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

Ladies and gentlemen, welcome to Anadolu Efes' First Half '23 Financial Results Conference Call and Webcast. Our presenters today, Mr. Can Caka, the CEO; and Mr. Gokce Yanasmayan, the CFO. [Operator Instructions] Just to remind you, this conference call is being recorded and the link will be online. Now I'm leaving the ground to Mr. Can Caka, Anadolu Efes CEO. Sir?

Thank you, Asli. Hi, everyone. Welcome -- I'd like to welcome you all to our second quarter conference call. As you are following since the start of the year, our performance, especially in the Beer Group, has been quite good, quite strong and obviously outpacing our expectations at the beginning of the year. So we observed an improved momentum versus the first quarter as well, especially driven by Turkey, Kazakhstan and Georgia. Despite last year, we had a very high base in terms of our EBITDA margin with the price increases we have taken over the board, but especially in Russia. We managed to increase our margins in the quarter as well, increasing our record level. Obviously, that has been supported by the strong top line growth. And also the favorable cost environment in the quarter, especially for the international beer operation, supported the margin improvement through the quarter. So I'm very happy this marks the sixth consecutive quarter where we were able to expand our margins on the Beer Group side, and that's obviously a big pleasure for me. Our strong momentum was not limited with operational profitability. Also, we were able to have significant improvement in our balance sheet management and cash flow generation, and we have now again pushed to new limits on these bonds as well. So with the very solid results we achieved in first quarter as we discussed from the very beginning of the year, we had very cautious expectations for guidance for the year. As we see the first half performance strong, we are revising our full year expectations on the Beer Group, and that has been translated on the Anadolu Efes consolidated results as well. Going to the volumes, obviously, our Beer Group volume performance significantly improved compared to first quarter, and we were able to grow our volumes during the quarter more than 5%. And again, as I emphasized, this is ahead of -- this was ahead of our expectations at the beginning of the year. As I mentioned, the growth is mainly attributable to Turkey beer volumes, which grew more than 20% in the second quarter. We also see improvement in the Russian beer volumes versus the first quarter and especially last quarter of the last year. So the decline in the overall beer market is lower in the quarter compared to the previous quarters and similarly reflected to our volumes. And as we have now Ukraine operational with 2 breweries, that is also supporting the volume growth. And overall, for the international operations, we have recorded a low single-digit growth through the quarter. Specifically for Russia, Russian beer market, as I noted a few minutes ago, showed some recovery versus last year's same quarter. Obviously, last year, it was a low base for the second quarter as the happenings in the region started -- or impacted the quarter very heavily. And also we had -- overall, the market had supply chain constraints. Also, we are seeing the pricing environment being highly pressured from the market players and also the trade members as well. So this is supporting the affordability and supporting the market in that perspective. Specifically, we see the markets like -- many global markets, we see both the premium and value segments growing in Russia as well. That is obviously value segment, more on the affordable side and the premium segment is a general beer market trend as we see across the board. And on the other hand out, when we look at our volumes, while volumes were down versus last year, and basically, again, this is the performance -- or the decline as the percentage is lower versus the first quarter and the previous quarters of the last quarters of last year. And that's partly related to the very high base. I mean we have taken significant market share in the first 2 quarters, first half of last year. So that was a high base for us when we look at the second quarter specifically that's linked to that. But overall, despite the high base, having a limited volume decline is better than our expectations. And obviously, when we look at the top line, I mean, with the pricing carryover with the price increases that we had last year had a significant carryover impact. For the first 2 quarters this year, we are seeing a positive impact. Obviously, this was partially normalized as we have this carryover effect disappearing in the second half. But obviously, we have lots of initiatives, lots of execution and better relationship with the trade as well, and that will be supportive of -- that was supportive for our volumes through the first half, and then we believe that's going to be supportive for the remaining of the year. And we also -- when we look at the nonalcoholic beer segment, we also see that our performance was ahead of the market overall. When we look at the other countries in the region, Kazakhstan volume improved versus first quarter, grew by low to mid-single digit in second quarter. We continue to gain market share in Kazakhstan. That is obviously positive. And another strong market for us is Georgia with more than 10% growth registered, and that is going strongly on the mainstream and premium side as well. And when we look at Moldova that's the most -- the market that has the most challenges. I mean we had the highest inflation in the region in Moldova and that has been impacting the consumers' disposable income. And also, we see the total population decline in the country with the macroeconomic challenges. That's why we see the market declining in Moldova, but we are also losing some market share because of the affordability issues. But overall, our CIS volume grew by low single digits on average during the quarter. So continued our performance in that perspective. Turkey, obviously deserves a couple of words. We had the strong momentum continuing in the second quarter. Obviously, the affordable pricing environment in the market is supporting this, but also a higher number of foreign residents in the country. Ramadan coming 10 days earlier, strong tourism and also supporting the market volumes. But again, this is a very strong growth we have registered in Turkey. And on top of the market growth, our volume performance was also very strong, over 20%. And we have also -- and that is more importantly, the growth was supported or coming from the off-trade channel, which is -- that is obviously consumer offtake and that's very, very important going forward. And we believe our diversion of affordable offerings also helped our volume performance in the future. That's the continuing trend in the market. A few words on soft drinks as well. I'm sure most of you have followed the conference call that our colleagues had yesterday. Obviously, just to remark, consolidated sales volumes declined slightly less than 9% in the second quarter, with soft volumes in Turkey and Pakistan. The volumes in Turkey had declined by slightly higher than 9%, mainly due to cycling 2 quarters of strong growth to our base, and we see higher impact of inflationary environment on demand on the soft drink side as the price increases that is supporting the top line and bottom line as well. In international operations, there was 8.6% decline, due to mainly Pakistan. And in Pakistan, the decline was around high 20s range and that's mainly driven by the macro headwinds as well as sudden increase in the excise tax that's returning as higher price increase. And in Central Asia, Uzbekistan continue to be the fastest-growing operation, proving the acquisition and geographical expansion as being a very right step for the CCI operations. And now CCI registering more than 25% growth in second quarter. A couple of numbers before I leave the ground to Gokce. For more details, our revenues grew on a consolidated basis, more than 63% in first half, reaching to more than TRY 62 billion range. In certain markets, we were able to take pricing and overall we also across the board, we enjoyed the carryover impact of the prices -- price increases of last year, and the growth was also supported by year-on-year higher FX translation impact, which is the international operations translated back into TL for the reporting purposes. In Beer Group, it has very gross profitability performance, and therefore, in EBITDA performance was delivered with strong support from international brewing international beer operations, and although OpEx to sales ratio was higher. Soft drink gross margin was impacted, as I mentioned, high inflationary environment, but it was mitigated by tight OpEx management on the soft drink side. And on top of the strong base, our consolidated net income increased to TRY 3.3 billion in first half, mainly due to high profitability EBITDA as well as valuation gain of around slightly less than TRY 700 million recorded from Anadolu Etap's consolidation into our accounts. It was another period where we were able to generate a high cash flow for our operations. When we look at the free cash flow generations, that was supported by both business lines and the in-source of, obviously, the support mainly driven by the higher profitability and very strict CapEx spending through the first half. That was slightly less in the second -- the impact of the lower CapEx will be less in the second half as we need to plan for the next year and even a longer horizon given the lead -- extending lead time in terms of machinery and equipment. But still, with the operational profitability, we will be able to continue our -- deliver our expectations. And as a result, our net debt-to-EBITDA ratio was parallel to what we had at the end of first quarter's lower than 1x. That's very healthy for on a consolidated basis. Now I'll leave the ground to Gokce for much more details.

