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

Ladies and gentlemen, welcome to Anadolu Efes Last Quarter 2022 Financial Results Conference Call and Webcast. My name is Asli Demirel, I'm the Head of Investor Relations of Anadolu Efes. Our presenters today, Mr. Can Caka, the CEO; and Mr. Gökçe Yanasmayan, the 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 Caka, Anadolu Efes CEO. Sir?

Thank you, Asli. Hi, everyone. Good afternoon to all, and welcome to our full year results call. Unfortunately, again, I mean, we are going to talk about the beginnings of the various sad events that happened earlier in February in Turkey. We had a devastating earthquake at the beginning of the month centered in the southeastern provinces of Turkey, affecting more 10 cities and millions of our citizens. Obviously, I would like to start with expressing my sincere condolences to the ones who lost their families, relatives and hope to see a rapid recovery for the ones who were injured. That is a big catastrophic event where we can't expect, unfortunately, rapid recovery. However, I'm sure the solidarity of the country will heal the wounds in time. Without any question, as soon as we heard about the unfortunate news, our priority has been the health and safety of our employees, business partners, team members and their relatives in the region. In this context, I guess, I mean, the only thing that relieves us, as of today, we -- all of our team members, I would say, the larger context are all safe. sale. We see, we have lost also our beloved ones, our relatives to some extent, but then -- and since then, we've been working in coordination with local municipalities, with NGOs in order to provide social aid for the region and trying to relieve the [ ease ] -- is in the region in this regards. Again, I mean, we're very sorry with what's happening and what has happened and I'm sure we will -- as a country, will overcome this very tough period of time. Coming back to our results, let me take you through our presentation. We will be -- we will try to be as short as possible and to leave spare time for the Q&A session. As usual, we would like to start with a [ wider ] scope, I mean, let's say, are from composite average growth rates for the last 5 years. As you see, our volume growth was in the range of 4%, significantly higher revenue growth, 4% and EBITDA growth -- or achieving the growth and revenue growth, supporting our value generation emphasis, and obviously, we have also a very strong free cash flow generation, which grew more than 35% then [ you'll be ] in the last 5 years. Next page, please. Okay. for specifically for the year 2022, we -- as we discussed in our prior calls, where we had a very strong set of results and that has been also complete, let's say, further settled in the fourth quarter. With the exception of Ukraine, we were able to either sustain our market shares or even strengthen, increase our market shares, while we continue to hold leadership in every other market. More importantly, in a year where we were constantly talking about inflation, one of the most problem, let's say, most maybe the concerns around for every other business, every other macro economy, and obviously, that inflation was translating into a strong COGS increase as well. And the emphasis on our side was to be able to price our beers and without impacting the demand. And we were able to expand our revenue per hectoliter. That is obviously driven by our emphasis on pricing initiatives, but also the revenue growth initiatives that we have taken with respect to the discount management, channel management and also product profitability management as well. So I believe we have further ensured our success here. And together with our focus on the cost side, on the OpEx side, we have been able to achieve the highest level of EBITDA margin of the last decade in 2022. And that's, again, strongly supported with the strong top line growth and also the various risk management mechanisms, including the hedges and everything and also our dedication to stick to our financial policy, including very smart standing approach. As a result of our high -- record high profitability, our free cash flow generation reached a level of TRY 6 billion. Obviously, there is a kind of, let's say, certain payables that has been planned in the year, but not realized. So there's a, let's say, from 23% to 22% here. That's why we look at -- we should look at this on a nominal basis. Gökçe will take you on that one. But still, it was a very, very strong free cash flow generation, which led to our leverage ratio going at around 0.7x. I'm also very happy to announce that in line with our commitment to maximize shareholder value. Our Board of Directors also proposed a dividend in the amount of TRY 1.2 billion, taking into consideration the cash flow generation and the low indebtedness level. Going into the total volume growth lines. I mean -- on a consolidated basis, our sales volumes declined by 2% in the last quarter, as guided. But on a full year basis, the volumes were up by 6%. Excluding the impact of Ukraine, looking at the numbers, organic growth basis also where we exclude the Uzbekistan, let's say, volumes, the volume performance was very strong at 5% level. And when we look at the beer volumes on the next slide, [indiscernible] specifically, beer volumes were 10% grow last year. And -- however it was totally due to Ukraine. If we exclude the impact of Ukraine, the volumes were flattish throughout the year. Next page. Okay. As you may remember from our previous calls, Russian beer market had a very strong start to the year reaching the growth in the first half. Well, we were also talking about the high base and consumer confidence and expectations with respect to the