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

Ladies and gentlemen, welcome to Anadolu Efes' Second Quarter 2020 Financial Results Conference Call and Webcast. My name is Asli Demirel, and I'm the Head of Investor Relations of Anadolu Efes. Our presenters today, Mr. Can Çaka, CEO; and Mr. Orhun Köstem, CFO. [Operator Instructions] Just to remind you, this conference call is being recorded and the link will be available online. 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. As usual, it is nice to be back with you with our second quarter results, especially with strong set of numbers. And thank you for joining us today. Hope you and your families are all safe and well, like ourselves. Needless to say, 2020 continues to be a uniquely challenging year due to the impact of the pandemic, obviously. Once again, I would like to thank my colleagues for their dedication and hard work during this unprecedented period. I'm happy to say that there has been no interruption to our business and no serious health issues within our teams reported across all our organization up till now. I'm very pleased with this strong second quarter results from top to the bottom in both business lines, so I'm aware of the challenges ahead. However, our performance in the second quarter is a good proof of our agility and ability to adapt to changing operating environment, where we will continue to leverage our learnings up to now so far and to seek further opportunities throughout the period -- throughout the remaining part of the crisis. As I noted at the beginning, it has been a very successful quarter in terms of operational profitability, where we were able to beat the second quarter of 2019 in both absolute terms and margin-wise. We take into account the first 6 months of the year in the -- in 3 different stages. Obviously, as we discussed at the end of first quarter, January, February, we had a good start to the year where our performance was significantly ahead of our initial plans. We were executing a very strong volume growth versus the prior year in the first couple of months. Obviously, with the start of the pandemic, during March and April has be -- those 2 months has been the most challenging months across all operations that we have seen significant declines in volumes as a result of the measurements taken by the government. We started to see some recovery by the start of May, benefiting from easing of the May measures, actions as well as the favorable weather conditions. We have been also observing that the consumer started to adapt to the new social environment and the new conditions coming with the pandemic, obviously. I'm happy to see also that we had a very good rebound in May, and further, that's followed in June and even outperforming our plans in certain markets. The improvement in the operational profitability is not only driven by the profitable revenue growth management, but also the savings in our cost and spending, which are on -- and I will deep into -- I will deep dive into to explain you further the measures that we have taken, the actions that we have taken. There has been significant savings in capital expenditures as well as we cut the investment plans. We were able to improve our core working capital in such a challenging period with significant improvements in receivable collection terms throughout this period. As a result, we were able to generate strong free cash flow in second quarter, both in beer business as well as soft drinks and more than doubled what we had last year. Even in such a challenging period, we continued our strategy of investing in our brands, and we have the relaunch of Efes family in Turkey with a new brewing technique, which extended the rest period at the beginning of the process that provides a smoother drinking experience, which I'm going to go in more details in the following slides as well. We have also maintained our investment-grade ratings, following the latest review of Fitch as a result of our leading positions in our core markets and with our strong brand portfolio together with our dedication to the financial discipline. We have already launched our post-COVID strategies and priorities with extended focus on our brands, consumers, customers as well as digitalization and financial discipline, leveraging the key learnings from the crisis as we look ahead. Going into more details. In Beer Group, our volumes were down by 2.6% in the second quarter. International volumes were flat with lower volumes in CIS countries and Ukraine, although Russian beer volumes were up by mid-single digits. Turkey beer volumes declined relatively higher due to higher share of on-trade channel compared to the international operations. Nevertheless, our volume performance was better than our anticipation across all operations. In soft drink operations, volumes were down by 16% -- slightly higher than 16%, cycling a 4% growth a year ago. Both Turkey and international business is impacted in the period, but Turkey was relatively more impacted due to its higher share in on-trade channel as well. Sparkling category, which makes almost 90% of our sales volumes in the period, has been a better performer among other categories and declined by around 10%. Other categories showed higher declines, especially due to on-trade closures in Turkey. On the next slide. In this slide, I want to highlight the significant differences in our operational profitability as well as free cash flow generation in different periods of the year, driven by the challenges -- driven by the changes in mobility. You see May and June compared to March and April. Beer business is about joy, getting together, music, fun. Basically, it's about mobility of our consumers. And against the pandemic, all measures were about limiting the mobility. All restrictions, curfews, on-trade bans, they are coupled with the low mode of our consumers driven by the uncertainty and concerns throughout the period. At the same time, we will focus on various measures and initiatives. The first was safety and health of our teams as we were adapting to the new environment. Therefore, March and April was about adaptation and lowest volumes due to these limitations, concerns, obviously, weather throughout the period as well. And May and June performance reflects the outcome of this adaptation. Frankly speaking, we have prepared ourselves for a worse scenario as the volumes pick up with easing of measures, support of better weather through the season. We were able to present a much stronger performance as you can see almost a black and white difference in these 2 periods, the beginning of the pandemic and then after the adaptation period and the beginning of the season. As a result of our profitable revenue management and our extended zero-based spending programs, together with the cost, OpEx and CapEx savings, both our profitability and our free cash flow improved significantly compared to the beginning of the crisis period. Further looking at our international beer business, volumes were