth excluding the one-offs. Let's move on to the next slide and then this slide basically shows our business segment contributions to our business. Retail had the highest revenue share at 50%, followed by the soft drink segments share of 26% and the beer's share of 15%. Soft drinks had the highest contribution of EBITDA, 54% while beer and the Migros has consolidated about 28% and 12% of EBITDA, respectively. As you can see, our 3 primary operations, Beer, soft drinks and Migros accounted for about 94% of our EBITDA. The chart on the right-hand side show the share of our international business share. In the first half, 30.4% of our consolidated sales were from our international businesses. The share of international businesses declined to 28.3% in the first half '24 due to strong Migros topline performance and relatively strong TL and weaker performance of CCI International businesses. On the other hand, the share of international EBITDA also declined faster from 67% in the first half of 2023 to 60% in the first half of this year. The share of international net income also decreased from 48.6% to 37.3% this year. This drop in share of international business, EBITDA and net income is mainly driven by relatively strong domestic margins so far beer and soft drink businesses and also relatively strong TL against U.S. dollars. Now I would like to turn the call to Onur, who will give you an overview on our segments performance.

Thank you very much, Burak. Good morning and good afternoon, ladies and gentlemen. I would like to welcome all of you in our first half 2024 financial results conference call. It's a great pleasure to be with you here today. Before starting with segments, I would like to mention that the financial figures you will hear in this presentation will be in line with TAS 29 financial reporting standards in hyperinflationary economies, unless otherwise stated. As usual, I will start with the Beer segment results, we had a successful first half in 2024 for the Beer segment. Our volumes for the Beer Group reached to 18.9 million hectoliters with a growth of 9.3%, this pleasing volume growth is most attributable to our 2 major markets, strong performance, Russia and Turkey. Beer Group revenues for the first half 2024, reached to total TRY 1,130 million with a growth of 1.6% compared with the same period of the prior year. This growth would have been higher if there were no mismatch between the inflation rate and the devaluation, depreciation rate of international operations reporting currencies against TL. When we look at the revenues without TAS 29, revenues reached TRY 41,106 million with a strong growth of 73.9%. Profitability on the other side, as measured by EBITDA has reached TRY 5,543 million in first half 2024 with a decline of 22.4%. The decline is most attributable to TAS 29 effect. International operations operating expenses being under pressure due to higher transportation costs in Russia and other regions. On the other hand EBITDA without TAS 29 was recorded at TRY 7,111 million with a strong growth of 15.5%. Net income for the Beer Group was TRY 4,153 million, with a 26.7% decline. This decline is mostly attributable to TAS 29 application that takes in Russia and higher interest rates in Turkey. On the other hand, excluding TAS 29, net income has reached TRY 3,230 million, with a strong growth of 101.1%. Also, free cash flow for the Beer Group for first half 2024 was TRY 3 billion, which makes us particularly happy. It's also important to mention that Beer Group is in net cash position of TRY 91.8 million. So continuing with the Soft Drinks segment, total sales volumes for first half 2024 reached to 793 million unit case with a decline of 1% compared with the same period of prior year. Robust performance of Azerbaijan continued growth in Turkey and improved platforms in Pakistan have paved the way for a better performance in the second quarter. Our net sales was at TRY 66,119 million for the first half 2024, with a decline of 2.7%. On the other hand, without TAS 29 effects revenues were recorded to be TRY 64,520 million with a growth of 66.2%. Our EBITDA for CCI reached to TRY 13,168 million in first half of '24 with a growth of 3.4%. Despite our cautious stance on price increases, again -- and cost controls have supported our profitability as mentioned by Burak. EBITDA, excluding TAS 29 for the segment was at TRY 14,012 million with a strong growth of 75.8% in first half '24. Our net income for the segment reached to TRY 8,352 million with a 5.1% growth. Strong operational performance, cost controls and monetary gains were the main contributors. Excluding TAS 29, net income was at TRY 5,486 million, with a strong growth of 16.3%. Going ahead with our Migros operations, we continued our goal in number of stores and reached to 3,490 stores in first half 2024 with an increase of 390 stores. Online serving stores also reached to 1,185 stores with an increase of 157 stores. Net revenues from Migros in first half 2024 was recorded at TRY 121 million -- TRY 104 million, with a strong growth of 11% compared with the prior year same period. While online sales supported the growth in turnover the competitive pricing strategy in all categories, also resulted with the higher market share. Net revenues, without TAS 29 reached to TRY 113,521 million with a strong growth of 88.8%. EBITDA for Migros in first half 2024 reached up to TRY 3,976 million, with a growth of 6%. Despite the pressures in operating expenses, Migros succeeded to grow EBITDA in absolute terms. Excluding TAS 29, Migros EBITDA reached to TRY 9,199 million, with a strong growth of 120%. Net income from Migros was recorded at TRY 1,950 million with a decline of 63.7% in first half 2024. The decline is mostly attributable to rise in operating expenses, particularly impact on expenses rise in interest rates and due to due date charges. Excluding TAS 29, net income was at TRY 1,072 million with a decline of 28.5%. As you well know, Migros is in net cash position, which particularly leases us. Talking about the Automotive segment. The automotive segment was naturally affected by the slowing domestic automotive market growth due to financial policies in the country and increasing competitive conditions following last year's very strong performance. Net revenues for the Automotive segment was recorded at TRY 20,252 million with a decline of 4% in first half 2024. Without TAS 29, the sales revenue recorded at TRY 18,873 million with a growth of 61%. EBITDA for the segment was recorded at TRY 1,056 million with a decline of 60.1% in first half 2024. Without TAS 29, EBITDA for the period was recorded at TRY 2,369 million with a growth of 19.4%. Concluding for the Auto segment, net income was recorded at TRY 515 million with a decline of 77.4%. Without TAS 29, net income was recorded at TRY 1,109 million with a decline of 21.7%. Continuing with agri industry, Energy segment, just the technical reminders as of April 11, 2023, on the later upturn, financial results are to be consolidated within the Agriculture, Energy & Industry segment, therefore 2023 results includes only May and the following months results. Net sales of the segment was at TRY 2,068 million with a growth of 8.8% in first half 2024. Without TAS 29, revenues were recorded at TRY 2,030 million with a growth of 87%. EBITDA for the segment was at TRY 428 million, with a decline of 19.7%. On the other hand, excluding TAS 29, EBITDA was at TRY 522 million, an increase of 52%. Net income for the period was recorded at TRY 158 million for the period. Without TAS 29, net profit was at TRY 314 million with a growth of 460%. Well, a little bit talking about our balance sheet and the deleveraging report. As you well know, financial discipline and free cash flow management are very critical and priority items for our growth. We are happy to have a net debt-to-EBITDA ratio of 0.71x in first half 2024. Our consolidated net debt was at TRY 30.1 billion, which in euro term corresponds to EUR 854 million. Without TAS 29, our net debt to EBITDA was recorded at 0.5x in first half 2024. Positive free cash flow generation, tight balance sheet and working capital management, idle asset optimization, proactive risk management were the main contributors to help the balance sheet and deleveraging. When we look at the numbers in 2018, our net debt-to-EBITDA had reached 2.8x even in the year 2018 as a period we have seen this number going up to 3.5x. Now we are at a healthy 0.5x with the financial framework and the financial discipline that we have. So finally, talking about our financial priorities that we keep on or keeping is the tight balance sheet management and working capital management, positive free cash flow generation, concentration on profitability and efficiency improvements, making sure that our risks are actively managed and deleveraging as we go further in there. So this concludes my presentation. I would like to leave the stage to Burak for his closing remarks.

