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

Ladies and gentlemen, welcome to Anadolu Efes Full Year '23 Financial Results Conference Call and webcast. My name is Asli Demirel. I'm the Investor Relations and Risk Management Director of Anadolu Efes. Our presenters today, Mr. Onur Alturk, the CEO; and Mr. Gokce Yanasmayan, the CFO. [Operator Instructions] I would also like to underline that as stipulated by the decree of the Capital Markets Board, the financial statements for the full year '23, have been presented in accordance with the Turkish Accounting Standards 29, the financial reporting and hyperinflationary economies and retrospective adjustments have been made for the prior periods in alignment with the same standard. In this presentation, certain financial items and metrics may be presented without inflation adjustments in order to ensure comparability with previous quarters and to facilitate analysis of our performance related to our '23 guidance. It's important to note that the financials presented without the impact of 29 are unaudited. Unless explicitly stated otherwise, all financial information disclosed in this presentation are presented in accordance with TAS 29. 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. Onur Alturk, our new Anadolu Efes' CEO. Sir?

Asli, thank you. Good morning, and good afternoon, everyone. I'd like to welcome you to Anadolu fiscal year 2023 Operational and Financial Results Conference Call. I'm delighted to be here for -- this is my first results call. It's been only 20 days since my appointment. However, it's been an intense period of catching up with operations, of course. And while this might be the start of my journey as a CEO, I'm certainly not new to Efes' operations. This marks my sixth year within the Efes' family and I could not be more excited to lead such a strong organization that our team has built so far. I am really dedicated to building upon this success and working. I have to ensure that we emerge even stronger. Together, I'm sure with my great team, we will capitalize on the opportunities, navigate the challenges ahead and continue to drive Anadolu Efes' towards greater success. Moving on to results of 2023, it has been another successful year, of course, for Anadolu Efes with its solid results operationally and financially. As a result of our [Technical Difficulty] vacation to our winning portfolio and operational excellence and strategic focus, we have strengthened our positions across the board despite casing so many challenges obviously. We have recorded a robust revenue performance as a result of our attractive portfolio play and strategic profitable revenue growth initiatives. This combines with our big focus on managing costs as a result of an impressive gross profitability. Despite the challenges faced last year, we have managed our operating expenses prudently. Although previous year's expense base was low, this disciplined approach has led to an outstanding cash generation, reinforced by strong operational profitability and effective working capital management. I'm also very pleased to announce our dividend proposal of TRY [ 2.25 ] per share and this is a testament of our commitment to delivering value to our shareholders, as always, of course. In 2023, Anadolu Efes' consolidated sales volume reached to 123 million hectoliters remaining flattish compared to the prior year. Our beer volumes reached 35.7 million hectoliters, meeting our high-end full year expectations and achieved a significant 5% growth, supported by the impressive result in both Turkiye and international beer operations. On the other hand, soft drinks performance was relatively softer attributed to mainly the difficulties faced in both Turkiye and Pakistan. Now if you dive into details, [indiscernible] in Beer Group mainly came from Turkiye and Russia, while Georgia also contributed in small scales. The international beer operations saw a 4.3% increase in sales volume and reaching 29.5 million hectoliters in 2023. Russian beer operations experienced a low single-digit percentage growth despite the competitive pricing landscape. It is worth mentioning that Ukraine production continued in 2 breweries, while headwinds are still being faced for obvious reasons, of course. In CIS countries, volumes declined on average, yet Turkiye beer operations had a phenomenal year, achieving a 9.1% growth to total 6.2 million hectoliters in total. When we come to Russia. The momentum in Russian beer market has been stabilized and the industry recorded a slight increase in 2023 and short stronger performance, particularly in the second half of the year. I am happy to say that despite a challenging competitive landscape, our operations have achieved an approximate 2% increase in volume. As a result, we have affirmed our market leadership in both value and volume share while strengthening our position in the premium segments, in line with our organizational strategy. Also, we have launched [ 40 ] newer schemes which is a huge numbers. This is in all segments throughout beer in 2023. Our company had the biggest innovation pipeline in the last 5 years. For example, [indiscernible] became the most successful launch among all in the markets. As a part of our product diversification strategy, which we have managed our portfolio to the newer beer categories, our nonalcoholic volumes increased by a low single-digit percentage and our [ cider ] volumes impressively grew by double digits. So these 2 helped a lot. Now when you look at Kazakhstan in 2023, Kazakh beer market experienced a mid-single-digit decline influenced by challenging economic and political conditions. Despite that, our volumes performed better than the market, and that allowed us to sustain our market leadership and even gain market share. Our [indiscernible] has successful momentum during this year, [indiscernible] consumptions continued that are still in place, but we keep on gaining market share in the first 2 months of the first year. And when we look at Georgia and Moldova. In Georgia, the new market showed relatively flat trends compared to the previous year. Despite this, we are able to report that our volume slowly grew in the low to mid-single digits. And our market leadership position was further solidified with a gain in market share. Notably, our brands, [indiscernible] gained significant share within the market. The highlight of the year was the successful launch of our premium craft beer brands, [indiscernible] further enriching our portfolio. And shifting to Moldovian beer markets. We observed a decline in the markets performance in 2023. While our volume performance lagged behind the markets, we are proud to have maintained our market leadership position despite the challenges faced. So despite these challenges, our new brand [Technical Difficulty] became the second most popular brand in the markets. So having come to Turkey, in the Turkish beer markets, we observed a strong growth of high single digits in 2023, despite cycling a high base. This is especially important given the environment of [indiscernible] and lower consumer confidence and also lower disposable income. Despite this, I'm happy to share that Efes' Turkiye has delivered an exceptional performance with our volumes up by 9.1%. The positive impact of the tourism has been a boost from both the markets and our volumes. It is important that [indiscernible] purchase remains the threshold trades, while we did observe relatively less growth in the on-trade channel, which is a trend expected in a high inflationary times and also the effect of 2 earthquakes. Throughout the years, we had successful product launches, including [indiscernible] And FX reserve. And these additions to our portfolio have been welcomed by our consumers. Our brands, Efes Malt and [indiscernible] also showed strong growth. Despite [Technical Difficulty] landscape, Anadolu Efes maintains its leadership position in Turkiye as of the other markets. Let's briefly cover our soft drinks business as well. In 2023, CCI's consolidated volumes decreased by 2.6% with softer performances in Turkiye and Pakistan, especially due to the natural disasters and macroeconomic challenges. On the other hand, some contributions came from Central Asia and Iraq. Uzbekistan emerged as CCI's fastest growing operation, registering a significant increase of 25.8%. And then we look at the financial performances totally in 2023, we delivered a very strong financial in almost every metric. And Anadolu Efes' revenues marked a 3.1% year-on-year increase, mainly supported by volume growth and of course, price adjustments made during the year. Our EBITDA margin realized at 17.9%, with 45 bps expansion. This was primarily due to the effective cost management and prudent OpEx spending. On top of our strong base, our consolidated net income was recorded at TRY 22 billion in 2023, which is mainly driven by strong operational profitability and its monetary gains recurrence as a result of TAS 29. In '23, Anadolu Efes' free cash flow almost tripled compared to a year ago. Strong free cash flow was contributed by both beer group and CCI, which was supported by effective working capital management and, of course, with its EBITDA performance. This strong level of free cash flow led our [Technical Difficulty] ratio to stay [indiscernible] levels, and that helped us a lot actually. Now, I would leave the ground to Gokce and he will provide a closer look at the financial metrics.