flat in second quarter compared to a year ago. Our Russian beer operation continued its volume growth in such a challenging period. Industry was also up by slightly year-on-year basis but showed some slowdown versus the first quarter. Aggressive competition continued this quarter as well. However, our pricing was much [Audio Gap] to the previous quarter. There has been a long debate about pricing and discounts in Russia I know. We just wanted to present here some solid background as well. You can see on the left-hand side, market share development in terms of volume and value in Russia for the first half 2019 and 2020. We gained almost 3 percentage points market share, both in terms of volume and in terms of value, and then they're both, as you can -- they're at the same amount, 3 percentage points during the period as you can see on the chart. That means our average price in first half 2020 is same as the level back in 2019 same period. Moreover, at the same time, we gained share of market in the core segment, where we had lower than our fair share. We even lost one of our premium brands in the portfolio as a result of the merger you will remember. And why I'm talking about this, I've been talking about much this during the last year, and I was constantly noting about our progress, portfolio success and further penetration in Russia, especially with the core segment. However, I was also noting the balance of our business and a strong focus on the value and volume at the same time. We have a balanced scorecard, I would say, between value we generate, our competitive position and our volume targets. And I would say that we were very successful in managing all these in a very balanced way throughout the first half of the year, continuing to be presenting a strong volume performance as well. Ukraine volumes were down in the period, negatively impacted by COVID-19 measures taken, where the industry volumes also declined. Other CIS countries, volumes were also under pressure throughout the period. The volume pressure was mitigated by savings in OpEx and CapEx and also the price increases, which supported our profitability. Going specifically into Turkey. The Turkey volumes were down by 24%, almost parallel to the first quarter despite the pandemic impact for the full cart. March and April have been most challenging months, as I described, due to the mobility restrictions and on-trade limitations. May volume showed some recovery also benefiting from Ramadan moving 10 days earlier. June volumes rebounded and showed better-than-anticipated performance. Due to the seasonality, June is a critical month for our business as you know, an easing of measures as well as increased demand from the consumers' base, which adapted to the new normality significantly contributed to our volumes, partially mitigating the decline at the beginning of the quarter. Despite the fact that on-trade demand is still very soft. Tourism, especially [ transformation ] on tourism has contracted. We observed that our consumers are going out to the parks, public places and try to enjoy themselves a bit with the impact of the good weather conditions, we are benefiting from that. In line with our commitment to invest in our brands, our brewmasters developed a new technique in brewing, we call +1 with extended rest that provides a smoother drinking experience. I'm proud to say that this technique, which we applied for an international patent is unique globally. We have already started to produce Efes brand of beers with this method by the end of June. Despite all challenges I mentioned before, we had a very successful +1 relaunch of Efes family with the new look and the new taste. I'm very happy about the initial reactions of our consumers [Audio Gap] coming quarters. Together with our craftmanship of offerings, we also had our seasonal offerings for the summer period, including Efes Summer Blue, Varim Limon, Bomonti IPA throughout the period and all these contributed additional to our volumes and will continue to contribute so. In the following slide, I would like to say a few words on our soft drinks business as well. Consolidated service volume was down by 16% in the second quarter, cycling over some [ base ] back in the second quarter of last year. The downward trend in volumes have improved from 27% decline in April to 10% decline in June. Volumes in Turkey showed gradual recovery, easing of measures, however, declined around 25% in the second quarter. Sparkling category was the most resilient among all with the support of right market execution of the teams, efforts to increase the immediate consumption packages in off-trade and reopening of on-trade, having mitigated the effect up to an extent. Still category declined relatively higher than sparkling as a result of the value-generation strategy rather than volume focus. International operations, volumes were more resilient compared to the domestic operations and were down by 9.5% due to the lower exposure in the on-trade. Pakistan volumes declined by 10%, being impacted by on-trade ban and curfews. Middle East volumes were down, however, sparkling was up and continued its strong volume momentum at the beginning of the year. Central Asia was the most resilient territory in the international operations, where in Kazakhstan, we were able to report volume growth in June. Looking at consolidated results, volume were down around 12% in the second quarter, being impacted by lower rollings on Turkey beer and soft drinks. Consolidated net revenue was almost parallel to last year despite volume pressure in the quarter and was realized at about TRY 7.1 billion. Top line performance was driven by higher average prices per hectoliter as well as positive currency translation impact. We are proud we have delivered 180 basis points expansion in EBITDA margin in Beer Group, which was backed by substantial savings in selling and marketing expenses. Soft drink operations margin has also improved in the period compared to the last year as a result of OpEx savings and reductions in all discretionary spending areas. We have recorded a net profit of TRY 360 million in second quarter, supported by the improvement in operational profitability. In the second quarter 2019, there was a one-off investment income related to FX gains. This was driven by the repatriation of cash from international beer operations to Anadolu Efes Turkey, resulting in an increase of TRY 190 million in net income. Therefore, excluding this one-off income, second quarter net income is significantly higher than its level back in second quarter 2019. Free cash flow in the second quarter more than doubled compared to the last year and reached to around TRY 2 billion. Increase in free cash flow was contributed by both business lines and driven by improvement in core working capital as well as savings in CapEx. As a result, our net debt-to-EBITDA ratio was 1.1x as of the end of the quarter. And now Orhun is going to take -- go into details in the coming slides for financial review. Thank you, Orhun.

