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Edited Transcript of AEFES.IS earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Anadolu Efes Biracilik ve Malt Sanayii AS Earnings Call

Istanbul Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Anadolu Efes Biracilik ve Malt Sanayii AS earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Asli Kiliç Demirel

Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - IR Manager

* Can Çaka

Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CEO & Beer Group President

* N. Orhun Köstem

Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CFO

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Conference Call Participants

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* Cemal Demirtas

Ata Invest Co., Research Division - Head of Research

* Ece Mandaci Baysal;Unlu & Co.;Senior Manager

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Anadolu Efes First Half 2019 Financial Results Conference Call and Webcast. I will now hand over to the Investor Relations Manager, Ms. Asli Demirel. Please go ahead.

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Asli Kiliç Demirel, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - IR Manager [2]

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Hi, everyone. Welcome to Anadolu Efes Beer Operations 2019 Second Quarter Results Conference Call and Webcast. 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. Can Çaka, Anadolu Efes CEO.

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Can Çaka, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CEO & Beer Group President [3]

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Thank you, Asli. Good afternoon, and good morning to everyone. Nice to be back with you with our second quarter results conference call and obviously, it is nice to have strong results to report today. It has been 8 months since I have taken over as Anadolu Efes' CEO, and I have to say it hasn't been a quiet period throughout this 8 months. We have seen good momentum in our business as we continue our progress in line with vision of being the largest brewer from Adriatic to China and moreover developing and owning social life and beer culture. In this journey, we define 3 areas of strategic importance, that is: to invest in our people; invest in our brands; and investing in our corporate wisdom. And we are quite happy to see that the robust operational performance we achieved so far is supported by our initiatives in these areas, but more important that this gives us confidence [that to accelerate] what we aim for. Happy to repeat, we achieved strong results in the second quarter of the year across the board. Consolidated sales volume grew by 4%, mostly assisted by very [slow] solid growth achieved in international beer reached -- drove beer segment volume growth to almost 9%. As a result of our price increases, favorable mix in line with our premiumization strategy as well as positive transition impact, revenue growth significantly outpaced volume growth throughout the quarter. Revenue growth for the beer segment in the quarter reached to 50%.

More importantly, growth in our -- in EBITDA was higher than that in revenue growth, 50% on a consolidated basis and more than doubling the EBITDA for the beer segment. Such superior growth resulted in almost 200 basis point margin expansion year-on-year for the quarter at Anadolu Efes and a whopping 460 basis points expansion for the beer segment. Higher operating profit and lower FX losses resulted in an improved bottom [line], obviously. Consolidated net income in the second quarter was TRY 434 million.

Finally, a few words on our free cash flow generation. As always, we have an emphasis on strict balance sheet management coupled with the strong performance, we've managed to generate more than TRY 630 million of free cash flow generation in the 6 months of the year. Needless to repeat, free cash flow generation is one of our top priorities, and we remain committed to deliver solid free cash flow in the rest of the year. However, it is note -- worth to note that strong performance in first half is also driven by certain timing differences in our CapEx spending and payment terms. Therefore, we do not expect to grow cash flow with the same momentum in the second half of the year. I already [spoke] on the financial figures. What I want to highlight here is that the share of international beer in our consolidated results is growing significantly. Last year in the first half, international beer only contributed [by] 30% to our consolidated revenue, while this year its share increased to 37% and contribution to EBITDA increased even higher growing 10 percentage points to 33%. If you take the international part of our soft drinks operations as well, 60% of our consolidated EBITDA as of today is generated in international markets. We find this diversification extremely important for the sustainable growth of our business.

Our total beer volume growth in the second quarter was very strong at 9% bringing the 6 months total volumes to 17.5 million hectoliters. In Turkey, our second quarter performance was much stronger compared to the first quarter. Tough trading conditions continued through the quarter. We have seen volume decline in many categories as a result of the weak consumer sentiment and higher prices. Moreover, we have seen illegal alcohol consumption growing as a result of the higher price points. The impact was of -- mainly on hard liquor, but also we are seeing also limited -- limiting factor on our beer sales as well. Despite all, Ramadan moving to May, tourism, especially holiday at the beginning of June out, and we were able to keep our volumes almost flat in the second quarter. A significant performance improvement also up by the expected price increase at the beginning of July.

On the other hand, we are focusing on our core mainstream brands, building on our heritage, while continuing to innovate and introduce new brands in the market in order to move the beer culture forward. We had sponsored and organized much more festivals, gatherings, while also creating new touch points through micro communities. Our commitment to quality, freshness and offering our consumers a brand of portfolio of their choice help us fulfilling our mission of brewing joy.