Thank you, Onur. Let me underline a couple of things on the closing slide. We will obviously continue to focus on creating value for our stakeholders by proactively managing our business through inflation and economic challenges ahead. As we said, we are also close to monitoring consumer sentiment in Turkey and all of our international markets to ensure we protect our consumers and customer space while delivering a strong financial performance. In the past, we have faced many volatile business environment in the markets that we operate. However, in the mid- to long term, we have consistently achieved improving our results in every markets we are in. Despite all of these challenges, we are facing today in most of our markets, we are still able to grow our business in the first half. And our balance sheet remains solid despite the many challenges we had to manage through the last 5 years. So on undeniably, there is a challenging environment with margins, cost pressures and the pressures on further pricing due to affordable to concerns. But on the other hand, there is still a lot of opportunities in every market and every business we operate in. Operational and financial priorities are defined and financial discipline is in place. Again, key theme is our free cash flow generation, utilization of idle assets, deleveraging and the tight balance sheet management. Finally, we continue proactive risk management through the inflationary headwinds and political and macro challenges that we're facing in our markets. The key focus area is that we want to pay attention moving forward our -- we will prioritize creating value for all of our stakeholders, including our consumers and customers, our community, our shareholders and obviously, our people; second, we will continue to focus on quality growth while focusing on the opportunities across all of the geographies and the sectors we operate; thirdly, we remain dedicated to achieving our sustainability goals and advancing our environmental initiatives; fourth, we will continue drive the digitalization of our enterprise, ensuring we stay ahead in a rapidly evolving technological landscape; five, maintaining financial discipline will be crucial as we manage resources efficiently and strategically. Last but not least, on the sixth, ongoing investments in our people and our talent we are #1 priority in nurturing the talent that drives our success will be our utmost priority in our group. So with that, I'll leave the floor for Q&A and thank you for attending our webcast today. Thank you.

Our first question is from [indiscernible]. Thank you for the presentation. As you imply a quick pick up for talk, we calculate your net loss coming from is approximately TRY 800 million. Could you give some color about the future expectations and the timing of possible breakeven point for auto operations.

Well, thank you very much for the questions. As we have talked about our Automotive segment. The same is valid for both Togg, wages that the automotive industry and the Automotive segment has been naturally affected by the slowing domestic automotive market growth both due to financial policies applied and increasing competitive conditions following last year's very strong performance in last year. And talking about clog, Togg is a new company is just ramping up itself, which is really -- has really successfully started its production last year and sold about 20,000 cars last year. We expect Togg to continue its successful production performance and continue as a very new and being account with bright start-up company. We do expect that in the coming years, Togg is steadily going to increase its production volumes and start generating value. Thank you very much.

And our second question is from [indiscernible]. What is the total dividend amount you received from the auto companies in 2024 and your dividend income expectation for 2025.

Well, thank you very much for the question. I think this is a very valuable question. You might remember that in the past years, the company is paying dividends to holding had been as low as 2 or 3 companies. Right now, we have increased that number and having many companies, almost all our subsidiaries being able to pay dividends. On the automotive side, as per the dividends received by the holding company from the automotive companies that we have has been close to TRY 1 billion, which we particularly are happy with due to the extraordinary performance that we had in 2023. Yet, we are not sharing any guidance on what the dividend might be. But I think it's worthwhile saying that we expect almost all of our subsidiaries to have the rhythm of paying dividends and sustainably continue paying dividends, obviously, in some companies at some economical conditions. These dividends may vary from high to low or from low to high, but we expect to keep on the rhythm of paying dividends, both in our subsidiaries as well as the holding company. Thank you very much.

Okay. This ends our webcast. Have a nice week, everybody, and see you at our next webcast. Bye.

Thank you very much.