Thank you, Onur. Good morning, good afternoon, and welcome to our conference call regarding the full year 2023 results. Onur has touched on the consolidated results for Anadolu Efes. I therefore won't go into further detail about Beer Group's results. At the end of 2023, Beer Group's consolidated revenue was TRY 58 billion, a 6.3% decline from previous year. The revenue from international beer operations decreased by 14.7% to TRY 41.9 billion since the reporting currencies appreciation was less than Turkiye's inflation rate. But I have to say here that comparable to the decline in revenue and even more cost of goods sold in international beer operations declined as well by 12%. Therefore, Beer Group's gross profit increased by 3.7% to TRY 26 billion with a margin of 44.9%. This represents a 429 basis points improvement in margin contributed both by Turkiye and international operations. In the next slide, please, I will tell about EBITDA. The beer group's EBITDA decreased slightly to TRY 10.7 billion, but we've seen a margin increase of 50 basis points to 18.4% EBITDA margin. The free cash flow generation, though, grew by 71% reaching roughly TRY 5 billion, thanks to improvement in working capital. So in the next slide, before starting the slide, I have to say that Anadolu Efes' financial statements are prepared in accordance with TAS 29, the standards for financial reporting in hyperinflationary economies. And as a result, all financial information disclosed on this call and in our earnings release are in full conformative TAS 29. However, financial information presented on this slide excludes the impact of TAS 29 and is presented solely for analyzing purpose. Please note that these figures won't be aligned with Anadolu Efes' financials and have not undergone an independent audit. So just to give you, again, idea about exclusion of the impact coming from TAS 29, Beer Group revenue was TRY 55.5 billion with a growth of 50% and excluding the impact of TAS 29, EBITDA increased by 6% almost to TRY 11.7 billion with a margin expansion of 126 bps which, by the way, beats our guidance of flat margin for last year. And excluding the impact of TAS 29, Beer Group net income would be reported as TRY 3.7 billion. So briefly to talk about the impact of TAS 29 on balance sheet items, as monetary items are not indexed, we see no impact on trade receivables and payables. However, nonmonetary items like inventories, fixed assets, CapEx are indexed. And therefore, we have seen their impact on our balance sheet and cash flow and these details are provided to you in this slide. So on the next slide, please, about cash and debt management. At the end of the year, we had 69% of hard cash in hard currency denominated in Beer Group and [indiscernible] Anadolu Efes, which is again in line with our prior practices. And our net debt ratio is quite low. It's 0.7x for Anadolu Efes and 1.3x for beer group. Next slide, please. And this one is on the risk management, just to present key beer group hedge figures to you. We have around 66% coverage for aluminum exposure of Turkiye and CIS countries. And regarding FX exposure, we have hedge coverage of 89% in Turkey and 100% in Russia. So that ends my part of the presentation here, and I hand over back to Onur. Thank you.

