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

Ladies and gentlemen, welcome to Anadolu Efes Last Quarter 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 are Can Çaka, the CEO; and Mr. Orhun Köstem, the CFO. [Operator Instructions] Just to remind you, this conference 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 Efe's CEO. Sir?

Thank you, Asli. Hi, everybody. Good afternoon. And as usual, good morning to those in the U.S. And again, thank you all for joining our fourth quarter 2020 earnings call. Needless to mention, 2020 has been a year and I'm sure none of us will ever forget this year. We discussed this, we made a very good start to the year and then faced with this unprecedented crisis. However, I'm proud that we responded quite rapidly, ensured health and well-being of our people, crafted our strategy, worked multiple scenarios and started a great execution. Our strong 2020 results are the testimony of our continuous efforts to ensure business continuity from production to the execution. Despite 2020 being a record-odd, we leveraged these challenges and learnings and emerged even stronger. Yes. I mean 2020 happened to be a challenging year, repeating myself. And obviously, there would be -- there would always be such challenges ahead, bumpy roads -- bumps on the roads going forward as well. But looking at the last 5 years' performance, we were able to show an excellent track record in line with our long-term strategy. We were able to grow our EBITDA ahead of our revenues and revenues ahead of our volumes. There has been a superior performance in free cash flow generation where it grew by almost 40% annually through this period. And again, at the same time, international beer business has increased its share, yielding a more balanced business portfolio. And similarly, our soft drinks arm -- subsidiary, CCI, is performing great, increasing its weight within the portfolio, which is good at the end. Our investments -- our return on our investments is increasing. On the next side, please. Let's get back to 2020. Our continuous adoption of new and improved ways of doing business paved the way to report very good set of results in 2020. We were able to expand our revenues by 16% despite a slight decline in our volumes. Revenue growth was a result of our initiatives to drive top line growth. Our EBITDA expanded more than 25%, yielding a margin of 19%, the highest level in the last 8 years. And thanks to our commitment to financial discipline and prudent management of costs and OpEx spending together with our superior working capital management, we recorded an all-time high level of free cash flow with more than TRY 3 billion, ending in a very healthy leverage ratio in such a difficult period. I'm also very happy to announce that in line with our commitment to maximize shareholder value, our Board of Directors proposed TRY 1.1 billion dividend distribution for 2020, considering the improved operational profitability, substantial amount of free cash flow generation together with the low leverage ratio. This year is unique from another aspect, too. In 2020, we took the initial and most crucial steps to our digital transformation journey, which is going to become the core pillar of our business model across all our processes from production to market execution. So we are committed to that. Within the next 2 years, Anadolu Efes will become a more digital and mobile company. Going -- yes, thanks. Looking at our international beer business. It was another successful year for Russia where the beer industry grew by around 3% according to Rosstat. We outperformed the market in the third consecutive year and sustained our leadership both on volume and value terms. We increased our value share by almost 2 percentage points as seen on the chart at the top right. Yes, it was a difficult year with significant competitive pressures and challenging pricing environment with excise tax hike at the beginning of the year, currency devaluation and commodity price pressures. As we have been emphasizing since the beginning, despite the challenges we are facing, we commit to our strategy of maintaining of our leadership profitably. In Ukraine, the beer market was down by low single digits, and our performance was in line with the market. However, we were able to post volume growth in the last quarter of the year. We have observed volume declines across other CIS countries. Despite the fact that our volumes are down and obviously throughout the year, we have seen 2 dynamics that are, let's say, to the disadvantage of our businesses, the on-trade closures usually, generally, in every other market, being the market leader, we have higher proportion of our volumes on entree. And we have seen also with the macroeconomic challenges economy segment growing, and basically, we are defocusing in every other market. The economy segment, we are much more stronger. We have much higher market share in the economy on the main segments. So despite all these trends, in every other market, we were able to increase our market share, especially in the second half of the year. So basically, our initiatives worked very well, and together with that, we were able to improve our profit margins and generate strong free cash flow in the other CIS operations as well. I want to give some more details on our strategy and drivers of growth as we achieved in Russia and Ukraine over the years. You would remember, we were emphasizing this. We were -- we had higher market share on the premium side of the equation. And also, we have much more focus on the premium side in order to ensure that we have revenue growth management initiatives. So in line