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

Ladies and gentlemen, welcome to Anadolu Efes' First Quarter 202 Financial Results Conference Call and Webcast. I'm Asli Demirel, and I'm the Investor Relations and Risk Management Director of Anadolu Efes. Our presenters today are CEO, Mr. Onur Alturk; and our CFO, Mr. Gokce Yanasmayan. [Operator Instructions] Unless explicitly stated otherwise, all financial information disclosed in this presentation are presented in accordance with TAS 29. There has been changes in the scope of consolidation in our first quarter 2025 financial statements. As known, on December 30, 2024, it was announced that pursuant to the presidential decree of the Russian operation -- Russian Federation, temporary external management had been appointed to Anadolu Efes' beer operations in Russia. Based on the evaluations, although the Russian operations formally remained under Anadolu Efes as of January 1, it was excluded from the scope of consolidation in the financial statements in accordance with TFRS 10. In the financial statements dated March 31, the beer operations in Russia, which were excluded from consolidation were accounted for as financial investments. 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. Sir?

Thank you, Asli. Good morning, and good afternoon, everyone, and welcome to Anadolu Efes' Quarter 1 2025 Operational and Financial Results Conference Call. Actually, we would like to begin today's call by sharing something that we are so excited about. As we look to the future, we have set a new vision for our company, Anadolu Efes, in line with our 2025 strategic road map, a vision that will carry our company into a stronger and more sustainable future. We now redefined our vision as becoming the fastest-growing beverage company with most loved brands that craft joy for consumers while enriching communities. So this new vision is rooted in a deep desire to become an essential part of our consumers' lives. We want every moment spent with our products to be enjoyable, memorable and meaningful. By constantly refreshing our strong local brands to meet evolving consumer expectations, we are already preparing for future today. Actually, our vision goes beyond being consumer centric. We also carry a strong sense of responsibility to enrich the communities in which we operate in our operating countries. Through our sustainability initiatives and social responsibility programs, now we are so committed to making a positive and lasting impact on society as well. Our goal is no longer just to maintain our leadership position, but to become the fastest-growing company industry. And to achieve this, we will build on our existing strengths while actively exploring areas for improvement and capturing new opportunities that I'm going to mention soon. I would now like to briefly walk you through the strategic priorities we have set to help us reach this ambition. As a part of our 2025 strategic road map, we aim to accelerate our growth by delivering strong performance in our core business, which is beer, while also unlocking new opportunities through geographical expansion and entering into adjacent categories and business areas. Our core business growth is anchored in empowering our people; deepening our connection with consumers; strengthening collaboration with business partners; enhancing efficiency and profitability, of course; driving digital transformation for the future of our company; and advancing our sustainability agenda. Through these priorities, we are committed to creating a long-term value for all stakeholders and shareholders. I would like to briefly talk about our priorities we have set to support this ambitious vision. We place our people at the heart of our priorities by investing in capability development to enhance their skills and unlock their potential. We believe this will ultimately add value to our organization. Consumers and their needs remain at the core of our growth strategy. In order to better meet the expectations and earn a lasting place in their lives, we are strengthening our end-to-end consumer insight capabilities and leveraging smart innovation to respond more swiftly to emerging trends. We view our customers and points of sale as business partners. Through our industry recognized commercial and financial solutions, we continue to support their development and success. To ensure long-term efficiency and profitability, we are building a culture of quality across our company. Now we are optimizing and digitizing our supply chain process end-to-end while also running a joint project with our group companies to enhance warehousing and field operations. Digitalization is another key priority for us, of course. By making all our systems more digital, we aim to become more agile and efficient organization. Sustainability is fully embedded across all of our business process, enabling us to create long-term value for both the environment and society. Half of the raw materials we use in our beers come from agriculture and nature. That's why we see ourselves not just a beer company, but also an agricultural one. We are fully aware of our responsibilities in these fields and have concrete investment and action plans in place. You can also reach to our practices from our first ever integrated annual report for 2024. Turning to geographical expansion. We currently reach consumers in around 70 countries in addition to our existing operating markets. While exports remain a key channel, we are also localizing in strategic markets through toll filling and license production partnership with local players. We also see strong potential in CCI's international footprint, and