Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi (AEFES) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Anadolu Efes 4Q 2019 Financial Results Conference call and Webcast. Are present today, Mr. Can Çaka, the CEO; and Mr. Orhun Köstem, the CFO. I now hand over to the Investor Relations manager, Mr. Asli Demirel. Please go ahead.

Thank you. Hi, everyone. Welcome to Anadolu Efes Beer Operations 2019 Fourth Quarter Results Conference Call and Webcast. Before we start, I would kindly request you to refer to our notes in our presentation regarding forward-looking statements. Now I'm leaving the ground to Mr. Can Çaka, Anadolu Efes CEO. Sir?

Thank you, Asli. Hi, everybody. Good afternoon, and good morning to those in the U.S. Welcome to Anadolu Efes Full Year 2019 Results Conference Call. Obviously, this is a very difficult time to have a conference call and talk about the performance of our company. We're very sorry about what's happening in Syria, and we hope that our soldiers who were in Syria to ensure settlement of the citizens. And today, it's heartbreaking, refugees, crises, rest in peace forever. Obviously, we do not know what's happening, and we will not be able to comment on anything for the time being. I'm sure you all share the sorrow that we have and excuse us if we sound a little bit dull through the conference call. We thought of canceling the call, yet we decided to at least have the opportunity to review the numbers in a solemn way. In short, our business delivered a very solid set of results through the year, where we were able to grow our EBITDA ahead of our revenues and revenue ahead of our volumes. Our magic formula worked through the year. We were able to record all-time low working capital, which enabled us to generate a very strong free cash flow, which is also obviously supported with the improved operational profitability. Our net income was also at historically high levels. Furthermore, our Board of Directors had supported our proposal to share it with our stakeholders. Therefore, yesterday, we announced also a dividend proposal amounting over TRY 1 billion. Winning with our brands and our portfolio was our #1 priority at the beginning of the year. And I think we started to reap the benefits of this across all operations. We managed to become the leaders of the operations, leaders in Russia and Ukraine, with deep focus on our brands and portfolio through the year. And we also enjoyed high margins in these operations benefiting from the better operating leverage and synergies of the merger. Furthermore, we were able to expand our leadership by increasing market share in Moldova and Georgia. In 2019, people and talent has been the core of our focus, and it will continue to be so in the coming years. We are building a cultural change in our operations where the organization become leaner with an open communication and focusing on winning culture, capability development within the organization and developing our talents were to key for us. And I can say that we are on a good track on these fronts. We also do our road map toward digitalization and taking an important step in this regard. We envision Efes becoming a digital company within the next 2 years. We have taken important steps in this regard, and we are about to kick a project to update our core enterprise resource management systems and gather all mobile and digital efforts under 7 different programs to lead all these efforts in one direction. Our final area of focus for us is our relentless efforts to optimize our business by lowering our cost, by lowering our spending and CapEx. These efforts are coordinated under zero-based spending, and we are expanding our efforts to different expense categories and to our international operations as well. Now I will be sharing a few comments on our performance, focusing more on the operations, obviously. Then I will pass over to Orhun, who will give much more insights on the financials. Then I'll be back with our priorities for 2020 and for future guidance. During the fourth quarter, we delivered 2.4% volume growth on a consolidated basis. This was as a result of very strong volume performance, especially in our Russian and Ukrainian beer businesses. Turkey soft drinks also contributed to our volumes in the quarter. Our revenue significantly outperformed our volumes, driven by price increases made in all business lines. We also benefited from the favorable mix. Our EBITDA margin expanded over 200 basis points, thanks to the performance of international beer operations as well as the Turkish soft drink operations. We recorded over TRY 1 billion net income in 2019, mainly attributable to the improvement in operating profitability. Now it was also boosted by one of gains like the sale of our Istanbul Brewery land plot. We recorded a very strong free cash flow in 2019. I would once again like to underline that this was a result of significant improvement in working capital across all business lines. As a result, our net debt-to-EBITDA ratio decreased to 1x as of the end of the year. I've already gone through the financials, but what I would like to draw your attention on this slide is the growing share of our international business within the total portfolio. We are benefiting from the diversification of our business and geography, and our portfolio is getting more balanced. As is shown in the figures, the dependence on Turkey is getting less, and the share of international business is increasing. Now 1/3 of our consolidated operational profitability is generated by our international beer operations. Regarding our beer business, the volume growth was almost 5% in the last quarter and 6% on a full year basis. The volume growth was nourished by the solid performance of Russia and Ukraine, but our strategy of revitalizing our core brands also contributed to these brands in every other international operation. You can also see the breakdown of our beer volumes on country basis where 85% of our beer volumes were generated in our international markets. Specifically in Turkey, sales volume was under pressure in the last quarter of the year, just like the previous quarters. The macroeconomic environment as well as the deteriorating consumer confidence have pressurized the whole FMCG sectors throughout the year. Beer market was down by mid-single digit for the year, negatively affected by the high price environment on top of the macroeconomic and the low consumer confidence issues. In such a challenging environment, in line with our commitment to drive value growth, we were able to expand our premium category. We never gave up investing in our brands and even increased our spending on marketing in order to strengthen our touch with the consumers. On the international beer side, we had a robust performance this quarter as well as we had volume increase 7%. The Russian market started the year very strong as you would recall, however, the amount become tougher in the second half partly due to the high comparables coming from 2018 season. The market closed the year with flat volumes, where we were able to outperform the market with high single-digit volume growth. We've managed to become the leader in the market in the second year of the joint venture -- second year of the merger. I'm pretty content with the performance of the operations, where we were also very successful in achieving the synergy targets. Ukraine market was also flat on a year-on-year basis, but our significant outperformance was assisted by the launch of products such as Kozel, Bely Medved, Stary Melnik iz Bochonka coming from the former Efes operations portfolio. In Kazakhstan, Moldova and Georgia, our leadership was maintained. In Moldova and Georgia, revitalizing our core brands paid off yielding additional market share gains, especially in the second half. And in Kazakhstan, we see our competitor discounting heavily and gaining certain market share in Modern Trade especially. However, I'm very confident with the health and standing of our brand portfolio. We have also started to launch AB InBev brands in all of our international operations, extending our portfolio on the premium segment, in line with our commitment to premiumization. Before I leave the floor to Orhun, I want to touch base on the soft drinks performance as well. Consolidated sales volume was up by 1% in the period, being negatively impacted by headwinds in international operations. Turkey and Central Asia, CIS delivered very successful results where we were able to mitigate lower volumes in Pakistan. Macro headwinds had significant impact on Pakistan and Middle East volumes during the year. Now I hand over to Orhun for financial review.

