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

Ladies and gentlemen, welcome to Anadolu Efes' First Quarter '24 Financial Results Conference Call and Webcast. My name is Asli Demirel. I am the Investor Relations and Management Director of Anadolu Efes. Our presenter today is Mr. Gokce Yanasmayan, our CFO. [Operator Instructions]. Following this, there will be a Q&A session where you can submit your questions using the question box on your web screen. [Operator Instructions]. As stipulated by the degree of the Capital Markets Board, the financial statements for the first quarter have been presented in accordance with the Turkish Accounting Standard 29. Financial reporting in hyperinflationary economies and retrospective adjustments have been made for the period -- prior periods in alignment with the same standard. In this presentation, certain financial items and metrics may be presented without inflation adjustment in order to ensure comparability with previous quarters to facilitate analysis for our performance relative to our '24 guidance. It is important to note that the financials presented without the impact of Turkish Accounting Standard 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. 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. Gokce Yanasmayan, Anadolu Efes CFO. Sir?

Thank you, Asli. Good morning, and good afternoon, everyone, and welcome to Anadolu Efes 2024 First Quarter Operational and Financial Results Conference Call. Let me start saying that at this point of time, our CEO, Onur, is in Russia. He's experiencing connectivity problems. So I will cover his part for today's call. Well, we are very pleased to report another quarter of robust growth achieving a double-digit increase in our beer group. This impressive growth is complemented by a slight rise in Anadolu Efes' consolidated volume as well. Our top line -- solid top line growth has exceeded the volume increase, demonstrating the effectiveness of our pricing strategy and revenue growth management initiatives. Through diligent management of our top line, we have successfully expanded our gross profitability margin, improving our efficiency and cost control, including hedging initiatives and revenue management. Although we reported a dilution in our EBITDA margin, as we stated earlier in our guidance, it's in line with our initial expansions. It mainly comes from Russian operation in beer group due to cycling a very high base of last 2 years. Furthermore, our financial discipline is evident in our consolidated net debt-to-EBITDA ratio, which was recorded at a healthy level of 1x as of March 31, within our target leverage ratio range. In the first quarter of 2024, our consolidated beer volume increased by 12.4%, driven by strong performances in Türkiye and Russia. Türkiye beer volume rose by 12%, while our international beer volume saw a strong growth of 12.5%. Russia demonstrated particularly strong growth with volumes up in the mid-teens. CIS countries recorded a moderate decline with volumes down by mid-single digits on the average. Ukraine had a successful quarter, increasing by low 30s, mainly due to the last year's low base together with the business recovery strategy, particularly in commercial drivers within all channels. In the first quarter of 2024, we experienced a growth in the Russian beer market. The market as a whole grew by high single digits, but our performance outpaced this resulting in a mid-teens increase in our total volume. The growth was achieved despite the challenging and changing competitive landscape. We have successfully capitalized on dynamic operating environment and changing consumers' preferences. Therefore, we have gained both value and volume market share. Additionally, we expanded our product offerings with new extensions in the near-beer categories largely in March 2024. Again, in the first quarter of 2024, the CIS region experienced a decline in volume with a mid-single-digit increase on average. Moldova and Georgia, though, registered growth while a softer performance observed in Kazakhstan, where the market itself also saw a decline. This decline can be attributed to various factors, including the impact of Ramadan and negative impact related to unfavorable weather conditions as well as floods. In Türkiye, our company demonstrates the strong volume performance with a significant increase of 12%, surpassing the growth of the beer market. While January showed a softer volume following the price increase taking as usual, yet we have observed an acceleration in performance throughout February and March. Despite the impact of Ramadan, we have managed to achieve robust growth in the first quarter, especially in our key brands, Efes (sic) [ Efes Pilsen ] and Efes Malt. Let's touch upon briefly on our soft drinks operation. In the first quarter of the year, CIS consolidated volumes declined by 3.2% due to lower volumes in international operations. Türkiye achieved volume growth of 5.4%, driven by effective consumer marketing activations and trade promotions. This growth is particularly significant as it cycles a low base of last year due to the impact of earthquake. In our international soft drink operations, volume decreased by 7.2%. In Pakistan, we faced significant macroeconomic and political headwinds together with a high base from last year, leading to a decline in volume. Kazakhstan registered a 10.9% -- 10.8% decline with foreign consumers moving back to their countries and high base of first quarter of 2023. On a positive side, Uzbekistan saw a remarkable 22.5% increase in volume, driven by improved market penetration. We delivered solid results in our top line figures as well as bottom line in the first quarter. Anadolu Efes revenues marked a 5.1% year-on-year increase, thanks to successful revenue growth management initiatives, price adjustments as well as favorable mix addressing value generation. Despite a fluctuation -- fluctuating and challenging cost escalation environment, the gross margins expanded in the period, yet EBITDA margin diluted due to operational expenses increasing ahead of revenues, which was already anticipated. Our consolidated net income was recorded at TRY 3.1 billion despite higher financial expenses. Increased bottom line was also supported by deferred tax income and monetary gains recorded resulting from Turkish Accounting Standards 29. As anticipated, the seasonality of our business led to a negative free cash flow in the first quarter of 2024. However, we expect this trend to normalize throughout the rest of the year. Consequently, our consolidated net debt-to-EBITDA ratio stands at a healthy 1x, reflecting our strong indebtedness. Now looking at the financials of Efes beer group, let me elaborate in more detail Efes beer group financials. Beer group's consolidated revenue at the end of the first quarter of 2024 was TRY 16.2 billion, a rise of 8.1% from the year before. International beer operations saw a 6.1% increase in revenue to TRY 13 billion. While sales revenue from Türkiye beer operations saw an impressive 18.3% growth to TRY 3.1 billion. The beer group's margin improved by 92 basis points to 40.7%, while its gross profit climbed by 10.6% to TRY 6 billion. Due to pricing and strong growth volume in Türkiye, beer showed impressive gross profitability. Nevertheless, the gross margin of international beer declined slightly, and this was primarily driven by Russia, in line with our expectations of the year. In the next slide, I will show you the EBITDA bridge of the beer group and free cash flow. Beer group's EBITDA decreased by 31.7% to TRY 1 billion and its margin contracted by 393 basis points to 6.8%. Overall, beer group margin declined as a result of decline in gross profit margin and increased spending primarily due to transportation costs in international beer operations, specifically in Russia. Beer operations usually have negative free cash flow in the first quarter, as I said, mostly as a result of higher working capital requirements. The impact of increased borrowing cost in Türkiye as well resulted in greater interest expense. On the other hand, in the first quarter, capital expenditures significantly decreased compared to the prior year. And in the next slide, I want to also give a flavor about financials without the impact of TAS 29. But again, let me repeat the disclaimer here: all our financial statements are prepared in accordance with Turkish Accounting Standards 29, which is the standard for financial reporting in high inflationary economies. So as a result, all information disclosed on this call and in our earnings release are in full conformity with Turkish Accounting Standard 29. However, financial information presented on this slide excludes the impact of Turkish Accounting Standard 29 and is presented solely for analysis purposes. Please note that these figures won't be aligned with Anadolu Efes financials and have not undergone any independent audit. So having said so, excluding the impact of Turkish Accounting Standard 29, beer group revenues was TRY 16.4 billion with a growth of 82% at the end of first quarter. Again, excluding the impact of Turkish Accounting Standard 29, EBITDA increased by -- would increase by 49% to TRY 1.9 billion. And excluding the impact of Turkish Accounting Standard 29, beer group net income was reported as TRY 693 million. About cash and debt management. At the end of again quarter, we had 64% of our cash in hard currency denominated in beer group and 67% in consolidated Anadolu Efes in line with our practices. And our net debt ratio is quite low, it's 1x for Anadolu Efes and 0.6x for the beer group. As I stated, this is within the ratio, leverage ratio, of our company. And following slides on the risk management, just to present key hedge figures to you, we have around 74% coverage in aluminum exposure Türkiye and CIS countries for this year. And FX exposure actually pretty much covered here, 100% in Russia and 94% for Türkiye. So that would end our presentation for today. So if there are any questions, we are ready to take them.