Gokce. Thank you. I'm sure [Technical Difficulty] before our priorities, but let me underline our strategic core priorities and what it's going to be for 2024. Based on [indiscernible] actually our strategic priorities will not change in '24. Our corporate strategy folks are reaching millions of consumers across different cultures, geographies, contents and profiles through our rich product range. We aim to respond to changing consumer preferences with our innovative approach and diversified portfolio. Our journey is guided by 4 strategic focus areas supported by the 3 accelerators to achieve our goals. Our growth will be driven by a consumer-focused consumer-centric brand portfolio, strengthening by innovative launches. We are very committed to our operational excellence, enhancing both the quality and efficiency of production process. Geopolitical expansion remains a key goal for Anadolu Efes. It's growth pursued through acquisitions and mergers in new markets. Yet, our primary focus is to complete our deals, both in Russia and Ukraine. We prioritize our [indiscernible], of course. Financial discipline is in deep core focus to our strategy ensuring a profit-driven growth while enhancing value to our shareholders. We will continue embracing disposition and data driven analytics in order to improve our way of doing business. And our sustainable efforts will continue to be focused on achieving net zero emissions, enhancing social impacts and promoting the quality and diversity in the workplace. As we look towards the year '24, I want to provide an update on our guidance. In January, we shared our initial '24 guidance, which did not include the impact of TAS 29. We are now working on providing an updated guidance that incorporates TAS 29. But apart from that, I am pleased to share that the year has begun strongly and our early results indicate that we are on track to meet our objectives in '24. We are conscious of similar challenges that persist from the previous years, macroeconomic geopolitical tensions with high inflation and currency [ volatilities ]. However, I am also confident to say that we are well prepared as we have implemented the necessary measures to mitigate risks and seize the opportunities as they arise. I think that's it for the summary. Thank you for listening to us, and thank you for your interest. I think now actually we are ready to take questions if they are any.

Thank you Onur. There are a couple of questions. Let me start with the first one. Could you give an update in regards to the current status of the transition of [indiscernible] of Anadolu Efes in Russia. What percentage of Beer Group's catch is in Ukraine and Russia?

Let me take the first part of the question, then I will let give the ground to Gokce. The deal is working. It's work in progress. We are very optimistic about it. [Technical Difficulty] this one. And now we are still waiting for the approval of subcommittee of the Russian officials and the percentage of the Beer Group's [indiscernible].

I think, again, we can give a percentage around 60% or so. 60% to 65% of our cash is in Russia and Ukraine of beer group, yes.

Of Beer Group.

Of Beer Group, yes.

There's another question from [indiscernible]. Could you please elaborate your expansion plans or M&A plans?