decline in the second quarter, second half that we have seen that trend realizing to the year. But again, on a full year basis, we are talking about a flattish volume for the market. And obviously, we have also observed a demand polarization. I mean that's happening everywhere across the board actually. And basically, we see the economy segment and also the premium segments growing rather than the main streams. That's very usual under the current circumstances. And when we look at the volume performance, it's below the market, but that's the -- due to our conscious decision in terms of having a volume and value balance strategy that we've been focusing for the last couple of years and also the falling purchasing power for our consumers, falling consumer confidence and inflation. And that's also linked to the inflation in the country, affecting our volumes, especially in the second half. And also we were covering also a higher base for the second half. Some of our brands, and especially we are very happy with our -- the largest local brand, Stary Melnik iz Bochonka, growing strongly with a couple of other brands in our platform portfolio. And more importantly, when we look at portfolio basis, we were able to keep and gain more market share, and that's also driven by the premium -- gains in the premium segment, and that's value share around 30% in the country. Looking then to Kazakhstan and Moldova. Moldovan economy was severely impacted with the situation in the region. And though Moldova has one of the highest inflationary environment in the region, also so it has further impact on the consumer, let's say, affordable for the consumers. And that's why we have volumes were in a declining pace, especially in the second half. However, we are gaining market share in the market, so that is a positive point. Again, we are seeing our premium and super premium brands growing. That's important. When we -- and our market share is at the top when we compare, again, look at the historical high level, and Kazakhstan is -- our volumes grew by low to mid-single digits, and we also increased our market share, and we are also improving our positioning in nonalcoholic beer segments as well and our largest, let's say, brand, mainstream brand in the market has increased its market share on the positive side. Looking into Georgia and Turkey. Starting with Georgia, beer markets grew mid-single digit with -- along with the marked macroeconomic recovery, an increased number of visitors to the country from the region. We continue to have -- increasing our market share in the country. Again, our market share reached a record high level. And also on the soft drink side in the country, we have achieved growth and double-digit growth compared to last year. Looking at Turkiye, we had a very good, very strong start to the year, recorded a very high growth rate in the first half, as we discussed, partly due to the low base of last year. And we continue with this period performance in the second and third quarter of the year, thanks to, obviously, a good tourism season in the country, but also our new launch in the country our premium brand. At the same time, export volumes grew and contributed as well. Thus, Turkiye beer operations had one of the most successful years and reached a sales volume growth of around 5.7 million hectoliters with a growth of almost 16% sales volumes exceeded pre-pandemic levels despite the decline in the consumer confidence in the country and the inflationary environment. So the strong performance achieved in -- with premium brand, together with the strong growth in the Efes Malt and Efes Glutensiz brands played an important role for this extraordinary success of Anadolu Efes Turkiye beer operations. A few words on the soft drink side, CCI's consolidated sales volume increased by also around 15%. While that was predominantly driven by the international growth on the international operations where the growth was more than 23% on a reported basis, sales volumes in Turkey grew by around slightly less than 3% despite the high inflationary environment and pressuring disposable incomes. Sparkling category showed a flattish performance while stills registered that growth in the range of almost 14%. International operations came from all regions, except Iraq and Jordan and specifically in Pakistan, the growth rate was around 13%. And also Uzbekistan was contributing to the growth. Inorganic debt but with also the strong growth the company achieved in the country. And finally, before leaving the ground to Gökçe for further details, a couple of words on top line figures. Revenue growth was around 130%, reaching to TRY 9.5 billion with higher volumes and pricing initiatives and revenue growth management initiatives, I need to underline that, excluding the impact of the FX translation, the growth was still at a very high level of 71% on a constant currency basis, and EBITDA growth was ahead of the top line growth. That makes us very proud and realized at around 148% with a margin of 19.2% and with a margin expansion of 137 basis points, and this was primarily due to the performance by our international beer operations. We delivered at TRY 2.4 billion net income compared to TRY 1.1 billion a year ago, so a significant increase despite the fact that the net financial expenses were up year-on-year basis. So with the profitability, with the improvement, we were able to overcome that and increase our bottom line and we recorded an all-time high level of free cash flow generation at around TRY 6.1 billion on operational profitability as well as the deferred payments in international beer operations. As a result, we closed the year with consolidated net debt to EBITDA ratio of 0.7x. So I leave the ground to Gökçe for further details.

