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

Ladies and gentlemen, welcome to Anadolu Efes' 9M 2024 Financial Results Conference Call and Webcast. Our presenters today, Mr. Onur Alturk, the CEO; and Mr. Gokce Yanasmayan, the CFO. [Operator Instructions] 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, Anadolu Efes' CEO.

Thank you, Asli. Firstly, welcome all. I would like to welcome all of you to our third quarter 2024 conference call. This is a very dynamic quarter for Anadolu Efes, marked with success in certain markets and of course, headwinds in others. However, I'm pleased to share, our Beer Group has achieved 6 consecutive quarters of volume growth with a solid mid-single-digit expansion in the third quarter of '24. In our soft drinks operations, challenges continued primarily due to the weakened purchasing power and ongoing geopolitical uncertainties that have significantly impacted overall demand. But as a result, we saw mid-single digit decline in Anadolu Efes consolidated volumes. Despite these volume contractions, we delivered a solid gross profitability, thanks to our effective revenue growth strategies which has, of course, offsetting cost increases. While we saw a strong improvement in gross profitability, rising operational expenses led to a slight dilution in our EBITDA margin. We are pleased to share that our consolidated net debt-to-EBITDA ratio remained below 1 this period, reaching a robust 0.6x as of September 30, '24, within our targeted leverage range actually. Additionally, we have once again achieved a net cash position in the Beer Group this quarter as well. Finally, in the light of these results recorded so far, we have decided to revise our guidance second time this year, which we will go through in the following slides. And when we look at the detail of the Beer operations, in the third quarter of '24, our beer volumes increased by 5.7%, continuing a strong momentum seen in the first 2 quarters as well. Growth was supported by strong performance in Russia, Georgia and Moldova. Turkey beer volume declined by 1.4% while our international beer volumes saw an impressive growth of 7.5%. Russia maintained a strong growth momentum from previous quarters, achieving a high single-digit growth, which highlights sustained strength of our business in Russia. In the CIS countries, increases in Georgia and Moldova operations have offset the decline in Kazakhstan, resulting in overall flat volumes. So when we deep dive into Russia, actually, beer industry in Russia maintained its growth momentum with mid-single-digit growth in the third quarter, building on the positive momentum seen in the first half of the year. We observed a shift from other alcoholic beverages to our category, Beer category since the start of the year supported by new investments, of course, and innovative product introductions, which further boosted market volumes. Despite intensified marketing efforts from competitors, I am once again pleased to report that we outperformed the industry, which means share gain, achieving high single-digit growth in the third quarter. We achieved this by focusing on our high-performing portfolio, staying committed to the commercial excellence and executing effectively. As a result, this success allowed us to strengthen our positions in all segments, except the value segments. Beyond our volume growth patterns, we maintained our leadership position across both value and volume metrics with additional share gains in each category. When we deep dive in CIS and Turkey, in CIS operations, Moldova and Georgia registered double-digit growth, which is good news for us, supported by effective brand activations related to Euro 2024 and Olympics. In Moldova, one of our main brands, Kozel and Finch, continue to drive growth this quarter in these segments while Kozel leading the premium segments, Finch is leading the mainstream segments in Moldova markets. In Georgia, Lowenbrau, Karva and Efes maintained their leading positions within their segments, while Natakhtari successfully increased its market share this quarter. On contrast, we observed a softer performance in Kazakhstan markets, recording at a slower pace than the previous 2 quarters impacted by weak industry dynamics. And during this period, we witnessed that the Efes brand increased its volume shares, while Kruzhka has maintained its leadership position with 13% market share. I'm also so proud to share that Kazakhstan achieved its highest market share in the last 4 years, diverging from market dynamics thanks to its strong portfolio, regional focus and effective sales and marketing initiatives. Overall, our CIS volume registered flat in this period. And when we come to Turkey, building on a high base from '23 as well as strong performance in first half, Turkey registered a decline of 1.4%, in line with the expectations actually. The decline was primarily driven by price increases implemented in the second half of the year, along with the weakening consumer purchasing power as no minimum wage increase was implemented for this period, all of which impacted the total volume figures in Turkey. And let's briefly provide some information about our strategic operations as well. In the third quarter of the year, CCI consolidate volumes declined by 9.2%, primarily by Turkey and Pakistan operations. Turkey volume was down by 12.2% influenced by the persistent high inflation, weakening consumer sentiment and the lack of minimum adjustments. International volumes posted a 7.1% decline. Iraq and Azerbaijan continued to deliver strong results, whereas Pakistan and Uzbekistan volume declined by 22.9% and 6.5%, respectively. In Pakistan, volumes were negatively affected by macroeconomic headwinds and weak consumer sentiment, while Uzbekistan experienced volume decline mainly due to the high comparison base from the previous year and purchasing power decline after the introduction of the excise tax in the country. Let's move on to our financial results. We delivered a strong top line performance. Growth during the period was driven by our Beer business and also supported by effective revenue growth strategies applied across all operations, such as price adjustments and the favorable mix addressing value generation. Meanwhile, despite profitable mix management initiatives, soft drink business recorded a decline as mentioned. Despite strong gross profitability recorded in the period, consolidated EBITDA margin was diluted due to the increase in OpEx for net revenue across both operations. Soft drink operations were negatively impacted by economies of scale, while our beer operations faced challenges in key markets, Russia and Turkey. As I mentioned in the previous call, margins continue to be pressured by the significant increases in raw material costs, transportation expenses in Russia. Meanwhile, in Turkey, higher trade marketing expenditures during the high season have led to an increase in operating expenses. Our consolidated net income was recorded at TRY 5.6 billion. The decrease in operational profitability along with lower recorded monetary gains compared to the same period last year led to the decline in the bottom line. Free cash flow recorded at TRY 5.4 billion at a lower level compared to the same period in '23. The decline was due to higher interest payments and increased CapEx in soft drinks following the investments in new production capacities. Consequently, our consolidated net debt-to-EBITDA ratio remained at a healthy level at 0.6x. That is highlighting our strong financial position. Now our CFO, Gokce, will give you details on the financial metrics.