Thank you for the question. Actually, we are looking for other countries that our partner, CCI, has footprint on, but yet again, our priority remains the same. So first of all, we want to close the deal in Russia and Ukraine. And then afterwards, we will be looking for opportunities especially in the countries that CCI has footsteps.

The next question comes from [indiscernible]. Could you please provide an update on the trading environment in Russia and Turkiye? And how it compares with your guidance so far? The second one is already answered, and that's reading. And the third one, do you see any cash flow pressure or upside from working capital?

So let me take through Russia and Turkiye environments. Then I will again leave the grounds to Gokce. For Russia, the year started with a strong growth in industry, and we have been outperforming the market up until now. So we have noticed that competitors are making some changes in their product portfolios including rebranding, redesigns, but our main challenge remains the same as pricing. We implemented a price increase at the beginning of the year, which was partially accepted by our outlets, sales outlets with the main retailers. And our prices are relatively higher than those of our competitors. And while we have had a promising start to the year, the key factor, which will affect our profitability in '24 will be how retailers will respond to our pricing and their acceptance percentage, of course. Additionally, fluctuating commodity prices could also impact our profitability. Overall, the year exceeded our initial expectations in '23 and with these strong starts, I think we are very optimistic in the Russian markets. But challenges are there. Pricing will be our -- our #1 priority will be closing deal and the next one in the field will be pricing. When we look at Turkiye, the beer operations in Turkiye have shown impressive growth over the past 2 years, so we have a strong base. As mentioned in the previous statements, we want to be cautious for '24 due to high base of the last 2 years, of course, and also, as we all know, the significant inflationary environment affecting our consumers' purchasing power, [indiscernible] money, disposable income and everything. However, there are potential catalysts such as anticipated increase in domestic and [indiscernible] numbers. We are expecting a good tourism season this year. And the year began largely in line with our expectations, and we are very ready for the year with a slight slowdown in January following the price adjustments, whilst when we look at year-to-date numbers in January and February, we see mid-single-digit growth in Turkish business. So after the effect of Ramadan to beginning of [indiscernible], we are very optimistic in Turkish operations as always. And also, as we all know, as you all know, we have a very diversified portfolio in Turkiye markets. So we are still investing in our brands, [indiscernible] and our portfolio. I think it's going to be a successful for Turkiye again.

Right, the next one. Working capital wise, I can comment on the numbers with no inflation for the time being in our initial guidance. We are seeing a small improvement in our working capital number without TAS 29. With TAS 29, we still have to work because there are many, many different factors impacting that number by the year end.

The next question is regarding Russian dividend. Can you please provide an update on the Russian dividend?

Well, I mean, as we have been communicating so far, we are really focused on closing the deal first. This was our priority -- strategic priority. Once we close the deal, dividend distribution will be in our focus.

Please elaborate the net loss in the fourth quarter without TAS 29?

Yes. The reason of that is the hard currency denominated cash we've been holding in our Russian operation. In the fourth quarter, ruble appreciated. So that created FX losses more than we assumed for. So that's the reason.

Company's strategy on volumes and pricing in high inflation demand. Will they continue to increase prices in Turkiye like you have in the past. We're seeing some volume decline. How will you balance profitability and scale?

Let me take this one. Actually in the first 2 months of the year, we are growing in terms of volume. As I said, mid-single digits volume growth. So in January, as you can remember, we have a good pricing in Turkiye. So in an inflationary environment like this, we will be, of course, looking for our consumers' confidence and purchasing power, but yet still, we have to be pricing up. But again, we have a very diversified portfolio with so many segments in Turkiye. I think we have very good products, very [indiscernible] products in each segment -- in each price segment. So in Turkey, we don't want to dilute our margins. We will work on discipline again. Yet again, it's going to be a balanced approach, of course, looking that our continuous purchasing power will be a priority for Turkish [indiscernible].

What's your CapEx guidance for '24 and how are you planning to finance the [indiscernible] acquisition?

The CapEx guidance for '24 unadjusted for TAS 29 is high single digits actually, we can say. And the finance of the acquisition, as we had announced, there will be no immediate payments. So we are not going to be talking about the finance plan [Technical Difficulty].

Currently, we don't have any more questions. Let me remind once again, if you are planning to ask the question, please write down your questions. Otherwise, we can conclude the presentation. Maybe let's wait for a while [indiscernible]. There seems none. Thank you for participating. [Technical Difficulty] Thank you.

Thank you for listening us.

Thank you.

This concludes our presentation.