we are evaluating ways to create synergies through collaboration with our subsidiary across multiple areas. Expanding into new business areas is another priority that will accelerate our growth and help us diversify our revenue streams. In Turkiye, we recently entered the distilled spirits category through a sales and distribution partnership with William Grant & Sons. We plan to further strengthen and expand such collaborations in Turkiye. As stated in our renewed vision, we are gradually evolving from a beer company into a multi-category beverage company, offering a broader range of choices for our consumers. While preserving our strength in the current operations, I'm confident that these priorities will take us closer to achieving our 2025 vision and will position us even stronger for the future. I would also like to take this opportunity to announce that we will be holding a Capital Markets Day together with Anadolu Group Holding and our group companies on June 23 at Mayfair Hotel in London. This will be a valuable occasion for us to share more details about our exciting new vision and strategic road map as well as to reflect on the outlook for the remainder of 2025 and beyond. If you are interested in attending, please reach out to our Investor Relations team, and they will be happy to assist you with the registration process. As we move into the details of our first quarter performance, given the ongoing uncertainties regarding our business in Russia, we have now classified these operations as financial investments in our balance sheet. This means they will no longer be consolidated in our income statement until there is more clarity. That having said, our focus in Russia remains clear. We are committed to managing the situation with resilience and ensuring business continuity will be #1 priority and doing everything we can to minimize disruptions. In order for ensuring consistency and comparability with first quarter of '25, the income statement figures for the first quarter of '24 in this presentation are presented on a pro forma basis, meaning that they exclude the financial results of Russian operations as of January 1, '24. We delivered a solid volume growth on a consolidated basis with 12% despite ongoing economic challenges, supported by the strong volume momentum in our soft drink operations. While Beer Group's volumes declined slightly by 0.7%, this was largely expected, as you may recall, given the very strong performance in the first quarter of '24. While our strong consolidated volume performance supported top line growth, the impact remained limited due to our focus on affordability, especially in our soft drinks operations. On the other hand, in our beer group operations, cost inflation was mitigated through effective price increases. On top of that, an improvement in COGS per hectoliter was recorded, supported by limited increase in can packaging material costs as well as lower raw material prices in our Moldova and Ukraine operations, which ultimately resulted in an improved performance in gross profit margins. In line with the nature of business, we stepped our selling and marketing investments ahead of the high season, which impacted our EBITDA margin for the first quarter. Free cash flow turned negative as anticipated, mainly due to the seasonal buildup in working capital and ongoing greenfield projects in our soft drinks operations. Lastly, our net debt-to-EBITDA ratio was recorded at 2x. So let's take a closer look at our Beer Group operations. In Turkiye, we continue to execute a clear and focused strategy designed to strengthen our leadership and unlock new growth opportunities. Our ambition to grow our market share in the beer category remains intact, while premiumization and brand differentiation standing as our core focus areas. We are not only committed to expanding our presence, but also growing our beer business through higher value offerings that align with evolving consumer expectations. We are constantly moving and reshaping our offerings to better match changing consumer preferences, channel dynamics and market trends. Agility here is critical to staying ahead. So portfolio optimization is a top priority for Turkish business, Turkish operation. Another strategic priority is the expansion of our presence in Spirit business. We see strong potential here. And constantly, we are leveraging our commercial and operational capabilities to tap into new categories and new consumption occasions. Looking at Turkiye beer operations performance in the first quarter of '25, we have seen a volume decline of 1.7% as Ramadan took place entirely within the first quarter this year and considering the outstanding volume performance in the same period last year. So we are lacking a high base there, and we observed the volume performance that softened in line with our expectations. In addition, we continue to see a shift towards in-home consumption driven by the persistent inflationary environment. We believe that the downward trend in volumes is not permanent for the rest of the year, and there are positive signs in tourism, which represents an upside potential, of course, for our volumes. In Kazakhstan beer operations, we are implementing a multidimensional strategy to reinforce our market position and capture new growth opportunities across segments. Our first priority is to keep our #1 position in flagship brand, Kruzhka Svezhego. This is a core focus area for us, and we are actively investing in brand equity. At the same time, we are expanding into the new fast-growing nonalcoholic segment with the launch of Kruzhka Svezhego Non-Alc 0, aiming to tap into increasing demand for healthier