Thank you, Can. Good morning, and good afternoon, everyone. To -- obviously, we're quite happy to be able to report a very strong set of numbers for 2019 for Anadolu Efes. And we're happy that our growth algorithm holds strong top line growth and margin expansion. And this year, obviously, there are a few of the items that I want to point you out about our performance. First of all, obviously, we're quite happy how our international beer business is doing. On one side, this was an important year as the merger in our operations in Russia and Ukraine were concluded. It was quite important that we had a seamless integration process, which was in place. And also, we have been able to deliver a strong set of results from the joint venture, both top line growth and bottom line margin expansion. In other markets of operation outside of Turkey, we still see above average margins, a healthy growth and healthy balance sheet and cash flow generation. So overall, as you see, the International Beer revenue grew by about 32% over an 8% volume growth, whereas EBITDA was a whopping 84% -- approximately 84% growth. And that -- the margin expansion there of 450 basis points obviously made up for the contraction in Turkey. Again, it was a challenging year in Turkey where we've seen the top line contracting. We have been able to reduce the gross profit margin contraction to about 220 basis points. And as far as the marketing and sales expenses are concerned as we have been communicating throughout the year, this year, we have stepped up our marketing expenses and investments in the market. And hence, we've seen in a contracting market and a contracting top line, our EBITDA margin contracting as well. However, together with the strong performance of the International Beer Group overall has performed quite well and over -- just under a 6% volume growth. We've seen revenues up by 30% and a 50-plus percent EBITDA margin growth with a margin expansion of 230 basis points. So that's -- and translating into Anadolu Efes, obviously, together with CCI's performance, we have been able to expand our margins to 120 basis points over a net sales growth of about 22%. So that's pretty much the P&L. And if we get to the details of the EBITDA in the next page, obviously, the volumes in the international brewing business, if you look at the Beer Group EBITDA, has been an important driver of our profitability this year. As I said, we've continued to invest in sales and marketing. That's true for our Turkish business, also would be true for our international businesses. But obviously, we have been able to maintain our G&A expenses. And we have seen about TRY 172 million of conversion coming into our EBITDA this year. And these numbers, as you see, that ends up with TRY 1.768 billion also includes IFRS 16 -- impact of the IFRS 16 that's fully impactful in 2019. Now if you turn to the cash generation, that's -- obviously, we have seen in Anadolu Efes a very strong cash generation of TRY 2.3 billion. And in the beer side and the beer grew TRY 1.3 billion. And obviously, on top of the EBITDA, what was quite important to see this year was how we have been able to manage the working capital. The working capital as a percent of revenue on the Beer Group side is on the negative territory. That's primarily owing to our businesses in Russia and Ukraine. Having said that, without those businesses, we have been able to half the core working capital as a percent of revenue in all other new business. In Turkey, for example, we have been able to convert the cash cycle to the negative territory, about minus 15 days. So that was a very important performance. And what's quite important also is that our gains that we have reached in the inventory days and et cetera are coming from certain initiatives, of which we will continue to see the impact going into 2020. And then if you look at the CapEx in '19 versus '18, it was pretty much at comparable levels, 9.2% in 2019 versus 9.4% in 2018. So that was quite comparable. Also in 2019, obviously, a word to say, there has been a number of sales of the idle assets that we have done. The biggest one of which was the land of our old Istanbul brewery. Basically, that also added back to the free cash flow generation this year. But overall, I think it's important to note that we have a very strong free cash flow generation. And I'm happy to say, if you exclude the land sales, which could be -- which is obviously a one-off for 2019, all the gains that we have achieved under core working capital, we would be able to continue maintaining and building on in the coming years. If you look at the balance sheet piece, which obviously is quite important given how the currency can move, and today is an example of that. As you know, on one hand, we continue to have 57% of our debt hedged through the net investment hedge and cross-currency swaps. In Anadolu Efes, that corresponds to about 69% of our debt on the beer side. And the remaining unhedged portion, the majority is in local currencies and Turkish lira that we believe doesn't create much volatility going forward. What we don't talk about here is obviously the risk management that we do to manage our P&L. You will remember that in 2019, we have hedged about 90% of the FX exposure of our Turkey P&L base corresponding to COGS, OpEx and interest. We already hedged 68 -- 86%, sorry, of that exposure for 2020. And in addition, we've already completed just under 90% of our barley purchases for 2020. So we're pretty much ready for the season. On the commodity side, as you know, we are actively also looking to manage the risk coming from especially aluminum, that's impacting the cans. Starting from 2019, we started to hedge financially, and that's about 60% of Turkey's exposure and about 40% of Kazakhstan's exposure. But if any of you who are following the markets, obviously the aluminum prices are getting soft and softer. And currently, we are enjoying the supplier prices. And we're looking to continue fixing prices potentially on a longer term because in the shorter term, we would very much like to continue enjoying this pricing environment. In the next page and as a result, if you look at how our P&L, cash flow and balance sheet have done, obviously, our net debt-to-EBITDA was at 1x in Anadolu Efes and 0.9x at the Beer Group. So we are -- let's say, we're at the lower end of our policy level, which we said that we intend to keep between 1x to 2x. We hold a majority of our cash in hard currency. In fact, obviously, we also can now receive dividends coming from the international brewing business. That's driven by generation of free cash flow in each of our international brewing businesses, which is good news, versus 74% of that is in our hard currency in -- on the Beer Group side. That's as of end of 2019. And therefore, as you see in the next page, about $115 million of -- worth of debt maturing in 2020. In fact, we already paid down a little over $40 million of that exposure. So we're going to run a very -- continue to run a very healthy balance sheet into 2020 as well. Obviously, the majority of our debt exposure is due 2022, that's owing to the Eurobond. That's maturing by the time and, therefore, we would be between now and then considering how to manage that liability. And obviously, it gives me obviously great pleasure to say we'll see how we can make our 2 investment-grade ratings work in identifying and evaluating the alternatives to do that. And on the next page, in a nutshell, if you look at our financial priorities, as we said, the funding plan for 2020 is on track, and we would obviously would like to maintain our leverage between 1 to 2x and that's the leverage ratios that you should be following. And in fact, we're quite comfortable with the maturity of the debt in 2020. We are managing actively the effects and commodity exposure, and we will continue driving down working capital requirement as we have done so in 2019 that we will continue. The zero-based spending, we are expanding the base between 2019 and 2020, not in terms of categories but also we've expanded and managing it in other countries out of Turkey as well. Our joint venture already has that obviously ability and capability, and you should expect us to continue focusing on our balance sheet health and free cash flow generation with very strong financial discipline in 2020. With that, I'll hand it back to Can.

