Coca-Cola Içecek Anonim Sirketi (CCOLA) Earnings Call Transcript & Summary

Good morning, and good afternoon, ladies and gentlemen. Welcome to our full year 2023 results webcast. I'm here with Karim Yahi, our Chief Executive Officer; and Erdi Kursunoglu, our Chief Financial Officer. Prepared remarks will be made by Karim and Erdi accompanied by a slide deck. We will then turn the call over to your questions. [Operator Instructions] Before we begin, please kindly be advised of our cautionary statements. The conference call may contain forward-looking management comments, including projections. This should be considered in conjunction with the cautionary language contained in our earnings release. A copy of our earnings release and financials are available on our website. In addition, in accordance with the decree of Capital Markets Board, our 2023 financials are reported using TAS 29 financial reporting in hyperinflationary economies. The financial figures in this presentation and all comparative amounts for previous periods have been adjusted according to the changes in the general purchasing power of the Turkish lira in accordance with TAS 29 and are finally expressed in terms of the purchasing power of the Turkish lira as of December 31, 2023. However, to supplement the information provided for the first 3 quarters, which were reported without inflation accounting and to offer insight into our performance relative to our 2023 guidance, we will also present certain items from our financials without inflation adjustments. These unaudited historical figures are clearly identified as such. Any financial figures making such clarification are reported in accordance with TAS 29. Also, following the call, a full transcript will be made available as soon as possible on our website. Now let me turn the call over to Karim.