and more versatile beverage choices. In parallel, we are focused on increasing our CAC share as well as the share of premium segment products and our presence in on-trade channels, which we see as a very good platform for long-term brand building. These dimensions will enable us to strengthen our footprint in Kazakhstan and secure our growth in the same country again. Kazakhstan's volume was softer in the first quarter, posting a low single-digit decline. This was primarily driven by pricing dynamics along with the full month impact of Ramadan, which particularly affected the on-trade channels. We implemented a price increase in January, but competition reactions came later and lower levels, which created a volume pressure on our operations throughout the quarter. Moving to Georgia. We are pursuing a focused strategy to strengthen our position in the beer category while improving the overall quality of our commercial execution in Georgia. We aim to grow our market share through targeted marketing initiatives and competitive pricing, ensuring our brands remain top of mind for consumers. Additionally, we are prioritizing to optimize our channel mix. We aim to improve working capital by improving channel mix management. We also recognize the strong potential in the CAC segment and focus on strategies like developing new products and the on-trade channel to have our fair share. Our investment in [indiscernible] platform will help us unlock additional value in the on-trade channel. Georgia started the year on a weaker note due to the impact of ongoing protests which began in December last year and continues into 2025. The unrest [indiscernible] and tourism leading a low teens volume decline. Despite the challenges, it's a great pleasure and pride for us, of course, to celebrate the 20th anniversary of Natakhtari, our flagship brand of Efes Georgia in '25. This milestone highlights not only the brand's strong heritage, but also lasting bond it has established with the Georgian consumers over the years. Moving on to Moldova and Ukraine. In Moldova, we are already performing strongly in the beer category, and we'll continue to build on this solid position. We are implementing mix management strategies across channels and packaging formats to optimize both pricing and profitability. At the same time, we continue to invest in building power brands to ensure we remain the preferred choice for consumers. Moldova carried its strong momentum into 2025, delivering low teens growth in the first quarter. This performance was supported by the continued expansion of modern trades and our focus on affordability and mix management, which helped us reach a broader consumer base. Moving to Ukraine. We continue to operate in a challenging environment. Our top priority continues to be ensuring business continuity and stability. Our focus is on stabilizing the sales team structure to maintain effectiveness on the ground. At the same time, we have secured prestocking at our Chernihiv brewery to help offset potential losses from Mikolayiv brewery and ensure supply chain resilience. In Ukraine, we recorded low teens volume growth in the first quarter, largely driven by the low base effect from the last year. Now let's briefly look at the performance of our soft drink operations in the first quarter. CCI had a strong volume performance for the year with consolidated volumes up to 13.4%, supported by positive contributions from all major markets. In Turkiye, volumes grew by 8.4%, mainly driven by accelerated trade promotions and effective consumer activations ahead of Ramadan. International operations recorded even stronger growth with volume up by 16.1%. Pakistan stood out with 17.2% volume growth, reflecting stabilizing macroeconomic environment in the country. Other major markets, Iraq, Azerbaijan and Kazakhstan also posted double-digit growth. In Uzbekistan, volumes grew by 8.4%, marking a solid performance despite the exceptionally strong base from the same period of last year. Overall, the first quarter was marked by a broad-based growth across geographies, supported by proactive commercial strategies and effective promotions. Now let's take a look -- a closer look at our financial performance. Our strong volume performance contributed to top line growth, yet the overall impact was constrained by our continued focus on affordability, particularly in soft drinks operations. Although profitability in Beer Group operations improved, thanks to strong gross margins, consolidated figures were impacted by the affordability focus in soft drink operations and higher marketing spend during Ramadan period. Lower operational profitability and monetary gains recorded under TAS 29 weighed on profitability during the quarter. In addition, the reclassification of previously accumulated currency translation adjustments from equity to income statement due to the change in the consolidation scope of our Russian operations resulted in a one-off increase in income from investing activities. Free cash flow in our operations remained broadly flat, while the impact of the seasonal investments and spending ahead of the peak season led to a negative figure. At the consolidated level, free cash flow was further impacted by lower operational profitability during the quarter as well as greenfield investments in CCI and higher interest rate expenses resulting in a year-on-year decline in reported free cash flow. Our leverage remains within our long-term sustainability target range of 1 to 2x, currently standing at the upper end at the 2x as of the year -- as of the quarter end. So now let me hand over to Gokce for in-depth comments on results for financials. Gokce?