with this strategy, we were focusing on our premium and super premium brands, and we have seen a very strong performance of these segments. For example, Corona Extra in Russia give a very good indication in that perspective, growing more than 50% year-on-year basis through the year. And another area was we were always mentioning that we had less than our fair share in the core and lower mainstream. So throughout the year, especially in Russia, our brands in the segment, starting from the upper end: Efes, Löwenbräu, Stary Melnik, Bely Medved. And on the lower end side, the Gold Mine Beer, we gained market share, and we showed the leadership in terms of share growth in this segment with our focus on the core and upper mainstream. We have expanded our portfolio on the nonalcoholic segment, which is growing nicely in Russia. So we have our global brands, Stella, Bud and Hoegaarden, nonalcoholic expansions. Together move in -- together with that, we moved into adjacent categories like crafts as well on that side. So as a result of our focus on growth of global brands, in addition to number of player additions, we have also introduced Bud Light on the upper -- or lower premium side. So we believe we will gain more presence in this segment going forward. So that's overall how we are positioning our portfolio in line with our, let's say, focus [ and just ] strategy. In Ukraine, we have a similar strategy. We are also eager to expand our non-beer offerings as well. And our best-performing brands in Ukraine were Bely Medved, Kozel, Stary Melnik, Essa. So we gained market share on the upper end of the core. And together with that, our global brands performed well, like Stella and Corona, and added to the premium segment gain shares and improved the revenue growth initiatives. So that's, in a nutshell, the [ leading ] brand portfolio focus. Going into Turkey. I mean let's remind, globally, when we look at the beer industry, beer industry impacted more wherever the on-trade has a higher stake in the total beer market. And within our portfolio, Turkey has the highest on-trade share. You would remember, it's around 1/4 of the total volumes. I think we include also the outside consumption. It is almost 1/3 -- higher than 1/3 of the beer volume. So the impact of the restrictions, closure on the on-trade where most felt in Turkey. Therefore, Turkey beer operations finished the year with just under 14% volume decline where we have been especially observing very tight restrictions since mid-November. 2020 is also a memorable year for us as we made the successful relaunch of Efes family under these difficult circumstances with no on-trade, no social gatherings and with off-trade sales limitations during December. Therefore, we have accelerated market activations and spendings related to +1 relaunch to enhance our visibility and consumer touch especially in quarter 4. The impact on our operating profitability can also be observed in quarter 4 after a very good run in the first 9 months. We started to see certain important stabilization in Efes family performance after the launch. That is good. And in Turkey, the second half of this year, 2021, will be critical as we expect some normalization and opening of the on-trade, more gathering. So that is, in a nutshell, what we are doing in Turkey. Let me say a few words on the soft drinks as well. CCI's consolidated sales volume increased by almost 12% in quarter 4 and thus limiting the full year decline to 1.9%. International sales volume showed a better performance and grew by almost 3% in 2020 as a result of lower exposure to the on-premise channel and a higher share of the strong sparkling category. Pakistan volumes grew by 6.2% driven by the successful market execution, bringing the leadership position in the sparkling category. Turkey volumes were undoubtedly the most impacted one, similar to the beer, due to relatively higher exposure to on-trade. But it has shown a significant recovery in the last quarter of the year as a result of activations of multipacks for at-home consumption and well-managed consumer promotions through new digital platforms. Let's look into the financial results after the volume performance. Revenues grew by 16% to TRY 26.7 billion as a result of price increases and revenue growth management initiatives. Please note that there was around 10% positive currency translation impact that had positively impacted our top line performance as well. We were able to deliver 26% EBITDA growth with 146 basis points margin expansion. Our EBITDA margin reached to 19%, which is the highest level in the last 8 years. And this performance was mainly driven by the saving programs in the OpEx that have been implemented since the beginning of the crisis. We recorded TRY 815 million net income through the year versus over TRY 1 billion a year ago. Although there has been an expansion on the absolute operational profitability, the year-on-year decline on the bottom line was a result of a few items, like lower contribution from the idle asset sales compared to the last year. The difference was around TRY 170 million. And as well as the noncash spare parts amortization adjustments and the Iraqi put option revaluation expense by our subsidiary, CCI. Yet, we recorded the highest ever free cash flow of TRY 3 billion driven by the superior performance in working capital management as well as prudent spending in our CapEx programs in addition to the strong EBITDA generation and positive impact of the idle asset sales program. As a result, we finished the year with the -- with consolidated net debt-to-EBITDA ratio of around 0.7x, and Orhun is obviously going to take us to more details.