So overall, we are seeing positive feedback from our customers, consumers and partners in all dimensions, yet the general trading is not giving us the expected momentum. However, we are committed to reveal the consumer franchise foundation that would provide us leverage once -- leverage this once the trading is a bit better. On the other hand, international beer operations had a very good quarter by growing 10% year-on-year. This performance is achieved by the positive contribution of all markets with the anticipated expansion of Kazakhstan where we were cycling a strong base [over] last year, especially Russia and Ukraine [with] Russia recording a high single and Ukraine double-digit growth rates.

In both Russia and Ukraine, we performed ahead of the market, solidifying our market positions. In Ukraine, the significant outperformance came on the back of the relaunch of Efes portfolio. And in Russia, our increasing presence in certain sales channels and good performance in certain segments contributed to the strong growth.

In Moldova and Georgia, we had, in line with our strategy, relaunch our core brands such, relaunches and increased activities around the core. We expanded portfolio with ABI InBev's premium brands, both markets contributed to the volume growth. We are clear market leaders in all the markets we are operating, and maintaining our headstart position in Russia as of today.

I will very briefly say a couple of things on soft drinks as well. I'm sure you listened to the CCI's conference call just before ours. Consolidated soft drinks volume grew by 2% with flattish performance in Turkey due to a very strong base effect and impact of [nonready-to-drink] tea category and also with 3% growth in international markets assisted by the strong double-digit growth of Central Asia. This [kind of] customer sentiment that I explained earlier, this growth especially in Turkey is obviously, a strong performance coupled with double-digit revenue and EBITDA growth.

I now hand over to Orhun for financial details and review.

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N. Orhun Köstem, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CFO [4]

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Thank you very much, Can. Good morning, and good afternoon, ladies and gentlemen, welcome again. We are very happy to report obviously a very strong second quarter for Anadolu Efes. As Can was pointing out, part of that is due to how the soft drinks business have performed, and I hope you followed up on that. But separately, if you look at Anadolu Efes, this is Page 9, obviously we're looking at a better growth quarter-on-quarter versus last year in the second quarter when compared to the first quarter of 2019. Our revenues in the first half therefore, grew by 32% ahead of the volume. Gross profit growing ahead of the revenue and then EBITDA as well growing ahead of the revenue. Therefore, we are also looking at margin expansion. I'll come into that in detail, but you see obviously, the Beer Group has been a great contributor to that growth and obviously, our businesses outside of Turkey have been the greatest contributor to that growth in this quarter.

Obviously, in the second quarter, again, the Beer Group has continued its growth momentum with volumes growing and then revenues growing ahead of volume and all our profit metrics are growing ahead of the revenue. Therefore, we are delivering an EBITDA margin expansion. Two things I would like to draw your attention to here. Obviously, one, if you look at our Turkish business, we've discussed earlier in our first quarter results that the start of the year was slower than our expectation volume-wise, and that was also coupled with higher level of input costs and obviously, the impact of the FX in our cost base, even with the hedges that were in place since last year. You will all remember that we have hedged about 90% of our FX exposure in Turkey coming from our cost of goods sold, OpEx and interest. The second quarter in Turkey has been relatively better. Obviously, the volumes have been, as Can was pointing out, slightly picking up. Tourism is kicking in obviously, we are seeing double-digit growth in there, basically. So therefore, you see a relatively better volume performance and a relatively better profit performance, but obviously not to the tune of what we would expect. So even though we would expect the better profit performance building up in the second half of the year because now we've made a price increase after the first half at the start of July and then obviously, volumes picking up that we have seen towards the back end of the second quarter. We will nevertheless expect to see a better second half in terms of profitability as well. But just to be on the prudent side, we have just adjusted our guidance in terms of our Turkish business at this point in time.

If you look at the international business however, obviously our businesses outside of Turkey more than makes up the shortfall that's in Turkey. Having said that, again, one word of caution, you'll remember -- you know that we were reporting on a pro forma basis between '18 and '19. If you look at the -- our JV in Russia and Ukraine obviously the first quarter of that business is even weak with combined impact of both businesses was not an EBITDA generator. So the performance you see in the first half obviously comes on top of that so it's profit-wise, especially -- the growth is quite significant. In the second half of the year, starting from the second quarter, actually, we're [rolling] our own performance, so to say, in JV so that's why we're going to continue seeing good performance, good top line momentum and -- versus last year's good margin expansion, but just a word of caution when comparing the first half results to keep this in mind.