Thank you, Onur. Good morning, good afternoon, everyone, for participating in our conference call today. So Onur talked about Anadolu Efes' consolidated results. I want to talk about the Beer Group results in more depth. But prior to getting into specifics, I ask you to refer to the disclaimer about the treatment of Russian operations, where we basically excluded from the consolidation, but treated as financial investments. I want to underline that Russian operations fair value was calculated to be TRY 48 billion, which is the equivalent of USD 1.3 billion. And as I said, it was recorded under financial investments. As this number refers to 100% of Russian operations, half of this value, TRY 24 billion is attributed to minority interest. There was also a net income impact out of this transaction, which was linked to currency translation adjustments being reclassified from equity to net income. Simply put forward, as Russian ruble appreciated against Turkish lira since the initial investment, a positive currency translation adjustment number had been accumulating under equity, this CTA was reclassified to net income. So we can say that there is no impact on the net assets of the company. And let me also remind on my part of the presentation, too, the figures disclosed are presented on a pro forma basis, excluding the financial results of Russian operations as of January 1, 2024, to ensure comparability. So -- and also an additional note, we have also presented key financials for Russian operations in our earnings release to provide insight about operations performance. Now in the first quarter, Beer Group sales revenue declined by 9.6% on a pro forma basis to TRY 7.9 billion, but this was mainly from international beer operations revenue, which was recorded at TRY 3.7 billion, down 13.5% year-on-year on a pro forma basis again. But we can here say that local currency price increases are in place and actually suggests us a revenue increase in local currencies. However, the decline happens when we convert revenue into TRY, Turkish lira because of Turkish lira's depreciation being lower than the index we use to -- inflation index rate we used to index prior year's numbers. But meanwhile, in Turkiye beer operations, we generated TRY 4.1 billion revenue, which marks as well 5.5% decline year-on-year basis. And the top line was impacted mainly by increased discounts because of the competition, obviously, and increased share of value segment products in response to prevailing macroeconomic conditions in the country. Beer Group gross profit remained flat on a pro forma basis at TRY 3.2 billion. Yet, we delivered a strong margin expansion of 384 bps on a pro forma basis again, and our margin was 40.3%. And here, price adjustments across operations successfully offset the impact of rising input costs and costs per hectoliter remained in this quarter relatively moderate. In the next slide, please, I'll talk about the beer EBITDA, which was recorded at TRY 4.5 billion negative with a margin of negative 6.2% in the first quarter. And this negative margin was primarily driven by Turkiye beer operations, reflecting the seasonality of our business. First quarter is usually the lowest income generating quarter for us, which impacts our profitability given the fact that selling and marketing expenses ahead of the peak season are also quite high in the same quarter. On the other hand, profitability in international operations, particularly in Kazakhstan and Moldova was quite strong. So for the rest of the year, we would expect gross profit and OpEx to get normalized and EBITDA to turn to positive. Beer Group cash flow was realized at TRY 7.2 billion minus TRY 7.2 billion and same as last year, we can say. And again, this is due to seasonality nature of the business. Again, typically, we record a negative cash flow in the first quarter of the year with increased working capital needs to get ready for the season. And in the next slide, I'm -- again, let me read first the disclaimer. Anadolu Efes' financial statements are prepared in accordance with TAS 29, the standards for financial reporting in hyperinflationary economies. As a result, all the information disclosed on this call and in our earnings release are in full confirmative 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. So excluding the impact of TAS 29, Beer Group revenue was TRY 8 billion with a growth of 23%, and excluding the impact again of TAS 29, EBITDA would decrease by [ 31% ] to TRY 0.3 billion. And if we were to exclude again TAS 29, Beer Group net income was reported as TRY 1.4 billion, which also excludes currency translation adjustment impact that I mentioned earlier in the first quarter. Next slide, please. So as of March 31, 2025, we had 57% of our cash in the Beer Group and 55% of our cash in Anadolu Efes in hard currency denominators. And our net debt ratio was 2x for Anadolu Efes 4.1x for the Beer Group. And on the risk management side, so the key figures for the group hedge currently 78% of our 2025 exposure for Turkiye and CIS have hedged. And similarly, FX exposure, we have hedged 95% of our current exposure for the year. So that ends my part of the presentation. Thank you, and I hand over to Onur.