Thank you, Cicek. Good morning, and good afternoon, everyone. Thank you for joining CCI's webcast. Before starting, I would like to underline that unless I explicitly mention otherwise, all financial figures I will refer to will be as per inflation accounting. Looking back at 2023. Well, 2023 was not an easy year. We faced difficulties in our operations due to natural disasters, economic challenges and political unrest in neighboring countries. These have taken their toll on the consumer sentiment and volume generation, especially in Türkiye and Pakistan. Geographical diversification enabled balancing the softness in volume in these 2 countries with double-digit volume growth rates in Central Asia and Iraq. Accordingly, as communicated in January, our full year volume was down by 2.6%. All of our transactions decreased less only by 1.2%. As a result, we have recorded 129 basis points year-on-year increase in the share of immediate consumption packages reaching 27.3% share on a consolidated basis. Besides package mix improvement, we are also quite satisfied with our strong performance in Energy and Adult Premium categories throughout the year. Our commitment to disciplined revenue growth management enabled a new record. We have exceeded the $4 billion mark in consolidated revenue for the first time ever. Our dollar-based net sales revenue per unit case before inflationary accounting grew by 22% and reached $2.5 net sales revenue per unit case, the highest mark reached in the last 10 years. As I mentioned earlier, through effective revenue growth management, including pricing actions to keep pace with local inflation, mixed management and effective discount management, our net sales revenue reached TRY 101 billion with 8.4% year-on-year growth. Our consolidated EBIT grew 26% and yielded 201 basis points margin expansion. When compared with our guidance shared at the beginning of 2023, which was given without the impact of inflation accounting, EBIT margin improvements realized as 300 basis points versus last year reaching 18%, significantly above our guidance for 2023. As a reminder, our guidance was flat to slight expansion in [ EBIT ] margin. Last but not the least, I'm also quite proud to report the highest dollar earnings per share in the last 10 years, with an earnings per share of $1.4, CCI's operating model and its people prove their strength and resilience despite the numerous challenges faced in our geographies. Next slide, please. As we all witnessed in 2023, challenges persisted in our operating environment. Natural disasters, macroeconomic headwinds and political unrest in neighboring regions impacting consumer purchasing power, willingness to spend and consequently, demand generation. Nevertheless, we remain committed to our long-term strategy of creating value via growing selected categories and channels. Accordingly, in 2023, we have delivered 5% growth in Energy category, and 11% growth in Adult Premium category, mostly led by the Schweppes brand. While Sparkling category declined by 3.3% year-on-year, Coca-Cola trademark performance was relatively strong. The Stills category grew by 6.2% on top of 18.7% growth realized in 2022. Finally, the Water category declined by 3.5%, in line with our strategy to focus on quality growth. On top of our specific focus on certain categories, on-premise and immediate consumption packages share, we have continued our efforts to increase the base for low and no sugar portfolio. As such, low and no sugar portfolio share among total Sparkling sales increased by 519 basis points year-on-year, reaching 13.3% as of 2023. Next slide, please. In Türkiye, the earthquake, over year long challenge of high inflation and therefore, lower purchasing power limited our volume generation. Also, in the fourth quarter of the year, political sensitivities around issues in the Middle East have resulted in some shifts in consumer behavior and had an adverse impact on our business. Nevertheless, we have increased net sales revenue by 25.7% year-on-year with a robust 32.4% net sales revenue per unit case growth, thanks to right pricing actions and the effective mix management. Apart from smart revenue growth management initiatives, we benefited from effective procurement and hedging. This supported Türkiye profitability and EBITDA margin expanded by 130 basis points year-on-year. In the Sparkling category, we declined by 7.5%, while the Stills category continued its strong momentum with a 6.7% year-on-year growth on top of 13.8% growth realized in 2022. Finally, the Water category declined by 3.9% year-on-year, while the Immediate Consumption package shares within water improved significantly in line with strategic mix focus. Next slide, please. While Central Asia, Iraq operations contributed quite positively to the volume generation with double-digit growth, the macroeconomic challenges in Pakistan diluted the volume performance. Hence, we have declined 1.1% year-on-year in international volumes in 2023. On the other hand, due to the purchase in power adjustments with inflationary accounting, net sales revenue declined by 3.3%. While without the impact of inflationary accounting, 59.3% growth is recorded. Moreover, Immediate Consumption package share improved by 109 percentage points -- sorry. Moreover, Immediate Consumption package share improved by 109 basis points year-over-year, while on-premise channel also grew faster, gaining 29 basis points shares versus last year. Coupled with disciplined cost management, our international operations EBITDA margin improved by 134 basis points to 22.7%. Next slide, please. In Kazakhstan, full year 2023 volume growth was 2.4% year-on-year cycling 16% growth, while Sparkling category was the main driver with 4.7% year-on-year improvement on top of the 19.7% year-on-year realized in full year 2022. Apart from volume growth, we had improved on-premise channel share by 72 basis points throughout the year. And volume performance was softer in the second half of the year, yet we have managed to keep our market share intact. Uzbekistan was again the champion for delivering the stronger growth amongst all CCI countries with an impressive 25.8% year-on-year surge in full year 2023. Post acquisition, we have been implementing our CCI's playbook carefully and therefore, setting up the right route-to-market infrastructure with focused cooler placements. Uzbekistan also delivered 440 basis points Sparkling market share gain in 2023 along with 185 basis points increase in on-premise challenge. As discussed previously, Pakistan experienced the most difficult macro economic disruptions in its history. Accordingly, Consumer Confidence Index dipped to the lowest figures in the second half of the year since the start of the measurement 11 years ago. The Pakistan rupee lost around 25% value against the dollar year-on-year. Inflation reached 75-year high level throughout the year, impacting the consumer purchasing power negatively. Accordingly, CCI posted 16.4% volume decline in 2023, citing 13.1% growth a year ago, yet maintaining share in the market, which is another testimony to the strength of our execution. Now I will give the floor to Erdi for the financial review.