Thank you, John. Good morning, good afternoon, everyone. Welcome to our conference call for first half results. Following another strong quarter, I'm happy to provide you more flavor about the results from the second quarter. Beer Group sales revenue was up by 49% to TRY 14.6 billion in second quarter, which represents an increase of 29% actually FX-neutral basis. International beer operations sales revenue grew by 38%, reached TRY 10.9 billion. And here, Can also mentioned carryover effect of pricing from last year still continues in the second quarter. Hence, revenue per hectoliter increase is still very strong in international beer, it's around 39%. But again, as Can also noted that this has to get normalized in the second half of the year as the highest price increase were implemented in the second quarter last year. Turkey beer sales revenue grew by 95% to TRY 3.6 billion, again, supported by a very strong growth of revenue per hectoliter of 61% and together with volume uplift of 21%. Obviously, good numbers in top line, good growth. Beer Group gross profit was also up by 68% to TRY 7 billion. And similar to first quarter, actually, here, we have a very solid profit and expansion in gross profit margin by 555 bps and thanks to mainly international beer and driven, again, by this pricing together with cost escalation being slightly better than our expectations. In the following slide, on the left upper side of the slide, you see net revenue in the second quarter increasing more than cost of goods sold, which leads to the expansion of gross profit I just mentioned. And just a reminder, percentages on the chart, represent FX-neutral growth. And you see also here again, the increase in OpEx is slightly higher than revenue. But in last year, in second quarter, actually, we had a very low base due to low selling and marketing expenses as [indiscernible]. Yet, together with that positive impact from conversion, Beer Group EBITDA grew significantly to TRY 3.4 billion in second quarter and we had quite high margin of 23.4%, actually. And this came with a high base of last year and represented an expansion of 317 bps in EBITDA margin. Typically, following of each first quarter in terms of cash generation, we see strong second quarter this year as well, and this is very comparable to last year numbers, as you see again. Free cash flow was supported by higher operational profitability. Here, we see negative number in working capital, which comes from actually a lower conversion impact of working capital in Russia as ruble also weakened this year. But all in all, cash generation was recorded at TRY 5.1 billion in second quarter. Next slide, please. On cash and debt management, actually here, things are more or less in line with our internal policies. By the end of Q2, 46% of cash we hold was hard currency denominated in Beer Group and 53% in Anadolu Efes consolidated. Net debt-to-EBITDA ratios are at a very healthy zone, 0.8x for Anadolu Efes consolidated and 0.4x for Beer Group. And then next on risk management briefly. Not much has changed here. I can say that from the commodities we can hedge, we had almost completely hedged our aluminum for 2023 already, and we have started to hedge for 2024 exposure. And currently we are around 38% of our coverage -- expected coverage. And from FX exposure point of view as well, our P&L was, for this year, well covered. For next year, we start also hedging [ our FX ]. So basically, this concludes my presentation. I will give word back to Can. Thank you.

Sorry, I forgot to turn my microphone on. Yes, let me repeat. We've been very cautious at the beginning of the year with the pricing environment, with the inflationary environment in every other market. We've been discussing at the end of first quarter as well that we would be revisiting our year-end guidance by the end of first half. So in that perspective, seeing the very strong first half results, we are revising upwards, especially on the Beer Group, our year-end expectations. Still, we are cautious for the rest of the year, but always various ups and downs, and there is a low base impact for the second half of the year. And we expect our performance with respect to the markets in every other market to continue. And we have full confidence to revisit and revise our full year guidance. And accordingly, we improve our beer volume to a growth expectation versus an initial decline expectation that we -- with the strong momentum we've seen in Turkey beer and less pressure, especially in Russia, we see low single-digit growth for the year-end. And therefore, on a consolidated basis, we now expect our volumes to grow by mid-single digits. Again, this was low mid- to mid-single-digits at the beginning of the year. We improved our beer revenue growth expectation to low 20s on FX-neutral basis as a result of the improved volume. Obviously, on a consolidated basis, we expect our revenue to grow by high 30s on FX-neutral basis again, and this was low 30s at the beginning of the year. In terms of Beer Group EBITDA margin outlook, despite we had record level of margin expansion last year, extraordinary strong performance in that line, we have positioned at the beginning of the year. We were expecting margins to decline, normalize to some extent, but now it's a bit limited now on the basis decline. And likewise, our consolidated EBITDA margin is expected to be -- expected to decline more or less in the same range. And I guess this is it for the time being. Thank you for your interest. And if there are any questions, we would love to answer your questions.