Thank you, Can. Good afternoon and good morning, everyone, wherever you are. We are very pleased to be with you today reporting on our 2020 full year results, and we are also pleased to report a very good set of results. And to the extent which I believe if one was to look back in the course of the next 5 to 10 years' time, it doesn't give a hint that 2020 was an absolutely extraordinary year for all of us. Now the reason I believe that is, if I walk you through, first, Page 12, our financials, as Can was explaining, is good. If you look at Anadolu Efes, we report top line growth despite the fact that our volumes are slightly less and our margin has expanded. Our EBITDA margin has expanded, and our free cash flow was a record high. Obviously, Coca-Cola Icecek had a great run in 2020. I'm sure you must have separately followed that. But I'm also sure that you must have noticed that at the end of 9 months in Anadolu Efes, we reported 19.1% margin in comparison to 17.6% a year ago, and now we report the same. That's not a typo. It's just that the numbers are the same. The composition is a little different. CCI was expanding their margins by about 300 basis points then. And at the end of the year, it's quite similar, 280 basis points, excellent performance. If you look at international beer or on the beer side in general, first, we have been able to improve our margin performance quarter-on-quarter throughout 2020. That's until the end of the year. Now if you look back on Turkey, we only had about 50 basis points margin difference at the end of 9 months. That difference has expanded in Turkey at the end of the year, and Turkey is now behind by 150 basis points. And obviously, that's due to what Can was explaining. We made a massive launch in 2020. And in the last quarter of the year as a preparation for 2021, we started investing and spending behind our brands. Nevertheless, if you look at the international part of the business, especially CIS, our operations in Kazakhstan, Moldova and Georgia, which collectively are at the comparable size to Turkey by all means, has reached very high margins and have delivered quite well free cash flow. So obviously, that has balanced the differential. And in our joint venture business in Russia and Ukraine, again, we have been improving our margins since the first quarter of the year, running through the last quarter basically. So we ended up the year in international businesses at flat margins versus last year. And even though Turkey was behind, we're reporting only some 20 basis point margin expansion on the beer group. Strong free cash flow, again, both on Coca-Cola Icecek but also on the beer group. As Can was explaining, there are differences between each year, especially if you look at the last quarter. You'll remember that we sold the Efes Istanbul Brewery land in the last quarter of 2019. So that was recorded in Turkey this year. We sold the Efes Moscow Brewery land, and that's recorded in our international businesses. So these are some of the differences that you should pay attention in our results. Otherwise, Turkey has maintained in free cash flow basically in that sense, and the working capital difference on the international is the result of the fact that we have delivered a little less than last year. You remember -- all of -- I mean all of the CIS businesses have done great. In fact, all of our businesses have done great in working capital. I'm going to share with you in a second what I mean. Having said that, our JV business delivers negative working capital, so it's accretive to our free cash flow. In 2020, it was less negative than 2019, so that's the primary difference between the years. But otherwise, very good strong performance that we're happy with. Now on the next page, again, if you look at how our EBITDA has developed, I'm sure you'll notice that the operating expenses piece, that was what Can was referring to, is a positive number. And obviously, we spent less than that previous year on the beer group. Now -- and this is great for 2020. But keep in mind that majority of the savings there, obviously, was coming from Zero-based programs and et cetera. But item wise, they were mostly coming from sales and marketing. In some of the markets, since the market volumes are down and et cetera, obviously, we haven't incurred the same amount of spending. But we would like to spend in 2021 to foster more consumption in our respective markets. So that's something to keep in mind. And if you look at this other number, the majority is the conversion. I believe it is TRY 190 million that falls into EBITDA is the conversion factor. If you look at the free cash flow, there you see a negative change in working capital. As I said, this is a year-on-year difference, otherwise. On 2020, we've reached a record low working capital in some of our businesses, including Turkey, which is primarily driven by receivables management and testament to all teams across all markets. We have managed our receivables at or below our previous levels in this relatively difficult times. Our inventory levels, our days of inventory have been a little bit higher by design because we wanted to manage 2020 in such a way that if second wave, third wave, whatever, were to come, there won't be any disruptions in our supply chain or production. So there's opportunity there for next year. And payables, basically, we're quite happy with the performance, and we're going to continue managing this quite carefully. Hopefully, in 2021, especially in the second half of the year, we see markets coming closer to whatever normal they could be at that point in time. But in general, as I said, good free cash flow performance. And at the end of the day, if you look at -- this would be on Page 14. Our leverage ratio, again, on Anadolu Efes, it has gone to 0.7x from 1.1x. And on beer group, it was 1x. Now it's 1.1x. So quite, let's say, a flexible balance sheet and healthy ratios for us. As I was saying, we recorded low -- very low working capital, and in places like Turkey, that was lowest ever. We are actively managing risk. Now at the end of 2020, on the beer group, the Eurobond is the only outstanding FX-denominated debt, financial debt, that sits in our balance sheet. And then we minimized the volatility on our bottom line with the [ net ] investment hedge that is in place. And separately, we managed the commodity and currency exposure in the P&L. In Turkey, for example, we've hedged against FX by 78% for 2021. Across -- we hedged about 60% of our aluminum exposure and about 69% of our [indiscernible] exposure in general. So hopefully, will allow us to have a good run in 2021 as well. As I was saying, we had an idle asset sales program since the end of 2018. I can say that by the end of 2020, it's almost done. I'm sure you must have followed from our announcements or from our footnotes, the last 2 items that we reported was on Moscow and then the Efes Lüleburgaz land sales. But that program is, for all practical purposes, complete. Our Zero-based spending program, we made great use of that in 2020. And in 2021, we are increasing the footprint of that program across operations like Moldova and Georgia. We also set it up at the end of 2020, and we'll start executing in 2021. Our average debt maturity now at the end of 2020 is below 2 years. That's primarily owing to the fact that our Eurobond is maturing in November 2022. It's difficult for me to tell you exactly what are we going to do with that, but I can tell you with great clarity that we would be ready to capitalize on any good market opportunity starting from 2021 for that. So with that, we go back to Can. Thank you.