Elsewhere, outside of Turkey, the business is in good shape. Again as Can was mentioning, Kazakhstan is a little behind, but that was expected because of the base. Everywhere the profitability, the margins are in good shape, and especially free cash flow is growing quite significantly.

If we go to the second -- Page 10. Now if you look at how our EBITDA is moving, obviously the biggest -- versus the first half of last year, the biggest contributor is volume and price. In addition to the price increase, obviously we're seeing our portfolio -- a higher share of premium in the overall portfolio, especially if you look at our businesses in Turkey outside of JV, the share of premium has been increasing to the tune of 80 basis points in the overall volumes, but that also contributes to the overall top line per hectoliter, let's say, growth. If you look at the cost of sales, as we discussed in most of our businesses we've seen input prices increasing. In Turkey, for example, bottle price increased ahead of 40%, energy prices are increasing [about] 60% levels, basically. So that obviously, contributes to how our cost of sales are growing.

On the other hand, as you know, we have been talking about how we have -- targeting synergies in our JV, especially it was a 3-year plan with an $80 million to $100 million target. I'm happy to say that we're pretty much in line with that target, potentially growing to deliver towards the higher end of that target as we progress into the second half of the year, which is also good news.

Sales distribution and marketing, yes, we are spending deliberately more on our brands, especially, in Turkey to support our brands. We have seen as -- again, we've explained the launches of our mainstream brands across the geographies in the period. Other parts of our OpEx is in check. You've seen these incremental effects of IFRS 16 in the breakdown, but more importantly you see the impact of conversion. Again, as Can was pointing out, only if you look at EBITDA on the Beer Group, only 13% comes from Turkey. So the rest is coming -- building outside of Turkey. And that's -- how we're seeing the first half of the year a translation effect on how the EBITDA is also building up.

Now moving then -- to cash flow generation. You're going to see a slight difference between the EBITDA numbers in these 2 pages, that's owing to exclusion of the other items and the IFRS impact, but if you see, we have a very strong free cash flow generation on -- in the Beer Group as well as obviously, Anadolu Efes. If you see on the Beer Group, the working capital performance is much better than last year. In Turkey, for example, we are still behind our plans given how the business had been moving in the first half. Nevertheless, we're delivering better performance, and we expect to deliver better [performance] in the second half in Turkey as well. Elsewhere, all the businesses are [brewing] strong free cash flow. We have been spending on CapEx in the first half, but as we were pointing out, the momentum of free cash flow generation is also impacted by timing of some of the spending that we have made. So even though we're happy with how we've done in the first half, it won't be the same in momentum, we shouldn't expect coming in the second half, but that's normal because that's how we were planning anyways and that -- also you see as a positive momentum coming through the overall Anadolu Efes business including soft drinks has a very strong cash flow generation.

If we move on to the balance sheet, again, you see the amount of hedges we have been discussing on -- obviously, quarter-by-quarter. We have net investment hedges in place on the beer side, on the soft drinks side. So the balance sheet hedges are in place, which obviously, positively impacts our profit before tax levels after EBIT, which is important in this level of, let's say, currency volatility. If you see, in the same period between the first half of this year and first half of last year, even with this relatively, let's say, lower levels that we saw at the end of the period, the devaluation of Turkish lira has been over 35%.

In addition to this, just the words, a reminder as we said, we are hedged up to 90% in Turkey in our cost OpEx and interest base, which is good news. We're building for 2020. We already started putting our protection from FX volatility into 2020. I believe we are just under 70%. So that's growing quite nicely. And even though, the -- let's say, currency seems to be a little soft at this point in time, bear in mind that our hedges actually represent -- the level of our average hedges represent at least somewhere between 15% to 20% better than what the currency is at today. So we are in good shape in terms of our operating performance. So therefore, in the second half of the year, obviously from a consolidated Beer Group point of view, that's a protection that's already in place.

And if you come to the Page 13, even with this currency volatility you see, we see the positive impact of how we're growing our EBITDA and free cash flow generation. Obviously, our net debt-to-EBITDA levels are lower versus the first half of 2018, and again, from a maturity point of view we still have, let's say, sometime before a majority of our debt Eurobonds mature. And even though the majority of our debt is in hard currency, also the majority of our cash we carry is in hard currency.

So now I will give the floor back to Can for his closing remarks.