Thank you, Karim. Today, once again, we are proudly sharing our full year results. And we have delivered our quality growth algorithm as another proof point of our continued success in creating shareholder value. In full year 2023, our EBIT growth realized is 26.2%, exceeding our net sales growth of 8.4%. The close monitoring of consumers' purchasing power, optimize discount management and right assessment of commodities market movements have paved the way for a strong delivery in our profitability. As a result, we have generated 214 basis points of gross margin improvement year-over-year and 201 basis points expansion in EBIT margin. We have also delivered 48.3% year-over-year growth in net income, reaching TRY 20.6 billion. While these figures are in full conformity with inflation accounting, our numbers without inflation accounting are also very solid and similarly trending with 300 basis points of EBIT margin improvement year-over-year, which significantly beats our guidance. Consequently, again, without inflation accounting, we have delivered the highest USD-based earnings per share with $1.4 in the last 10 years and which is also up by 34% year-over-year. Next slide, please. Our determined focus on efficiency continued to yield positive outcomes also in full year 2023. On a per unit case basis, net revenue per unit case growth was 11.4%, which implies $2.8 of net revenue per unit case. Without inflation accounting, net revenue per unit case was $2.50, the highest in the last 10 years. This was achieved by right revenue growth management strategies and mainly through discount and mix management. With smart procurement measures, we also managed to contain cost of goods sold per unit case increased much lower than our net revenue per unit case growth at 7.9%. Successful hedging and prebuy initiatives made a positive contribution to manage cost of goods sold per unit case during the year. Subsequently, EBIT per unit case growth has surpassed the NSR per unit case growth with a solid differential and realized as 29.6% year-over-year. Next slide, please. In 2023, operating profit was up by 26.2% compared to the same period of last year. While strong revenue growth management was the main driver of EBIT expansion, controlled cost of goods sold and OpEx performance also supported this success, as mentioned earlier. As a result, we reported TRY 14.5 billion EBIT in 2023 with 14.3% margin. On to the next slide, please. As Karim mentioned, our full year results presented in this webcast and in our earnings release are in full conformity with Capital Market Board decree on financial reporting in hyperinflationary economies. Therefore, on this slide, we have presented some of our figures without inflation accounting so that we can provide more clarity as to our performance versus our guidance for 2023. Kindly note that these figures without inflation accounting are unaudited. Starting with the P&L. We have delivered 70% net sales revenue growth with a robust 75% year-over-year improvement in net sales revenue per unit case in TL terms. EBIT has reached TRY 16.3 billion with 104.2% year-over-year growth and yielding 300 basis points year-over-year margin expansion. Moving on to some balance sheet items to be specific to some DCF items, inflation accounting impacted inventories the most. However, since our average inventory that is not very high, the impact is not too significant. Total balance of inventory changed from TRY 12.2 billion to TRY 13 billion due to inflation accounting hedges. CapEx to net revenue was 6.1%, with inflation accounting and 6.3% without. Lastly, free cash flow before -- without inflation accounting was TRY 2.5 billion, which is in line with our guidance provided earlier. Next slide, please. As a result of our tight financial discipline, our balance sheet remains to be strong and flexible. Our net debt is $504 million, which is only 0.8x our EBITDA. Our short FX position after net investment hedge is at a comfortable level of $63 million. Thanks to our proactive debt management, the average maturity of our debt is 3.2 years with 42% of our current debt is scheduled to be paid from 2027 to 2030. This creates an additional comfort zone to manage and plan our liquidity on their current type global monetary conditions. The upcoming Eurobond payment in September 2024, will be partially repaid with existing cash and partially refinanced through bank loans. We will continue to be prudent in financial management to maintain a healthy balance sheet and strong liquidity position. Next slide. Now let's have a look into 2024 outlook regarding our procurement initiatives. We are quite satisfied with our approach in procurement strategy. And once again, we managed to gain a good visibility as to the majority of our 2024 raw material needs. In markets where sugar can be hedged namely Iraq and Jordan, we covered 100% of our sugar needs for 2024. Before the other markets, we mostly completed our prebuys. And right now, our total sugar coverage corresponds to 70% of 2024 sugar need in those markets. Similarly, for aluminum and resin, we have covered 70% and 86% of 2024 needs now, respectively. Looking at our commodity exposure for 2024, we are comfortable with our current hedge levels and rates. We will continue to monitor our markets closely to add further coverage if needed. Once again, thank you for joining this webcast. And now back to Karim for his closing remarks.

Thank you, Erdi. Finally, we have just recently completed and announced the acquisition of Coca-Cola Bangladesh Beverages in line with our aspiration to capture meaningful opportunities through inorganic growth. We are very excited and pleased to add another promising geography to CCI. Bangladesh offers amazing growth opportunities and fits well with CCI's expertise of operating in developing markets with low NARTD consumption. Bangladesh population is approximately 170 million people. And with this, Bangladesh is the 8th most populated country in the world. According to IMF estimates, the real GDP growth is anticipated to be 6.7% on an annual compounded basis in the next 5 years compared to 4% of emerging market average. Median age is only 28 years old, and urbanization is accelerated. Bangladesh is divided into 2 regions from the Coca-Cola Company's franchise perspective. CCBB that we have acquired serves nearly 2/3 of the population in both regions operate on an exclusive basis as per the license agreement with the Coca-Cola Company. As a result of the country dynamics, the NRTD market offers significant growth opportunity. The NRTD market has posted 10% CAGR in the last 3 years and reached 410 million unit cases. According to global data forecast, the industry had a 12% CAGR growth potential until 2032. Per capital consumption is one of the lowest, even in the peer countries group. To make a comparison to our largest markets, the 46 servings per-capita NARTD consumption in Bangladesh is 134 in Pakistan and 557 in Turkey. Bangladesh has the potential to immediately contribute to CCI's growth, thanks to our winning operational capabilities and effective route to marketing from peer markets. Now we will be happy to answer your questions that you shared via the Q&A chat box.