Thank you, Orhun. Let me remind you once again about the levers of our profitable growth and market share expansion. Going forward, and especially in 2021, we will continue to invest in the market to drive consumption. I'm happy to say that we will increasingly leverage our digital infrastructure as we expand the footprint of our digital capabilities on the field. Our brands will always be at our core focus. We'll continue to invest in our brands. We'll continue to innovate as we explore new extensions and new categories that are appealing to our consumers. In terms of profitability, number one priority is to make sure that we have a healthy top line performance. Therefore, we will continue evolving and benefiting our profitable revenue growth management initiatives. As of today, I can say, in every other country, we had the price increases implemented over the board covering the excise taxes, covering part of the cost and raw material inflation. So that has been done by -- within the first 45 days of the year. And we'll continue, we'll leverage our Zero-based spending program through the year. And in 2021, we started to expand this program across all CIS operations while also adding new categories within the scope. So it will be extended in everywhere. We intend to drive consumption and deliver growth profitably as we transition to a new normal, hopefully, through the year. However, I would like to emphasize that it is very likely that 2021 is going to be another challenging year, no surprise here. There are still a lot of uncertainties ahead of us. I'm happy to note that we made a good start to the year. But considering the uncertainties lying ahead of us, we remain cautious. Although we see reason to be more optimistic especially for the second half of the year, we do not expect to get -- we get near to normal in the first quarter and probably through the second quarter as well. Under these assumptions, we expect our beer volumes to grow by low single digits and with soft drink volumes growth to be around 4% to 6%. As a result of our profitable revenue growth management initiatives and price increases, beer revenues are expected to grow by low teens, and that expectation on the soft drink side would be around high teens. We'll continue to invest in our markets and brands to drive consumption in 2021. And therefore, we will step up spending on marketing when there was a significant saving through this year. Thus, following a very prudent 2020, we expect some dilution of our profitability margin in 2021 with top line growth. We will continue to deliver strong free cash flow generation. However, as we [ roll ] a very low working capital base in 2020 and as Orhun said, now that our idle asset sales program is concluded, our absolute free cash flow is expected to be lower than that of 2020. So thank you, again, for joining us, and thank you for your patience and we can take the questions now.