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Can Çaka, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CEO & Beer Group President [5]

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Thank you, Orhun. I already touched base on strategic priorities, but this is the foundation of our business I want to emphasize and add a couple of things here further. As discussed, we had relaunched our core mainstream brands through the quarter almost in every other market, only lately in Kazakhstan. We experienced a very positive feedback and momentum with all the brands. Moreover, we have taken the innovation lead both in terms of [internal] product, but also in packaging, small sizing initiatives, so forth. We are not only expanding our portfolio with premium brands like Corona and Bud from our shareholder, but also linking the portfolio to the segmentation and driving the affordables in these difficult times. That's on the brand side and continuing investment onto increasing our touch point, especially, with our younger consumers.

Again, as we've discussed on the people side, developing talent for future and capabilities for today is crucial to us, quite critical. We have on-boarded 2 Senior Executives, made a couple changes at managerial and higher levels. We have seen -- I have seen a great support from the team since I joined back and a lot of enthusiasm. We are developing a (inaudible) and a winner culture and I see brewing all these -- make me feel quite happy and confident about what to expect further. On the corporate wisdom side, as I call it, is the backbone of our business. I already shared my vision on this before -- but creating a digitally supported digitally enabled business is the vision. That's a work in progress. Priority is set, delivery is expected. This is exactly about the way of -- and Efes way of working, creating those principles, but in particular, this is about digitizing the teams and making the segmented information available for them, while they are interacting with their customers. And that's, again, a part of the culture and empowerment process that we are looking after, so that would create the operating principles going forward. So I've seen a lot of positive development in all these areas throughout the period. So we are very confident that's a [brewing] Process again. And really I mean the financial discipline, as Orhun was mentioning, is our -- is in our DNA, it's a part of our discipline and principles. For many years, we have been very prudent and conservative in our -- in managing our balance sheet, maximizing the free cash flow generation despite [its prudence] -- benefits in the past years, and we will keep our promise in that manner, we will keep our approach in that manner so we are committed to deliver.

Finally, I'm sure you have seen in our announcement, we made slight changes to our guidance. On a consolidated basis, our guidance remain intact, however, for the purposes of prudency, after seeing the first half performance of Turkey beer as a bit weaker than we anticipated and that of our international beer much better than we expected, we are revising down the growth expectation in Turkey, while increasing it for international markets. Our expectation of delivering low to mid-single-digit volume growth and revenues to outperform sales volume remain unchanged. We will end up fully -- continuing to deliver strong free cash flow generation for both beer and soft drinks for the full year.

We are now ready to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Daniel (inaudible) Barclays.

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Unidentified Analyst, [2]

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I wondered if it would be possible just to get a bit more detail on what you think is driving the success in Russia? What's driving the outperformance of the JV versus the wider market?

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Can Çaka, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CEO & Beer Group President [3]

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Obviously -- I mean first of all, the JV from -- I mean we have (inaudible) 2 complement businesses in Russia, so that's -- that was very important and we have common vision and so on and so forth. So I would think on a principal basis we have very good, let's say, cooperation with our partners, ABI InBev in there. A clear, let's say, shared view. The integration was very -- I mean those are the foundations, but important to repeat, the integration was very successful. We set up the team, the senior leadership team, very quickly. They joined together and created a culture, joint culture [desk] so that worked very well. And as discussed, I mean I mentioned the business is very complementary in terms of geography, in terms of brands, in terms of the channels and so forth. And the combination created a very strong franchise, especially, as we mentioned in our previous calls in premium, in superpremium and premium in last [year's] like Moscow taking the lead from day 1. So basically there were a couple of areas involved in terms of channel and in terms of geography where the business was underrepresented, I would say. And with the combined portfolio, actually, we had all the tools and the capabilities and all what the business would need to cover that underrepresented areas, channels so on and so forth. So there was a clear strategy there, and I think the team made a great execution on the ground pinpointing these areas, opportunities and executing and delivering those opportunities. Those are the driving factors of the success.

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Operator [4]

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Our next question comes from Cemal Demirtas, Ata Invest.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [5]

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My first question is related to competitive environment in Turkey. I see that your sales volume contraction is narrowing down in second quarter. How was the markets in general? And what was the reason behind lower margin expectations related to Turkey [beer] that's partly related to Turkey operations? I want -- I would like to understand it, beer markets and your position in Turkey. That's my question.

