Earnings Call: Q1 2021

May 6, 2021

Ladies and gentlemen, welcome to Anadol FSA's Q3 2021 Financial Results Conference Call and Webcast. My name is Vasu Demir, and I'm the Head of Investor Relations of Anadol FS. Our presenters today, Mr. Jan Cechar, the CEO and Mr. Alim Tristan, the CFO. All participants will be in a listen only mode. Following the first part of the call, there will be a Q and A session, and you will be able to write down your questions on the question box on your web screen. 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 grounds to Mr. Jan Cakha, on the line of the CEO. Sir? Thank you, Asli. Hi, everybody. Good afternoon and good morning wherever you are. Thank you all for joining our Q1 earnings release call. Apparently, things have not become any easier since our year end conference call. 2021 has started and continues to be tough, especially in Turkey. However, I can happily say that we have made a pretty strong start to the year, driven by the dedication and hard work of the entire Ramonuma FS team under such challenging circumstances. So I just wanted to take the opportunity to thank to the whole team for this strong set of results. We delivered 13% volume growth in 1st quarter with the contribution of both business lines. Beer volumes were expanded by almost 5% with Russia, Kazakhstan and Moldova taking the lead in terms of growth percentages. CCI also had a remarkable performance both domestically and internationally. In addition, we had a strong revenue growth in the quarter as a result of price increases, favorable product mix and as well as the favorable conversion impact. We also had a good profit performance in the quarter. In addition to the support of the top line, there has been some shifts between quarters in terms of OpEx, which we expect partially to be normalized in rest of the year. Therefore, we were able to deliver a better than expected revenue and margin performance in the quarter. As noted in our full year results call, we accelerated our focus and investments related to our plus one relaunch in Turkey in order to be ready for the peak season. That is why the OpEx in our Turkish operation was higher compared to a year ago. We had relaunched FS family last year with full look and feel revitalization. And now we are renewing our look and feel in the field in the market as we planned at the beginning of the year as we communicated in our prior calls as well. We were also able to beat expectations in terms of free cash flow with a significant improvement year on year basis, when this is supported by a very disciplined working capital management, thanks to Orum and his team obviously here despite the fact that we increased our market investments incrementally in this quarter to drive consumption and to be ready for the season. We are continuing to invest on our infrastructure to improve our digital capabilities in order to be more effective and efficient in the post pandemic era whenever it comes. Therefore, our digital transformation projects, which were awarded by industry experts in the first place, will continue to be at the core of our focus for about achieving our long term targets. As a recent note, we made an announcement on Monday regarding our intention to emulate the opportunities to refinance our USD Eurobonds that are maturing in 2022. In this regard, we made our application to the Capital Market Boards for approval and started the process. So this would be another busy period for our finance team. In the Q1, our consolidated volumes reached 23,200,000 hectoliters and 31% of our consolidated sales volume came from beer group. Our revenue growth significantly outperformed the volume increase exceeding TRY 6,000,000,000 and contribution of beer group in terms of the revenues was higher compared to the volume proportion almost reaching to 40% of revenues in the Q1. EBITDA performance was very strong as well. This is especially attributable to the performance of soft drinks. International beer margin was also higher in this period. Therefore, consolidated EBITDA margin improved by almost 500 basis points reaching to 11.6 percentage points in the quarter. Due to the seasonality of our business, peak cash flow was negative in the quarter. 1st quarter is the time where we spent disproportionate CapEx, as I noted, to be ready for the peak season, whereas the from the revenue and profitability contribution point of view, the first quarter is the lowest among other quarters. However, there has been a significant improvement on a year on year basis from negative €1,000,000,000 TL last year to a negative €250,000,000 this year. So basically, we are talking about a positive €750,000,000 improvement on the free cash flow generation versus last year. Our beer operation sales volume was up more than 4%, reaching to 7,300,000 hectoliters. International operations was the main contributor to the growth. It was another strong quarter for Russia where the beer and industry grew around 6% year on year according to Rasta. And for and our volumes were even stronger than that. But more importantly, we gained value share compared to the year end. We are focusing on the value share. So we gained value share in the country. We saw positive dynamics in different price segments and specifically Buds brand, Bud showed highest volume growth increasing more than 25%. Spotfulness and Stella to other licensed brands registered, double digit growth rate as well. And also our Nanook offerings had also remarkable performance benefiting from special sales through e commerce channels. However, there has been some deterioration. We followed that and there has been some deterioration in consumer purchasing power in the period due to the economic conditions following the COVID period. Therefore, we are cautious for the rest of the year. In Ukraine, the beer market was down by low single digits and our performance was slightly below the market due to the implemented price increase ahead of the competition in Ukraine. We are expecting our performance to normalize starting from the Q2 onwards when prices are more settled. We continued our launches in the quarter offering consumers different tastes and varieties as well. So our efforts are continuing despite all I mean, in Ukraine, the number of cases are increasing. Unfortunately, that there is the impact on the market and our performance, specifically in Ukraine. Kazakhstan and Moldova both had superior performance with close to 20% volume growth each year. Also, Georgia was also up by low single digits. We are observing in every country some premiumization, which