Thank you, Can. Good afternoon, and good morning, everyone, and welcome again. Now obviously, as we were reporting on our first quarter results, that was at the time of COVID. And obviously, we knew that, although some of the metrics were down versus the previous year, they were in line with the plans. But obviously, there were many concerns about the pandemic and its impact on the overall business, economy, our lives, et cetera. I mean we passed the quarter with that, obviously, the outlook for the pandemic, difficult to say, it's clear now. Having said that, what's clear is our measures that we have taken at the time to support our business have delivered in the second quarter of this year. In general, if you look at the top line performance, obviously, the volumes are relatively soft, mainly the international brewing business driving much of the positive volume performance versus last year. And in general, the Turkish business is trailing behind given the channel structures in Turkey in the second quarter. If you look at the revenue performance, though, obviously, on Anadolu Efes level, our revenue is almost flat. On the Beer Group, in the second quarter, we posted a 5.5% growth over last year, basically. And obviously, there are currency translation impacts. And with that, if you looked at that 5.5%, we should have been 1% behind in revenue if you excluded the currency impact. The good news is, though, on per hectoliter basis in the second quarter without the currency impact on constant currency terms, the Beer Group has posted 1.6% revenue growth per hectoliter, which is good news. And in our top line, that's obviously due to mix and how we manage our revenues. In Turkey, the revenues were down by 1.9% in the second quarter, even though on a per hectoliter basis, revenues grew over 20%. And then on the international side, the revenue growth in the second quarter was 7.1%, obviously higher than the volume growth, but there is also a currency impact there. And on a constant currency terms, the revenue per hectoliter is almost flat. The difference is less than 1% negative. But the other important thing to underline is we have, all across the board, have been able to expand our margins in the second quarter. For Anadolu Efes, it means that our EBITDA in absolute terms grew by 8.5% in the second quarter with a margin expansion of 180 basis points. For the Beer Group, we've seen a little over 20% growth in the second quarter with margin expansion of 250 basis points. Turkey is where most of the -- or the biggest margin growth has come. The EBITDA has grown by almost about 50%, and the margin expansion was over 500 basis points. And on the international, we are looking at 19% EBITDA growth in the second quarter with 210 basis points of margin expansion. Now obviously, in all the cases, if you look at our -- there have been many measures that we have taken, as Can was explaining, to curve down our cost of goods sold. And I'm going to touch base in a little while that the change in cost of goods sold was very, very small but the real difference was coming from OpEx. We have mobilized many of our resources at the start of the year, including expanding both the scope and the reach of our zero-based spending initiatives across most of the operations. Obviously, in addition to those structured measures that we have taken, once we started living with the pandemic, we have put in place many programs on savings, which I'm happy to say has delivered for us in the second quarter. So with that, if you look at the first half, obviously, we haven't been able to fully, let's say, offset the impact that we've seen in the first quarter. Nevertheless, at the end of first half, the EBITDA margin for Anadolu Efes is at 15.5% on a 60 basis points behind last year. And for Beer Group, it's 10.9%, only about 170 basis points behind last year. These are the EBITDA margins. Now on our balance sheet and some of the risk management details. One, obviously, as we are referring, we had a very -- also very good run on our free cash flow, which I'm going to talk about momentarily. Our net debt to EBITDA on Anadolu Efes is at 1.1x, and on the Beer Group is 1.2x, which obviously shows better numbers versus the end of first half 2019. This obviously is a function of making sure that we focus on our free cash flow, and I'm happy to say that we have generated free cash flow even better than our expectations or our business plans for the year in this period. We don't have any long-term refinancing needs in 2020, which is good news for us in a year like this. Obviously, it gives us a lot of flexibility. Currently, we hold about 60% of our cash in hard currency as I'm sure you're aware. There are many -- there's many movements in FX quite recently. And our current cash balances cover our financial debt obligations over the course of next 12 months. It's more or less 3x. Our cash is 3x higher than our financial debt obligations in a rolling 12-month basis. As a result, we've seen Fitch maintaining our investment grade so that means we maintain both of our investment grades in this unprecedented, challenging times. It's also good news for us. We're very happy and proud for that. For rest of the year for FX and for aluminum, we're hedged to a great extent brought at 92% levels. For aluminum especially, we do not want to hedge, as I'm sure you must be following, the spot prices are among some of the lowest if you compare over the course of the past 5, 6 years. So we enjoy that. That's one good outcome of, let's say, the crisis for us. We also started