Thank you, Orhun. You would remember at the beginning of the year, last year, we set our priorities mainly focusing on people, on our brands and corporate wisdom as we define the excellence in the operations, the infrastructure and the digitalization and vision. And obviously on the funding layer, it's always the financial discipline for us. So when we look at these priorities, starting with the brands, I mean these priorities will continue for 2020 as well, and we will be focusing on our core brands. And on the other hand, we'll continue to provide different choices with great taste and quality to our consumers. We are committed to grow in value terms through premiumization by expanding our portfolio as well. Obviously, we will never ever sacrifice the quality, that's #1 priority. And in order to create a lean and efficient process management, we are well aware of the importance of the improvement in corporate wisdom. And I was mentioning before, our priority will be on investing more in people. We believe in the potential of our people. We know how important it's to nurture the talent for the future of the corporate. No need to say, as noted, financial discipline has been one of our priorities, part of our DNA and proven by our solid financial performance. We'll be -- continue to be prudent on CapEx spending, balance sheet management and free cash flow generation. Before going into our guidance, I would like to also comment on another sad issue, on the outbreak of coronavirus. Unfortunately, the globe is facing a very important health issue as well. And we are currently assessing the development, following the development of the virus outbreak and it seems the challenges are expected to continue for a while. The virus, coronavirus, will inevitably impact our business in China, as we are one of the -- China is one of our major export markets, especially from Russia. However, we would like to underline the fact that the export business has limited share within our total sales volume. We'll continue to observe the progress of the outbreak, and we'll revisit our 2020 expectation in due course, if necessary. I guess now we are ready to take your questions. Thank you for listening.