Thank you, Onur. Good morning, good afternoon to everyone participating in our conference call today. So Onur talked about Anadolu Efes' consolidated results. Let me get into Beer Group results in more depth. So our top line expanded significantly in the third quarter. The Beer Group's consolidated revenue reached TRY 25.1 million, a 27.4% rise over the same period previous year. Our revenues in international Beer operations have grown by 40%, primarily driven by increased volumes and price adjustments in Russia to favorable product mix, however, has been a key driver of our revenue growth for our Russia operations. Additionally, I have to mention our international beer top line growth was positively impacted by the application of IAS 29 to 2023 figures. The deceleration in the inflation rate in Turkey from 6 months to 9 months this year lowered the index revenue base for 2023, and effectively boosting this year's growth rate for sales revenues. In the third quarter, Turkey's beer operations generated TRY 7.9 billion in sales revenue, a growth of 6.4%. And in 9 months '24, Beer Group's revenue increased by 9.6% to TRY 69.9 billion. Third quarter Beer Group's gross profit increased by 20.9% to TRY 12.2 billion, with a 262 bps dilution in gross margin reaching 48.8%. As we previously talked about, the main reason behind this is significant cost increases associated with raw material prices linked to foreign exchange in Russia. Although we have seen a slowdown in the gross margin contraction this quarter, this remains an ongoing challenge for this year. But as the top line increased strongly, so did the absolute gross profit. Consequently, the Beer Group's 9-month gross profit was recorded at TRY 31.9 billion, with an almost flat margin of 45.7%. So if you move to the next slide of, yes, Beer. In third quarter, Beer Group's EBITDA increased by 1.4% to TRY 5.3 billion with a margin of 21%. In Russia, even though the OpEx over sales ratio increased year-over-year, improved commercial performance have moderately declined in EBITDA margin compared to previous quarters. However, in Turkey year this quarter, we see margin contraction driven by relatively weaker gross profitability along with higher OpEx spending in the trade marketing. As a result, the Beer Group's 9-month EBITDA was reported at TRY 11.3 billion with a margin of 16.2%. And the Beer Group's free cash flow grew from TRY 2.1 billion to TRY 4.3 billion. Significant growth is supported by working capital management along with disciplined capital expenditure despite increased interest expenses. As of 9 months, the Beer Group achieved a net cash position of TRY 4.3 billion. And next slide, please. Here, let me start with the disclaimer. As Asli mentioned at the beginning, Anadolu Efes' financial statements are prepared in accordance with TAS 29, the standard for financial reporting in hyperinflationary economies. As a result of financial information disclosed on this call and in our earnings release are in full conformity with TAS 29. However, financial information presented on this slide excludes the impact of TAS 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 an independent audit. So excluding the impact of TAS 29, Beer Group revenue was TRY 68.9 billion with a growth of 67% in 9 months. Similarly, we have seen an increase of 40% in EBITDA reaching to TRY 13.2 billion in 9 months, again, without the impact of TAS 29. And Beer Group net income, excluding the impact of TAS 29 was reported as TRY 6.1 billion for the first 9 months. So in the next slide, please. About cash and debt management. As of 9 months, we had 64% of our cash in hard currency denominated in Beer Group and 59% of our cash in consolidated Anadolu Efes, which is pretty in line with our practice. And our net debt ratio is quite low for Anadolu Efes, it's 0.6x and we keep having a number below 0 for the Beer Group as we are in net cash position. Next slide, please. Just an update about the numbers on hedges. Basically for 2024, we have completely hedged the aluminum exposure of Turkey and CIS. It's done. And for '25 exposures, 38% of our exposure have been already hedged. Regarding FX exposure, actually no big news here. We have fully -- almost fully covered it for 2024. That ends my part of the presentation here. And now I hand over to Onur. Thank you.