Thank you very much, Can Bey. We have a couple of questions. Let me start with the first one. Can you provide an update on your Russian dividend? Can you provide an update on the progress with regards to Russian JV acquisition? Does news of Russian nationals being prioritized in any acquisition in Russia change your thinking at all? How have discussions with ratings agencies progressed? Your outlook is negative by S&P, and you are still on watch negative by Fitch. When can you expect your rating to be normalized?

I can take this.

Thank you, Gokce.

We didn't actually -- we have understood that these processes are overlapping with the deal finalization. So basically, our first focus is to finalize our deal and to be able to apply to that and then we'll go forward with the dividend prioritization. So there is a prioritization there, and we want to make sure [indiscernible] first. So I think that's, to a certain extent, answer your question about the progress of the deal, as well as deal -- as well it's progressing. We are still in active discussion and starting to finalize the details of our agreement. Obviously, after the recent developments pressure, we are being cautious and trying to also understand what's happening and making sure that we do take the right steps, but our intention is still to finalize the deal and to [indiscernible]. And when it comes to the rating agencies, we have basically -- the good news there, actually, is that our rating was downgraded with reasons out of our company performance. I think, which is a good news. And we are obviously committed to take our ratings back. But -- and we have constant touch with S&P and Fitch, reviews meetings with them. Actually, I can't obviously tell about timing, that's something that they would know, but our performance are strong and we are willing to take our rating back as well as soon as distribution allows us.

Thank you, Gokce Bey. Can you confirm how much cash you have at EBI net earnings level and the percent of hard currency cash?

I can also give an answer to that. Around 50% of our Beer Group cash is in [indiscernible] Netherlands.

And there is a question about the ABI but you already answered so I'm not going to repeat it. A question comes from [indiscernible]. How was the third quarter performing in both domestic and international markets? Are you able to reflect cost increases in selling prices? Is there a possibility of an increase in profit margins in the third quarter? And he continues with a question of could you provide information about the competitive conditions in Russia. Is there any update on the complete acquisition of assets there? The same question. So Can, maybe you take or...

Thank you. Thank you, Asli. Let me try to respond to this. I mean, obviously, with respect to update about Russian JV development structure, provided the details. When we look at the volume performance that I was trying to pinpoint during the presentation, when we look at the international markets, we would be having a lower base effect going forward in the second half with volumes mainly driven -- mainly we have seen in the international markets volume decline in the second half of last year, driven by Russia, but also with the higher price points and the higher price increases across the board. So in that perspective, we see second half as a lower comparable in terms of volume, obviously, going forward. Turkey is different on that perspective in the second half of the year. You would remember last year, while we were able to grow volumes with our offerings that, say, making the -- expanding the portfolio with more affordable offerings as well that also helped the market grow in Turkey, we also -- which has been supported by a very strong tourism impact. Therefore, in 2Q, we will have a higher comparable in the second half of the year because of these main drivers. So the 2 pieces of the equation was our portfolio, international and Turkey would have different comparables, but that's, again, will reflect all this into our year-end guidance in that perspective. You see a flattish volume for the time being, and we are giving the guidance for the full year as low single-digit volume growth. Therefore, we expect to see volume growth continuing in the second half. In terms of cost increases, as we discussed at the end of last year as well, 2022 was not only impacted with very high commodity prices, current commodity cycle is supportive, but we were seeing a higher inflation, let's say, carryover inflate -- higher inflation impact moving into 2023, higher in enterprises and higher secondary raw materials in that perspective. We see in that sense in the first half, we have seen, let's say, better than our expectations in the pressure side, so that is positive. And currently, we see that continuing as well. That's also reflected into our margin guidance going forward. So overall, we don't see a major issue in terms of reflecting or covering the -- how we already implemented that the price increases that are necessary to execute our year-end expectations. So we are properly going forward. We're trying to make sure that we don't lose the, let's say, competitiveness in terms of pricing, see value segments growing in every other market. Value offerings are usually significantly less than our fair market share across the board. That's why we're very cautious to make sure we reflect -- compete on the -- respond to the competition in that perspective. And let's link this to Russia. In terms of pricing environment, we see the, again, similar to what I'm trying to describe right now, the pricing environment with lots of promotion from the old players, I would say, and let's say, lower than inflation price, being that is driven by the competition, that is driven by the -- let's say, trying to make the all the products more affordable and more -- competitors driven by more from the competition side. We see the pricing remain tough. The good news is we had significant carryover impact for first half. Second half, that would be balanced. But again, with the volume performance, we -- currently we are in good track for reaching out -- reaching to our year-end targets. I believe that covers all aspects of the question.