Thank you, Can. Good morning, good afternoon, everyone. Before I start, I would also like to express my deepest condolences to everyone to who lost loved ones in the earthquake. Very difficult to describe our feelings, but I have no doubt that we will recover from this devastating earthquake, working altogether in collaboration and in solidarity. Can has already provided a full year perspective for Anadolu Efes consolidated financials together with beer group results. So I intend to focus more on fourth quarter results of beer group. Beer group sales revenue grew by 80% to TRY 9.7 billion in fourth quarter. The increase in FX-neutral basis was also strong, 16%. International beer operations sales revenue reached TRY 7.8 billion and taking into account the declining sales volume of international beer in fourth quarter, actually this represents 126% increase in our revenues for [indiscernible]. And in constant currency terms, it's a 27% increase. This was thanks to strong pricing premiumization and higher Turkish lira conversion impact. Turkiye sales volume as well outperformed the expectations and grew successful by 10% in fourth quarter. Anything from this increase as well as pricing sales, revenue performance was very strong and increased by 101%, while revenue per hectoliter growth was also very good at 84%. Going down to gross profit level, Beer Group gross profits also successfully extended and ahead of the revenues, growing by 99% despite high escalations in cost of goods sold and [indiscernible]. This means actually a margin expansion of almost 400 basis points in the fourth quarter. As Can also mentioned earlier in the meeting, effective use of FX and commodity ages supported our margins. Let me give you more details on EBITDA and our free cash flow in the following slide. The numbers you see on EBITDA graphs are on a constant currency basis so that we can clearly demonstrate average impact on our financials. In fourth quarter, we talked about revenues growing ahead of cost of goods sold, like actually the rest of the year. However, the increase in operational expenses are above revenue growth this quarter, which is unlike the rest of the year actually, but this is mainly due to postponed commercial spending to the last quarter. And in any case, EBITDA grew by 100% to TRY 1.9 billion with a margin expansion of 200 basis points. EBITDA margin in fourth quarter was 20.1%. Despite the positive contribution from profits, we see a negative swing on cash generation in the fourth quarter. This was already expected due to [ canalization ] of some capital expenditures and payables into the last quarter together with early procurement of certain raw materials. Another major factor or impact here was the negative conversion of working capital as TL remained pretty stable in the last quarter and ruble weakened. Nevertheless, we recorded a -- we reached a record high level of TRY 3.7 billion in full year 2022. But again, as Can earlier mentioned, I have to note here that we are significantly above our guidance as we have postponed some payments in Russia. And if we had paid this in 2022, we would be looking at a free cash flow generation in line with our guidance somewhere in the range of last year's numbers. So moving to the cash and debt management on the next slide. Here, I would like to underline that by the end of the year, more than 40% of cash we hold was hard currency-denominated in Beer Group and [indiscernible] in Anadolu Efes consolidated. These are lower than our historical averages as we had a successful cash generation in Russia this year, and we were yet to convert rubles in hard currencies by the year-end. So as of today, I can update the numbers and tell that we have reached more than 60% in group already and close to 70% in Anadolu Efes. And net debt to EBITDA is the indicator we are looking at when it comes to debt management. And this was 0.7x for Anadolu Efes and 1x type for the Beer Group, so even lower than our long-term guidance that we use. And you've seen actually a very significant improvement versus last year as 2022 was a successful year in terms of cash generation. And about risk management, while there are certain commodities that we can hedge, and aluminum is one of them, and so far, we have hedged 80% of our exposure for 2023. And we can also have price visibility for buying procurement. And there also, we have reached 70%. And FX hedges is another tool that we use to protect our bottom line. And there, 27% of our cost of goods sold and OpEx are FX-denominated and these are mainly coming from Russia and Turkey. In Russia, we are fully hedged. In Turkey, we have hedged more than 90% of our exposure. So actually, this concludes my presentation. I'm giving the word back to Can.