Gokce, thank you. Let me continue with revised expectations. In light of the first 9 months performance, we are making prudent revisions to our year-end projections. While most of our business lines have demonstrated resilient performance, each has been uniquely affected by the external landscape up to a certain extent, of course. We have revised our year-end outlook for Beer Group's top line performance upwards, driven by strong volume growth in the first 9 months while maintaining a cautious stance on profitability margins. On the other hand, as discussed yesterday, soft drinks operations, we have downgraded their guidance due to macroeconomic headwinds and geopolitical uncertainties. Consequently considering both the challenges and successes in our markets, we have decided to make revisions on a consolidated basis. And according to these revisions, we improved our Beer volume growth expectation to high-single digits driven by a very good momentum achieved in Russia especially. In contrast, our soft drink operations, we have revised volume expectations to low to mid-single-digit decline from flat or low single-digit growth due to the decrease in consumer sentiments in the key markets. Therefore, on a consolidated basis, we now expect our volumes to remain flat, which was low-single digits growth previously. And we improve our Beer revenue growth expectation upwards from low 30s to mid-30s on an FX-neutral basis as a result of improved volume guidance. Meanwhile, due to softer volume performance, we now expect a soft drinks operation revenue to grow by high teens to low 20s on an FX-neutral basis, which was low 30s growth previously. And finally, as initially communicated, there was some risk for EBITDA margin dilution to be higher than initial plans. Following the first 9 months performance, the risk has materialized and necessitating a downward revision in Beer Group's guidance. Consequently, the expected decline in EBITDA margin has been revised from 200 bps to 300 bps, while profitability expectations for soft drinks operations remain unchanged. Consolidated profitability expectations have been adjusted from 100 bps decline to 150 bps decline. And despite this, nominal EBITDA generation is expected to exceed our initial projections significantly. And actually, that concludes our presentation. Thank you for interest and patience. We appreciate your attendance. And now, Asli, we can take questions.

Sure. Thank you, Onur and Gokce. The first question comes from Antonio. Can you please provide an update on your M&A transaction in Russia? When do you expect to get a dividend from the entity? We have a couple of similar questions, so let me just read this one, and this will be the answer for all.

I think there are a lot of questions about Russia. So let me give a brief overview about our Russian business and the agreements. So let me remind you the key terms of the agreement. So Anadolu Efes, we've acquired AB InBev's noncontrolling interest in Russian business. And meanwhile, AB InBev have been acquired Anadolu Efes' interest in Ukraine business. So this is the essence of the agreements. And of course, in order to facilitate an easy dividend repatriation process after this transaction, we decided to transfer the ownership of Russia from Netherlands to Turkey. So we are restructuring the new entity in Turkey. And of course, let me remind you, all of you that this transaction is subject to certain conditions and regulatory approvals in multiple jurisdictions actually. The exact timeline for completion depends on these regulatory processes, but we have already submitted the necessary applications. And now, we are waiting. So this is the brief overview that we can give about Russia.

Can you please provide the percent of cash held in Russia and the expectation portfolio?