Thank you, Can Bey. Another question, could you provide cash position in Russia and Ukraine? Could you share the contribution of Russia and Ukraine to the total EBITDA in first half? How it changed compared to the first half of last year? Could you provide maturity schedule of loans in Turkish beer operations? And how do you plan to handle short-term maturities?

So let me take that. Cash position in Russia is quite strong. Actually, we are quite cash positive there. And currently -- and again give percentages to around 50% our acquired total cash of Beer Group is in Russia and Ukraine together, and that represents more or less 1/4 of Anadolu Efes' consolidated cash positions. Contribution to EBITDA is, again, for Russia and Ukraine together in Beer Group, we can say that it's around 65%, and that's very similar to last year's actual levels. And in Anadolu Efes, it's again, 1/4 of our beer is generated in Russia and Ukraine together, we can say. And the Turkish loans, yes, they are of short nature, probably on the average close to 6 months or so. And we accept that there are difficulties in Turkish market currently about refinancing. Therefore, in the second half of the year, we may choose to close some of them and refinance some of those, depending on the availability and [ cost profit ].

Thank you. Another question comes from [indiscernible]. Congratulations on strong results. Could you comment on USD-ruble performance and its effect on our -- on your business overall, including price actions? Have you observed the major change in competition in Russia following the change in controlling Carlsberg?

Can, if you like, I try and take this.

Yes. Go ahead. You're good.

We -- obviously, we are working on potential impact of global depreciation currently happening in Russia. And it is quite volatile. So the numbers, as we work, they change. I will be able to give a better flavor of the impact of this change once we finalize our budget process towards the end of the year, but there will be some impact that we will probably need to pass some of that through price actions for next year, though. For 2023, as I told, we are fully hedged actually, so that doesn't have any impact.

Yes. Another question from [indiscernible]. Do you think the volumes in Russia came higher because the overall consumption is higher than expected? Or you stole market share from the competitors?

Good question. I mean, as I tried to explain, the market performance was better than our expectations. So the market is performing better. And I would say, despite a very high base of high market share we had last year, our performance also is better than our initial expectations. I wouldn't say our current market share is higher than what we had last year, but until we have very much focusing on value share as we discussed in prior calls as well, then in that perspective, we see our value share is reasonably in line with our expectations.

Thank you. Can you provide more color on postponed payments and your free cash flow comments for '23?

Can, maybe I can just detail -- tell that there are certain payments that we have to do on JV level of Russia and Ukraine, which were depending on the cash repatriation from Russia. That's why they are being postponed.

The last question is actually a similar one. Is my understanding correct of no dividends or other distributions from Russia took place since '22? Is it due to difficulties with obtaining permits? Could you please discuss which countries, apart from Russia and Ukraine, paid dividends in first half to the holding company beer segment?

Yes, we haven't received any dividend since 2022. That's correct understanding. As I try to explain through process, which overlaps quite a lot with the deal closing process. Therefore, again, we wanted to focus on deal closing before we go forward there. And besides Russia and Ukraine, actually, all our operations are some sort of dividend or loan repayment. There is a cash flow, actually, from our [indiscernible].

Thank you very much. This concludes all the questions. Maybe we can also conclude the conference call as well. Thank you for joining and listening.

Thank you all. Thank you, Asli.

Thank you.