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Can Çaka, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CEO & Beer Group President [6]

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Yes. Thank you. I mean you're right. I mean our performance is improving. Our -- let's say, that is promising for us. When we look at the overall market conditions, again, in the second quarter, let's say, there were a couple of surprises to us. At first, repeat of elections for Istanbul municipality was a surprise. So that also created a little bit, let's say, downturn on the consumer sentiment, especially in April. And during the time and repeat announcement was made. Certainly, Ramadan coming 10 days earlier had a positive impact. So that's a mix. More or less, we like to think -- I mean throughout the quarter, specifically for the second quarter, our performance, as far as I understand, is in line with the general market performance as well. As I tried to mention, I think it's important to note that the current consumer sentiment, the macroeconomic volatilities in Turkey are still valid. We see the tough trading conditions. On the other hand, we see also tourism impacting positively. We have seen probably because of our, let's say, early holiday in June, we have seen the little bit better performance in June. People took whole days at the beginning of June, but domestic tourism has not picked up as we were expecting in July. So basically there are lots of pros and cons, but I think overall, it's important to -- for us that we continue to invest in our brands as part of our strategy. And what we have is a feedback that's working, that's creating a positive, let's say, positive feedback from our consumers with respect to our brand and -- brands and our portfolio and our business approach. So that's promising and that we expect to benefit from that momentum once the trading conditions are a little bit, let's say, favorable. That's what I can say. Coming back to the margins, I mean certainly, lower volumes are impacting the margins. So that is one. As Orhun mentioned in his part, I mean we have seen, partly because of weaker [margins] versus last year, partly because of the inflation, higher cost pressures, and that's -- I mean we have -- are facing. So now we have, at the beginning of July, we had another price increase. So that is going -- progress. So those are the main factors of the expected margin decline specifically for Turkish operations.

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Operator [7]

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Our next question comes from Ece Mandaci, ÜNLÜ & Co.

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Ece Mandaci Baysal;Unlu & Co.;Senior Manager, [8]

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Could you please provide some more details regarding the demand environment, competition environment, especially, for the Russian market? Because in the earnings report you mentioned that the market share performance is head-to-head almost with the main competitor. So going forward, how we should expect your market share development compared to your competitor? And what response you get from the competitor in terms of pricing? I knew that they had a more aggressive pricing compared to you and you had -- got a more premium positioning in the market. Could you please elaborate on all of these factors?

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Can Çaka, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CEO & Beer Group President [9]

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Well, really good question, every aspect in one question so that would be very difficult to answer all -- in all dimensions, but I'll try. Obviously, I mean we have outperformed the markets in the first half, and we gained market share. As I tried to explain, that is driven by the fact that we were moving into regions where we were underrepresented. We were moving into the traditional channels where we were underrepresented. And also we were improving our performance in the mainstream, so that has overall helped us in, let's say, outperforming the market and gaining market share. And that helped us to catch the market leaders. So that is the current situation. When it comes to pricing, I mean more or less, we all had the same pricing. Certainly, there are different channels, different dynamics. So we -- what we are seeing on an overall basis on an average, you might say, that reflects in a different number, but when you compare on a segment by segment, when you compare on a brand-by-brand basis, I don't think we are pricing -- we are not pricing any different than our competitor, than the leader. So in that perspective, we are confident in what direction we are heading to, and that's going to continue. So to me, I mean we are not driving volume sales in order to get market share. We are very conscience in terms of profitability, in terms of financial targets with financial discipline that we have for both Russian and Ukrainian operations as well. So that is the top line and the bottom line mix of targets from top line and bottom line. And I think the delivery of the business in that perspective is quite satisfactory, reflective in our numbers. I hope and I guess I covered all the dimensions. Orhun, would you like to add anything?

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Ece Mandaci Baysal;Unlu & Co.;Senior Manager, [10]

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Please...

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N. Orhun Köstem, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CFO [11]

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I think that was a very comprehensive review. And obviously, again, from our side, at least from a financial point of view, obviously we're also quite happy that, that growth is coming with a margin expansion without necessarily sacrificing margin expansion and free cash flow generation. That's obviously, I hope, evident in our results.

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Operator [12]

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(Operator Instructions) Our next question comes from Gulsen Ayaz, Deniz Invest. (Operator Instructions) We have no further questions. Dear speakers, back to you for the conclusion.

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Can Çaka, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CEO & Beer Group President [13]

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Thank you very much. Thank you all for attending. Hope to be with you for the third quarter's results as well.

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N. Orhun Köstem, Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi - CFO [14]

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Thank you. Bye for now.

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Operator [15]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.