Thank you, Gökçe. We have slight pace of -- change of slides, which we still see the risk management page on the screen. Okay. It seems it is [indiscernible] with us. So you see the strategic core priorities page, which is good. I'm not going to go in details. I mean, obviously, our strategic priorities didn't change. Obviously, I mean, sustainability is one of the key additions, and that's a very important area that we focus on. And that's an accelerating and supporting factor for our future success. But when we are talking about the future of the business, we are talking about people, we are talking about our winning portfolio, our brands. We're talking about the operational excellence. And also we are talking about the growth for our business. So those -- that is the meaning of this strategic core priorities. Obviously, our financial discipline digitalization, which we can also mention among the operational excellence as part of the accelerators and key priorities as well together with the sustainability, as I mentioned at the very beginning. So let's move into the '23 expectations guidance. Obviously, need this to mention, '22 has been a great achievement, although the year started with a lot of challenges and obviously this year also is another year starting with challenges. So we got used to this now, and we are confident enough to have another year of success for our operations. Obviously, macroeconomic developments, geopolitical tensions, [ volatilities ], the impact of earthquake will be the primary concerns. Therefore, we have a cautious stance and our expectations probably will be hopefully revised upwards through the year as we see the progress. But at the same time, we have a -- we need to also note that '22 has been extraordinary in terms of profitability and especially noting that even the current competitive environment, current pricing environment are, let's say, margins in our position was a little bit almost sure thing when we look at '22. So we expect to see some normalization in that perspective as well. So overall, beer volume is expected to decline by low single digits throughout '23. That's, as I tried to explain in different contexts, I mean, given the high inflationary rate, consumer confidence levels, we expect a certain pressure in terms of the total beer market, let's say, position. So in that perspective, obviously, we will continue to strive to gain market share in any other market. But again, given the expectation with respect to the overall market, we expect our volume to decline on a low single-digit level. And when we look at the soft drink side of the operation, we see mid- to high single-digit volume growth on the soft drink side. Obviously, we'll continue in terms of revenue growth management initiatives in both business lines, and our consolidated net sales revenue is expected to grow by low 30s on an FX-neutral basis and where our beer revenues are expected to grow by high teens on an FX-neutral basis and the expected growth from soft drinks is high 40s to low 50s, again, on an FX-neutral basis. Our consolidated EBITDA margin is expected to decline around 100 to 200 basis points, impacted by the increased cost pressure and lower top line volumes, I would say, and expect it to be ahead of our pricing. Our CapEx to sales ratio will be stable at the normalized levels of high single digits. We can expect a lower level of free cash flow generation in '23 versus '22 due to the postponed payments, as I mentioned, so there's especially in international beer patients. So that would have higher cash outflows for 2023. So thank you again for joining us and for your patience. And we are ready, and we'll be happy to answer your questions.

At the moment. There are no questions at the queue. So we just wait for a few minutes. We will have a -- give some chance for people to write down their questions. There is a question from [ Daniel ] from Barclays. Could I please ask how much cash is in Russia? Do you have visibility on your ability to upstream cash? Has there been any progress on AB in the divestment transaction? Could you give an indication of what percent of Russian revenues are attributable to the international AB-InBev brands such as Stella Artois compared to Russian -- domestic Russian brands?

All right. I mean, let me give a little bit of color on the negotiations with ABI, and Gökçe can help you for the rest. Obviously, first of all, continuing, I mean, firstly, we are operating in a very complex environment and given the current [indiscernible], this has been triggered by the events happening in the region. Therefore, it is a progress with a lot of complexities. That's why it has taken longer than expected, but there's good level of progress. So we continue on the negotiations and working around the details of a potential deal. That's what we can state as of today. With respect to the cash flow generation and our capability to, let's say, distribute dividends, take as distributing dividends comes Russia, within last year, there has been a new legislation came into force. When you need to distribute dividends, you require -- your businesses are required to have an approval from the committee. We made our application to the committee with respect to the distributing dividends for the profit that we have generated for 2022. That's an ongoing discussion. So we have provided the necessary documentation, so on and so forth. So I'm positive that, that would be a positive response from that because as of today, we believe that there shouldn't be any limitations with respect to the distribution from Russia. And I think that should be continuing going forward.