looking at longer term and executing longer-term hedges on commodities. And in addition to aluminum, we started hedging for PET. For what it makes sense, especially on the beer side, this is Moldova and Georgia. We extended the aluminum hedging for across all our operations with an outlook of rolling 8 quarters forward. And there, as I was saying, we are enjoying very good levels. We also started to hedge our barley procurement partly, and that's all, let's say, leveraging the impact of the crisis on demand and on the overall commodity prices. And needless to say, a part of what we have done are going to be permanent in terms of the saving programs, in terms of working capital management, in terms of hedging initiatives that we have, and that has become part of our post-COVID financial strategies. Next, just I would like to break down the EBITDA and how that has moved between 2019 2nd quarter and 2020 2nd quarter. First of all, the net revenue in comparison is down. That's primarily driven by volume performance, especially in markets like Ukraine and Turkey, where we've seen volumes not growing. That's a primary driver. The cost of sales -- the impact of cost of sales is very small. As I said, this is mainly coming from markets like Turkey, where, for example, although we are hedging effects, there's still some devaluation feeding into our cost base. But other than that, the gross margin impact was rested to about 100 basis points in the first half of the year, obviously, with most of the programs that we are running. And the biggest -- one of the biggest impact is coming from SG&A and marketing expenses. The G&A expenses, they are more or less flat compared to last year. So give or take on the Beer Group, the absolute numbers are quite similar. But the most of the savings are coming from selling and marketing expense, selling expenses, obviously, in certain markets as we said, where volume is not growing, obviously, we enjoy lower selling and transportation expenses. That's a function of volume. But in marketing, also, we have cut back on some of our initiatives for the first half of the year that didn't necessarily prevent us on making sure that we continue focused spending. Because as Can was explaining, it was important for us in Turkey that we have being prepared for the launch of Efes Pilsen and Efes Malt in this period. So obviously, we have continued to support our brands, even though we have incurred serious savings in the period. And the other figure that you see over here, obviously, the majority of that is currency translation, about TRY 60 million of that is coming from currency translation of that other number. In rest of the year, in terms of cost of goods sold, the material savings will be permanent. Most of the overheads will be permanent. If we see that the volumes pick up and some we see certain positive signs with the season, obviously we will consider how we can support better our business by making sure that there's value-add in our EBITDA. And if you look at the free cash flow, again, there's a positive impact coming from EBITDA. At the end of the first quarter, you will remember we had a very long discussion that we wanted to tell you, the working capital because most of the downside was in the working capital in the first quarter. And although it was planned, the numbers were not looking very nice. I'm happy to say that, obviously, we're back on plan, we're back on track and we are even doing better than our plans so far. So that's lifting our free cash flow quite nicely. Across the board in all our markets, I'm happy to say our receivable performance have been excellent. And the receivable days -- turnover days in Turkey is like 15 days better. In Russia, it's 4 days better. Cash cycle -- cash conversion cycle is better in key markets and that's coming even though that we have consciously increased the inventory days in the second quarter just to ensure that there was no business interruption at the height of the pandemic, basically. But overall, we have delivered a very, very successful working capital. And all of the performance, obviously, all of the mechanisms in place will continue rest of the year. The income taxes or the tax calculations, obviously, as we have delivered a better profitability is a little bit higher during the period. So that's where there's a negative impact on the cash flow. As Can was saying, we've spent less on CapEx, which is also supporting free cash flow. On the Beer Group side, our CapEx to sales at the end of the first half is about 8.5% that compares to about 9.3% at the end of first half 2019. And there is a TRY 22 million negative on the net financials and FX side. In fact, here, the most of the driver, as we are looking at the Beer Group, is coming from the fact that we haven't received the planned amount of dividends from CCI. So that's the main driver for the period, given the measures that was taken by the government during the pandemic period. Other than that, our -- actually, we are at a net interest positive place. As I was saying, we are doing much better. And as you see, we are doing a very significant free cash flow generation. And together with the reduction in interest rates, we are enjoying that for the time being. And our -- as you know, with the net investment hedges in place, obviously, we don't look at a significant FX loss for the period. And therefore, we have been able to enjoy free cash flow in the second quarter of the year, over 2x what we have seen in the same period of 2019. So with that, I will hand back to Can for his remarks.