Hello, everyone. Let's start with the first question. With Turkey making up less than 1/3 of earnings and declining in share, the hyperinflation and combinant FX volatility, would you consider reporting your results in USD instead of Turkish lira?

Thank you for the question. We don't have a plan as such, and we will continue to report in Turkish lira.

Second question comes from JPMorgan, Hanzade. Do you continue to see demand weakness in our operating countries during the boycotts against U.S. products? Second, how has been demand [indiscernible] evolving in Pakistan since the beginning of the year? Third, what will be your guidance under IAS 29? Four, how should we interpret sizable pressure on Turkish margins in IAS 29 versus IFRS? Would this suggest that on a normalized inflation and raw material cost inflation, Turkish operations may have lower margins than its previous [indiscernible] EBITDA margin?

I'm going to take the following questions, I'm going to take #1 and #2 and Erdi will take number #3 and #4. So number one, about our operating geographies. So first, from a macroeconomic standpoint, it is important to note that in 2024, inflation is slowing down in our operating geography. And that is important to note because it gives us the opportunity to rebalance revenue generation so that we do not only depend on list pricing but can also effectively manage the mix to category mix, channel mix, pack mix as well as our trade discounts have optimized this level. So the objective for us in 2024 is to rebalance our revenue generation. Again, leveraging the fact that inflation is overall slowing down in dollar terms and therefore, giving us the opportunity to recreate a more balanced revenue generation with volume growth, mix management and trade optimization. Question number two, about Pakistan. Pakistan is a land of opportunity for us. Our 2,300 people in the country are focused on growing the business, and we are supporting them by continuing to invest. Positive news coming from Pakistan, from a macro context standpoint, the new government has been announced, appointments of ministers have been announced as well, and we see positive developments as we now look for IMF to support the country as it was previously announced and international investors to continue investing in the country. All this to say that we observe right now a stabilization in the country, which will allow us to recreate growth with our customers to satisfy our consumers. As a matter of fact, we have now launched a very ambitious plan during Ramadan with launch of 2-liter Coca-Cola for INR 200, so catching the magic price points of INR 200. And this offering entails a 500-milliliter free product. Hence, creating growth with consumers and partnering with customers. So to answer your question, we see stability around the corner in Pakistan, and we are here to continue winning in the marketplace to offer to consumers what they want and to partner with our customers to create growth.

Thank you, Karim. Let me continue with the third and fourth question on this. As to our guidance for 2024, Inflation accounting is new for all of us, and we are all trying to digest this in -- with full implications. Therefore, we, at the moment, refrain from providing a guidance with inflation accounting for now, which was our guidance from early Jan is still intact and valid. And the last question on this as regards to Turkish margins. Yes, we're keeping our guidance at this point published early and no further comments on this one.

Next question. Congrats for strong results. Coca-Cola lags behind in terms of population where they are made. Current sales market produce $20 billion, [indiscernible] $30 million. Although the dynamics of geographies in which they operative would differ, as the largest [indiscernible] in the same ecosystem, do you find these figures possible for CCI? What could be the main reason for outsized gap?

Thank you. That's a great question. My friends from FEMSA are doing a great job, but it's a formidable bottler. Just to give some perspective on their key countries. If you look at Mexico, which represents a sizable portion of its performance, Mexico has an NARTD per-capita above 1,000. In comparison, CCI on average, has a 400 per-capita. And again, with a wide range of realities going from the 40 per-capita or the 10 KO per-capita in Bangladesh, as I said earlier, of to Kazakhstan with 200-plus per-capita for the Coca-Cola NARTD share. So I will say that we have plenty of opportunities in our geographies because of the low per-capita that our -- that the categories have. And at CCI, we are committed to develop the market, it means grow per capita over time, at the same time, implement the right strategies through revenue management through route-to-market in order to, at the same time, create revenue and trade value. So for us, we are committed to developing a market and grow per capita as well as create value over time. It's just that [indiscernible] of our market as I explained, we operate in lower per capita markets versus our colleagues from FEMSA.

Next question comes from [ Evgenia ]. I have several questions. One, could you please share your guidance for '24? Two, how much EBITDA do you expect Bangladesh to generate on an annual basis?