[Operator Instructions] We already have a question from Nikolay Kovalev, VTB Capital.

I have 2 questions on your Russian operations. First is on the price competition, given that you're now at the first part in the country. Do you see that the next rival is trying to gain market share back due to the aggressive pricing policy? And my second question is on your international profitability. You guide for the improving EBITDA margin from already quite challenging level. So I was wondering, are you keeping intact your synergies estimate? Or do you see some upside risk? And also, what share is attributable to 2020 out of your total synergies expectation from the merge?

I mean, specifically for Russia, let me take the first question. And for the synergies, I'm sure Orhun would help me. I mean, for Russia, specifically, I mean, a significant part of the business is going through Modern Trade. There is always kind of a, let's say, continuous relationship and continuous promotions through this channel to our consumers. So there is the fact that price discounts and promotions continue in the market and we'll always be there. When we look at our portfolio, when we look at our business, certainly, we see our business very well balanced between different segments. And we have a strong lead on the premium side of the portfolio that is helping us. In that perspective, we have a strong position in the major tiers in Russia, higher market share than our average market share. Those are contributing to the current trend of our business. And in that perspective, when we look at the, let's say, our brand's positioning, our portfolio positioning within different segments, we see that we have -- with respect to the pricing, we have very healthy, very reasonable position of our brands within every other segment. So in that perspective, our business or the merge business was a little bit under-indexed in terms of traditional trade. And in terms of core, in the past, we have -- because of various reasons and the combination actually had helped us in terms of developing our businesses in these channels and segments, driving out the synergies, driving out the -- utilizing the infrastructure that we have and benefiting based on all those with the strength that we have. So in that perspective, yes, the business continues on a well track. And I believe this is a very -- we are very happy with the performance. We are very happy with our brands and portfolio standing. We are very happy with the execution on the ground. So it is not simply a price competition in Russia. It is about the brand portfolio. It's about reaching out to consumers and creating the relevance with the brand portfolio, with the brands that are winning. So in that perspective, we are very happy with what we have today. Orhun, would you like to comment on…