Thank you, Orhun. Let me try to go for our expectations for the year. Despite such a uniquely challenging environment, we've delivered strong results, especially in the second quarter that's above last year and exceeding our initial expectations, I would say. However, we still refrain from giving a detailed outlook for the year as there are still uncertainties ahead. Having said that, we would like to share an update, which will provide you some insights for the second half of the year as a result of reopenings in on-trade and gradual easing of the measures across all our operations as well as better-than-anticipated results in the second quarter. Our initial expectation of having a low double-digit decline for Beer Group volumes for 2020 is now revised to be around mid single-digit decline. As we discussed throughout the call, we have extended our zero-based spending programs, implementing certain saving initiatives. With the help of this, we expect full year EBITDA margin contraction to be less than that of the -- in the first half. In terms of capital expenditures, we reiterate that we expect CapEx to be lower than last year on an absolute basis. It is worthwhile to underline that we made substantial progress in our core working capital management in the first half despite the challenging environment, and we will continue to improve it for the rest of the year. As a result, we also expect to generate positive free cash flow in Beer Group throughout the year. And as usual, this is the end of our presentation. Thank you for joining, and we are ready to take your questions. Thank you again.[Audio Gap]

And as long as there is a, let's say, high performance in terms of net earnings in these subsidiaries, the noncontrolling interest shares, obviously, is increasing. So that suggests those subsidiaries delivered a higher increase in terms of their net profits compared to the same period last year.