Asli, any questions?

There are some couple of questions on the floor. So let me start with [indiscernible] question regarding the outlook for '25, and are you planning to provide the guidance for Beer Group operations like revenue and margins? What's your outlook for '25? And what's your expectation for Beer Group CapEx in 2025?

Actually, no. I mean given the unique situation in Russia and our commitment to transparency, we won't be providing a Beer Group guidance for '25, of course, until we have more clarity. But from a broader perspective, we expect our beer business to have a flat to modest market growth across our operations. However, our focus remains on the same, outperforming the market in every geography that we operate. In nearly all our operations, we aim to grow revenue above inflation, of course, supported by pricing advantage and favorable mix. We are also committed growing EBITDA in absolute terms to really anticipate some margin pressure. At the same time, strong free cash flow generation and deleveraging will remain top priority for us. So -- and once again, we won't be providing a Beer Group guidance, but we are expecting a modest growth -- flattish to modest growth in all our operations. On the other hand, again, within the question, I see Russia. Russia's first quarter volume growth was mid-single digit, a solid growth in Russia and still the operation is performing fairly well. And for full year of Russia's expectation, again, we are expecting a modest growth. Also in the question, I see CapEx ratios. So for the Beer Group, the CapEx spending ratio is approximately 78% of sales revenue. In Russia, it's less, 5%. In CIS, within the high single digits. In Turkiye, slightly exceeds 10%, primarily due to euro-based marketing investments such as [indiscernible] and also capacity investments, of course. On the COGS side, again, from the question, we appreciated the COGS in the first quarter. We are expecting normalization in the upcoming quarters for COGS. I think this is in a nutshell.

Thank you. There was a very similar question from [ Nicky ]. So I'm not reading it once again. There is another question regarding the EBITDA -- negative EBITDA in the first quarter in the Beer Group. And I think this, Gokce, this question is for you regarding the '25 free cash flow. Although [indiscernible] actually comment on this. Would you like to make any more comments on top of it? And maybe about the negative free cash flow on first question.

I think there was a question about this negative free cash flow we explained.

For the full year -- what we expect for the full year?

Well, we expect for the full year, of course, to see corrections from the current level. And we expect to end somewhere close to flat cash flow towards the end of the year. That's going to be our focus for this year for the Beer Group.

We observed that Russia generated TRY 2.5 billion EBITDA in the first quarter, yet the net income was only around TRY 40 million. Considering the operations are in a net position -- net cash position, can you explain the factors behind the relatively low net income?

Well, here, of course, I would refrain from making comments too certainly because we are trying to analyze Russian numbers, but we don't have the full details of it. But to the extent we understand, this net income difference is basically Russia holds foreign hard currency denominated cash and those are creating FX losses, which [indiscernible] net income.

You mentioned -- I think this question was already answered, but let me once again read. You mentioned deleveraging is a focus for '25. What is the level of leverage expectations for year-end?

Well, it's parallel to current levels we expect for this year.

We cannot take questions on Russia because there are very detailed questions like the amount of cash, et cetera. So we're not able to make any comments on this for the moment.

Well, we can remind you that we have provided some numbers to the extent we can in our earnings release for insight purposes. Please refer to those numbers.

Will you look at M&A to -- what's your strategy to diversify into spirits when you look at M&A to achieve this goal? And in which markets do you see the opportunity?

Well, thank you. Thank you for the question. Actually, it's a part of our growth strategy. Our growth strategy focuses on enhancing our brands and expanding both our product range and categories. I think we have a best portfolio of local brands in the mainstream segments in each country of operation. Additionally, also, we have access to our partners, [ ABI's Global ], an international portfolio, which allows us to offer a wide range of premium products for our consumers in geographies that we operate. But we continue to seek opportunities for geographical expansion, especially within CIS countries being the primary targets, particularly in areas where CCI is present, both for beer and again, both for spirit category, I may say. Countries like Azerbaijan, Uzbekistan are potential investment areas, and we are actively looking for opportunities to expand our presence in key international markets. Also, we see strong potential in China, Belarus and Central Asia as well as the Middle East and Africa. So I mean, in China, as a China company, we try to initiate our local production to enhance market penetration and reducing our logistic costs. And also, we want to grow in Chinese markets. Belarus presents a significant potential as an export market, of course. We currently have 15% market share. This presence provides us with valuable insights into markets. So we are ready to expand our footprint in the markets. It may be either with an M&A or other methods. And in Uzbekistan, following a recent tax regulation change favoring imported products, we are increasing our market share through products that we are sourcing from our Kazakhstan operation. And also, we are now evaluating the options for local production opportunities as well. So yes, in the geographies, as I mentioned in my presentation, we are seeking for opportunities both for geographical expansions for beer business. And also, we are looking for opportunities to expand our Turkish spirit business as well.

Onur, thank you very much for the very detailed answer to the question. As far as I see, there are no more outstanding questions on the floor. So I would like to thank everyone for joining the call. So this ends our call. Thank you.

Thank you, Asli.

Thank you.