I think regarding the cash we have in Russia, and in the second question, we have also, together with Ukraine, it's being asked end of the year. So we can say that between 35% to 40% of our cash in the vehicle in this country sector. And international brands such as Stella Artois, low single to mid-single digits in our revenue share, as I can say.

Maybe for the last part of the second question, what was Russia and Ukraine contribution to group's EBITDA?

EBITDA wise also, we can say that 65% to 70% together are the contribution.

Can you please update us on conversion of rubles to U.S. dollars? Again, another question from [ the taxation ], but we already...

There is no problem of converting rubles into the dollar. As I told, [indiscernible] converted that year this year.

Can you please provide more color on phasing of payables in international year? But this has already been answered. Can you also discuss pricing environment in Russia, Turkey, Kazakhstan for beer business in 2023 to date and expectations for the year?

Well, I mean, let's put Turkey and Kazakhstan first. Obviously, as discussed, the [ pokes ] or the inflationary environment is continuing, and there's a reflection of core as the -- of that inflationary environment to the cost. Basis basically last year, because increases were driven by the commodity increases, although this year, the commodities are below the historical high levels of last year, we are still seeing higher cost base coming from the energy that is linked to also the packaging, secondary packaging, and also the inflation of all reflecting into the cost base. So we still cost environment going higher. That's why we have planned -- to plan to have higher than inflation cost price increases in every other country. And for Turkey and Kazakhstan specifically, Georgia and although are not that different as well, we have already taken the very first steps and increased prices early December or early January. So we have increased our prices in line with our plans. So I don't see much of an issue in any of the operating countries with respect to pricing. And I would say, actually, the year started very well, and we have seen a reasonable continuation of the trends in the third quarter of last year. Record first month of the year, obviously. February was kind of, let's say, as we discussed at the beginning, was impacted by the earthquake in Turkey. And Russia is a little different, I would say. The last year was totally a different environment. We have increased our pricing, given all these volatilities, all this -- based on the happenings. In the second half of the year, actually, we've seen, let's say, a lot of discounting and promotional activities from the competition. And that is especially ruble strengthening against dollar also creating an opportunity for that reason. That's why pricing environment today is a little bit tougher compared to the rest of the portfolio. That is one of the reasons why we are guiding for a margin dilution. We expect a lower pricing environment in Russia, specifically this year, and that's mainly driven by the competition, follow the competitive reaction and would be able to -- I think we would need to follow and we would need to align our pricing to the competition because already -- we are already indexed. That is good for the value. But again, you cannot continue together, continue to have the same sort of progress in a very short period of time. So I would say this year is a little bit more digestion in that perspective. That is the reason of the margin dilution and, let's say, a tougher pricing environment in Russia.

There are two questions, but I think, Can, you already answered. One of them was margin decline. Why there is a margin decline -- yes. And why there is a volume decline in the guidance. So you already answered. So there's a question to Gökçe. Can you please confirm that FX cost under cost of goods sold have been mostly hedged. Would this mean no major cost pressure in case of TL depreciation throughout the year? Or is currency hedging level higher than the current TL-U.S. dollars?

No. I can confirm. Yes, I can confirm that we are protected, [ not in the books ], it's also be taking into account when we calculate our exposure, operational expenses, too. So, 91% almost fully -- our average hedge rate is lower than current levels of TL-USD.

Last one at the moment. What are your expectation regarding a significant increase in taxes on alcohol to finance government's expenditure on earthquake rebuilding?

So that's a very difficult question. As of today, it's very difficult to answer on our side. The one thing known is the government will be in need of more tax revenues and tax revenues. They are going to relocate businesses unknown today. So it is really, really difficult for me to make any comment on that.

And last question is what is the EBITDA contribution of just Russia?

Well, this year, it was practically the same as Ukraine, was not an EBITDA contributor. So we cannot say for Russia as well the range of 65% to 70% would be a number we can use.

Those are the questions. So we don't have any more. So thank you for -- everyone, for joining.

Thank you.

Thank you.