There's another question from [indiscernible]. Would it be reasonable to assume that the JV in Russian plan will continue to report net earnings in 3Q as well. Could you also provide working capital to sales for EBI and for Turkey beer separately?

Thank you, [indiscernible]. Now let me now specifically talk about net earnings or et cetera, but obviously, our expectation for the joint venture is the -- is that we're going to continue expanding the margins year-on-year and therefore, be able to develop better profitability, that hopefully would flow obviously to the bottom line. That is one. Now core working capital to sales. Well, I mean, let me guide you with the numbers because for international beer side, as you know, it's negative. That's mainly driven by the joint ventures. For the first half last year, I think that was about minus 21%. This year, there's even 100 basis points extension to that, about minus 22%. So there's a slight improvement. For Turkey, though, there is an even more stronger improvement because that number was about 21% at the end of first half '19. At the end of first half '20, it's about 3.3%. So there's a very serious improvement. As I was saying, that's mainly driven by the receivable management performance that actually is not attributable only to the second half, but has been there since the end of 2019, since the last quarter of 2019 as well, where we have started to see the impact of most of the measures that we have taken. So overall, let me also conclude, that's not part of the question, but obviously, our core working capital to net sales on the Beer Group has moved from about minus 13% to about minus 17%. So minus, and we have extended that in the first half of this year.

There is one question from [ Anush Malhotra ]. Do you see a continuation of Q2 turn into Q3 so far?

Let me take this, Asli. Thank you for the question. I mean it is -- I would say the trends are similar as we have seen lately in May and June because we see the season continuing more or less in the same manner. But still, I mean, we have to note also that the pandemic is not over in certain countries. Sometimes we see sparks and increasing number of cases, which increases the number of measures taken by government in those countries like we have seen in Kazakhstan throughout last month. So in that perspective, I can say from the consumer perspective, consumer behavior cost perspective, with the good weather conditions, we see our consumers going out and trying to have fun so the trends are quite similar as of today.

There is one question from [ Corag ] regarding the breakdown of the free cash flow, I mean acquisition line amounting TRY 126 million. And it is as a result of what he's asking.

Thank you [ Corag ]. That TRY 126.4 million that you see as a cash outflow is actually due to the capital increase of Anadolu Efes. This -- our affiliate, which you mainly see in our income or associates line, that actually has taken place, if I'm not mistaken, in the first quarter of this year mostly. That's not attributable to the second quarter of the year.

For the time being, there is no further questions. [Operator Instructions] There are no more further questions, so I think it's time to conclude the call.

Thank you very much, ladies and gentlemen, for this. And hopefully, we will meet again in better times with better results in the coming quarters.