And there are a couple of questions already. Let me start with the first one. Please provide more color on the competitive environment in Russia.

Okay. As we discussed competitive environment, all we see in Russia is changing at the moment. We are seeing that there are new -- first of all, it's Heineken and it's Carlsberg. We have new management and new shareholders. There are new owners there. So there is a change in the market. Then we are seeing that competition is redesigning their product portfolios for the time being, and we are yet to observe how their portfolios will be looking like in the future and trying to understand their behaviors.

Any update on Russian JV deal?

It's in the progress. Actually, we had announced in December that we have applied for legal clearances and this process is continuing. If any developments, we will obviously publicly announce that.

Why there is a large discrepancy between EBITDA margin decline in beer and much better EBITDA, net income performance?

Just a second, I'm trying to understand the question, the margin decline in beer. That net income performance in changing inflationary accounting because of monetary items -- monetary and nonmonetary item adjustments actually. That's the reason of the discrepancy we've seen without inflation and inflation majorly.

What is the reason for higher transportation costs in Russia? Do we expect normalization in this year?

Well, I mean, I won't go into the details, but very briefly, I can say that shortage in railway is what we faced that changes the mix of the transportation to trucks from Romania, which is at a higher cost level.

We already answered the Russian beer market and the competitive market there. What is the reason behind pricing ability challenges? Are competitors following destructive competition strategy? The deal question is already answered. Can you quantify reason behind decline in beer operations, EBITDA margin in terms of normalization and hedging? Any adverse impacts from difficulties in Kazakhstan?

Well, pricing challenges in the Russian market, I would say this is actually market as usual. This year around -- the issue is that we have high cost base increases. We are having certain price increases, but they may not be enough to cover the cost inflation that we face in a single year time. That's, I think, the main challenge that we are having. And Kazakhstan actually, I don't think that we are expecting by year-end any impact -- adverse impact on our financials. The markets volumes are under pressure, but financially we expect to have an okay year.

Could you clarify how much cash beer group -- of beer group is in Russia?

Well, as of end of first quarter, I think at around 70% of our cash is in Russia.

And maybe to give a ...

And yes, I think it wasn't asked, but let me say it myself. So -- and around 70% of this cash in Russia is also hard currency denominated.

Is your guidance for '24 unchanged?