And we already have one from [indiscernible]. Could you please elaborate on your performance in the international markets, Russia and Turkey, in the first 2 months of 2021, which is the growth and how are the on-trade channels performing? Do I get it right that there will be a price adjustment in line with [ tax excise ] and inflation and there will be a production change in favor of more premium products?

Thank you, [ Sasha ]. Actually, partly I answered this. I mean, obviously, as I noted, in every other operation, we implemented our price increases to cover the excise wherever it is applicable and the cost inflation as much as possible. So that is done. How the market started, I mean, we started the -- let's start from the assumption first. I mean we were expecting the first quarter to be more or less with similar restrictions like the fourth quarter of last year and gradual relaxation in terms of limitations through the second quarter and kind of normalization starting from second half onwards. Having said that, I mean, we have seen -- despite the number of cases are still high everywhere, we have seen certain, let's say, relaxation in Russia and in CIS -- Central Asia and CIS countries, other CIS countries. So there, we had a strong start to the year, I would say, overall. Turkey, more or less similar restrictions as very similar, on-trade is closed. Weekend lockdowns continue. Lockdowns after -- in the evenings during the weekdays continue. So there's not much difference versus the last quarter. So I would say that -- from the product mix, obviously, overall that is part of the strategy we are driving. Globally, we see premium segment growing, so we are investing in that one. That is -- in every other country, we see the premium segment growth and our market share growing in this segment that is balancing the core and mainstream growth as well. So that's helping us. So that's, overall, similar that -- where we expect a similar trend like we had this year. I hope this covered the question probably.

[Operator Instructions]

[Foreign Language]

Okay. There is one from [ Barclays ]. Given leverage is very low, do you think you would likely use the headroom you have? Is the priority dividends, expansion CapEx, acquisitions? Or do you expect to remain around current leverage levels for the foreseeable future?

Thank you, [ Daniel ]. Great question. [ Leverage is, I ] have to tell you, if you ask me how we were going to land at the end of 2020, I'd probably have given a different number back in the first quarter of 2020 or second quarter of 2020. So we are at a good place. Now if you look a few items in terms of our capital allocation that we need to consider, the first priority, obviously, is to invest in the organic growth of our business, our brands, which I'm sure you must have already seen, as we explained, we are also doing in 2020 and we should continue to do so. Especially in 2021, that could be important given the fact that in many of our markets, in Central Asian markets, in Turkey, obviously, the total consumption -- market consumption came down. So we would like to make sure that we support consumption growth in 2021. So basically, organic expansion is important for us. Secondly, yes, from a shareholder value creation, whatever incremental cash is available to us, yes, we do distribute dividends. I'm sure you must have seen through the course of these past 2 years, especially when we have the idle asset sales program, we have turned the proceeds into dividends basically. Going forward, as I was saying and Can was underwriting, I mean, that program has practical purposes. It's been finalized. But nevertheless, we will continue to obviously seek to grow our free cash flow. Finally, I mean, a few things for us was quite important in this period of time over the course of the past 2 years. One of the -- and we have -- I'm happy to say that we have acted on those priorities. One of them, as I'm sure you must be following us, is to ensure that in Russia and Ukraine, that we would very much like to ensure that the joint venture operates successfully, which we have seen. So -- for the past 2 years. In Turkey, we wanted to make sure that we invest behind our mainstream brands, primarily Efes Pilsen family. And as I said, in 2020, we have made the relaunch within that family with reasonably early but reasonably good results that we have received. And finally, going forward, back to answer your questions, yes. I mean we are very much active at making sure that we can achieve these targets. We would look at any expansionary opportunities. But that probably would be practically beyond 2021. And in general, again, as you will remember, normally, our policy is to maintain our indebtedness somewhere between 1 to 2x net debt to EBITDA. As I said, we've landed at the end of 2020 much better free cash flow than our anticipation. But you should take this, again, as a general rule -- as a general, let's say, guidance, going forward. Thank you.