Thank you for the question. For the first part, again, our guidance for 2024 from early Jan still holds, with mid-single-digit volume growth, low 40s percentage FX-neutral NSR growth and EBIT margin flat versus previous year. And for Bangladesh, we can't comment on Bangladesh specifically, and Bangladesh is quite small at the moment within our total for now.

Next question comes from Matias. Can you comment on cooler investments across different markets?

Yes. Thank you for the question. Well coolers are a critical growth CapEx investment for us. So the way we look at it, to summarize, over the years, our shareholders have always been committed to invest ahead of demand. And what does it mean? It means that, overall, when you look at over 15 years CAGR, we typically invest between 6% to 8% of our revenue into CapEx. And in this CapEx, you have different categories of CapEx. You may have your greenfield for manufacturing plants, you're going to have new lines and you're going to have coolers. So roughly, the way we look at it is we dedicate a 1/3 of our total CapEx to coolers so that we can grow in the marketplace ahead of demand and then grow the per capita on the other side with our colleagues from the Coca-Cola company so then we can then bring the customers, bring the consumers to stores and so that the consumers can meet our beverages in the coolers and create transactions every day. So that's the way we look at it. So 1/3 of our total CapEx going to coolers, give or take on average, and we dedicate to 6% to 8% of CapEx revenue every year on average.

Next question comes from [ Virginia ]. What are the main investment projects planned for 24?

Great question. Again, we are committed to investments always. What we have right now planned is quite straightforward. We do have some greenfield plant. We do have some line investment plans. And so when it comes to greenfield, we're planning to have 2 new greenfields in Kazakhstan and Uzbekistan. So you're going to see that coming up before the season in 2024. We're planning to also have some new line investments in Türkiye, planning some new greenfield also -- planning for further greenfield it's time for a little longer, but we started the process in Iraq. So all in all, a significant year of investment in 2024, again, completely in line with our winning to invest ahead of demand, and to create capacity ahead of demand. And again, back to the earlier question about having like 6% to 8% of revenue dedicated to capital -- over the years.

Follow up question from [ Ingenia ]. Could you please share any details regarding your net leverage ratio targets?

We don't have a specific target on this, and we are comfortable to be below 2x net debt-to-EBITDA. And currently, as I mentioned earlier, we're sitting in 0.8x.

[Operator Instructions] Next question comes from [indiscernible]. Would you agree that $2.5 per unit case net sales revenue would be actually for CCI universe with the current micro dynamics.

Thank you. It's a good challenge. I don't think it is a seeding. I think it is a step in the right direction. Again, the way we plan and the way we execute is very disciplined. We first look at what is the cost of goods sold per unit case inflation, then we look at how can we create growth in the marketplace between volume generation revenue, pricing on the shelves as well as mix management and trade optimization. $2.5 per unit case is a good threshold, but it is certainly not the end of the journey.

[Operator Instructions] Next question comes from Mattias. Given the change in accounting rules, are coolers now better reflected or closer to intrinsic value on your balance sheet?

Good question. I mean that's the -- that's one of the kind of advantages of inflation accounting to bring obviously fixed assets also to closer and to more realistic value, and we can also stay the same for coolers, of course.

Next question comes from [ Zerman ] from Ata Invest. How do you see the outlook in the first half of '24, both in Türkiye and international markets? Any short-term color on price line demand trends, please?

Thank you. That's a great question. As you may imagine, it's something that we track every day. So to answer your question, a little bit related with the previous question on a similar topic. Again, in our geographies, when you look at the cost of goods sold driven by inflation, we observed a slowdown in 2024 compared with 2023. That slowdown is happening in front of our eyes, and it gives us the opportunity to rebalance our revenue generation. One thing that we need to establish for us is to recreate volume growth so that we can benefit from these lower inflation rates, and that is going to be our focus for 2024.

Next question comes from [ Pascal ]. You talked about your '24 guidance. Can you please give us a sense about our FX and inflation assumption to get to this item?

Thank you again. We don't share any guidance yet with inflation accounting. So also, therefore, hence, cannot share any FX and inflation assumptions at this point.

Would you consider coming back to the market to finance your investment projects? Do you have a need for additional funding?

At the moment, there is no need for additional funding. Our balance sheet is strong enough and set for all the plans for -- and within 2024.

No more questions left at this point. Thank you for joining CCI's webcast. Goodbye.