Well, I mean, as Onur mentioned, we are in a sensitive process. So we are trying to share information sensibly. But what we can say about Russia and the cash is that we are able to still park almost 60% of our money in Russia in hard currencies. So that's still manageable. And I think that's what we want to share today.

We have seen headlines about Turkish exporters starting to use ruble swap to make cross currency payments. Does this update apply to your ability to repatriate dividends from Russia?

I think Onur answered this. We are first focused on the deal and then we will focus on the dividend repatriation.

Please discuss potential for share buybacks considering the decline in the valuations of Efes and CCI.

There are currently no consideration.

And actually, let me add this one actually as well. We haven't applied to the Russian Finance Ministry for dividend approval until now. So that -- let me underline this one to avoid any conflicts with the deal process. Therefore, we will postpone any application regarding dividend repatriation until the deal process is finalized. So let me remind this one as well.

Could you please provide more color on domestic market in Turkey? And what's the outlook for sales for '25?

Actually, in Turkey, volume performance exceeded our expectations in year-to-date figures, registering low mid-single-digit growth in '24. We expect to close the year with a low single-digit growth. And during the quarter, we observed the expected slowdown in consumer sentiment. It's highly affected by the decrease in purchasing power and the inflationary environment. However, the slowdown in this quarter was very mild, thanks to our wide portfolio of our brands together and our efforts to penetrate into new consumption occasions. And also on the pricing side, we have taken a 35% increase at the beginning of the year, following the excise adjustment in July. We have taken another 17.7%. So this was the second increase this year. And we are still working on next year's volume for Turkey markets, and we are optimistic on this one as well. Let me say this now.

What was the reason for positive working capital change in the third quarter?

Well, the main reason behind was the extended payable terms in Russia specifically.

Can you elaborate on competition and Russian beer market in detail? How are competitors behaving? Any positive or negative surprises?

Well, again, let's start to cover Russian business and the total performance. We have actually said that we outperformed the industry for another quarter. That's the most important, most crucial part. And this happened despite the intensified competitor marketing efforts and high growth comparison from the first half. While the market grew at mid- to high single-digit rates, our year-to-date growth reached low double digits, which is outperforming the total industry. And year-to-date figures show our position as a market leader, both in value and volume share. This is our #1 priority. With our market share, it's now exceeding 30% in terms of value, thanks to our wide portfolio. And we expect to continue this volume growth in the last quarter as well. In the third quarter, all segments in our portfolio recorded growth, except the value segment, which is actually not a big problem for us as well. And this mix shift is contributing positively to overall profitability. And in terms of financial metrics, Russia delivered strong top line growth during this period. As previously communicated, we anticipated EBITDA margin dilution in '24. However, improved commercial performance and of course, favorable sales mix, especially with the help of premium portfolio and effective transportation cost management helped to moderate this EBITDA margin decline in the third quarter. And also, we are still observing discounts from our competition. And again, we are still selling our products more than 100 index, around 105, 106 index, while our competitors are selling their products 92, 94 index. So again, we have a favorable mix with the help of premium portfolio. We are again waiting good results in the next quarter -- in this quarter as well. So this concludes our, I think, Russian business.

Could you please clarify the proportion of Beer Group EBITDA and cash balance in Ukraine?

Well, I think both are around 2% to 3% in terms of Ukraine's share in our Beer Group.

And how is the complete landscape in Turkey? In tough macro environment, what kind of observations have you made about demand switch between alcohol beverages consumption?

Again, our Turkey volume performance exceeded our expectations. And we are now registering a low single-digit volume growth. Our market share is stable. And actually, thanks to our wide portfolio, the slowdown in consumer trends -- actually depending on inflationary environment, Consumer Confidence Index and other macros, we are not affected that much. So we are optimistic on this one as well. For the last quarter, I mean, in the year-end, we are expecting again low single-digit volume growth in Turkey operations. And for next year, now we are sharpening our portfolio, our execution. We are optimistic as the Beer category is resilient.

The last question is about rating agencies. If we have been in touch with the rating agencies, and what's their feedback?

I think if they will have any feedback, they will publish a report where you will be able to read them. Obviously, we have meetings with them, update them constantly. But if they have something to say, they publicly announce that with their reports.

For the time being, I don't see any new questions. Let's wait for 30 seconds and then we can end our session for this quarter. This concludes our presentation. Thank you for everyone for joining.