is supporting our profitability, but always our focus on and where we are the most stronghold segment is the mainstream segments and we registered growth in the segment through the period as well. Turkey, we discussed this several times. It's obviously the most impacted from COVID among all the other operations due to the high share of on trade. Our volumes were impacted the most as a result, especially in the 1st 2 months of the year due to the cycling of the prerecurring period last year. However, we benefited from a temporary reopening in March where the shortfall of the 1st 2 months was partially mitigated. So those are our positive signs. Whenever we are out of this pandemic, I would say, things will be we expect things to be normalized and be better. During the Q1, as noted, we accelerated our marketing spend related to our PlusOne relaunch. And we are seeing early positive signs of stabilization in our market share that is comforting us. Obviously, plus 1 relaunch around the FS brand family is positively perceived by our consumers. A couple of notes on our subsidiary. CCI's consolidated sales volume continued its growth momentum and increased by almost 18% in Q1 with positive contribution from all countries. International operations had a superior performance with Pakistan and Jordan taking the lead. There was there were obviously lockdowns and restrictions that curbed the number of based on the number of COVID cases in Turkey. And despite these headwinds in Turkey, we were able to deliver more than 10% to 12% volume growth. Spotting beverages growth was even higher when it registered around 20% increase. Stills category grew more than 15% with improvements in juice and energy segments all positive. While the water category declined by almost 15%. International Operations grew more than 20%, 23%. Pakistan had a superior performance and posted more than 40% volume growth with consumer and shepherd initiatives and regional acceleration plans as well as optimal resource allocation in the country. In the CIS, the volume growth was more than 8%. Excluding Kazakhstan, all countries recorded double digit volume growth rates. Middle East posted 9% and the performance was driven there by Jordan where the volumes were up more than 40%, 42%, remarkable performance. We have already discussed the operational part in the previous slides, but I would like to go over the strong bottom line that we have delivered. Our net income was almost TRY 300,000,000 in Q1. It benefited from higher operational profitability, obviously. And also, there were some one off items like FX gains recorded as a result of repatriated cash from FS Brewers International to 100 LFS that is in order to finance our working capital needs here. And also we sold our land in Villa Brugas during the period. Therefore, gains from the sales supported the bottom line as well as the free cash flow. Now I'll hand over to Orhan for his remarks on financials. And unfortunately, this would be last call on our side. Actually, Orhan is leading the call. Basically, I would like to thank him for his great contribution to this organization for long years and especially for the last 2 years working with him was quite a kind of a pleasure for me. Obviously, Orum's departure is good for Orum and is a loss for another AFS. But I'm happy for Orum and that's business that's right. I'm pretty happy that we were we have a strong bench at Anadol FS and we were able to take the news from Oren happily and while being happy for his career, we were able to also name his successor. Gokce will be joining the team here in Istanbul, spending long years in international operations in finance and leading the team. You would remember Oren paved the way for CFOs having operational experience. So I believe Gokce's operational experience was also added to our team. So I'm very confident with this replacement. And I would like to thank Orhan once again. And I don't want to have him crying before he makes his final remarks. That's why I'm going to cut short and leave the guarantee. Thank you, Orren. Thank you, Jan. And many thanks for your kind words. Obviously, well, it was thrilling for me to be a part of the journey for FS starting from the largest brewing business in Turkey and now today obviously a very sizable regional beverage business. Many thanks for your leadership and support, especially over the past 2 years, where we have been making serious changes to the business, which obviously will impact the future years to come. And as John was underlining, I'm quite confident as I pass the flag on to my successor, Gertje, which I'm sure is going to continue raising the bar to better levels. Ladies and gentlemen, welcome again to our Q1 results webcast for Anadolay FS and we're quite happy to report another quarter of strong results. First of all, it's important to note that the Q1 of 2020 was our latest memories of our normal lives. So basically, growing over that quarter in the Q1 of 2021, we feel was quite important. Even though the rate of rebound is different, as I'm sure you know, in alcoholic drinks and beer, obviously, and some of the shopping patterns like e commerce or home delivery are restricted. So in essence, there are different paths and velocity of rebound for our 2 business units. Coca Cola HJJ, which I'm sure you must have followed, has announced a very, very strong set of results and obviously contributed quite significantly to Anadol FS results in this Q1. Beer Group also in Beer Group, we have enjoyed very strong growth volume terms, obviously, 4% ahead of last year. And between the volume growth and the price increases in all of the operations together with our favorable product mix, we have been able to grow revenues ahead of volumes. Even on a constant currency basis, our growth was close to 19% revenue. And then EBITDA, we ended up with a slight negative EBITDA. As Jan was pointing out, this is although we have seen very, very strong performance across our businesses in Kazakhstan, Moldova and Georgia and very favorable results in Russia and Ukraine compared to last year. Nevertheless, we have been disproportionately spending in Turkey in this Q1 as we prepare ourselves for a very busy season hopefully in rest of the year. And those preparations resulted in a slight negative EBITDA even though a very serious rebound from last year's Q1 and a 3 10 basis points margin expansion. But more importantly, as I'm going to walk you through in the next page, a very significant positive swing in the free cash flow of the beer group, just under CLP 700,000,000 compared to the Q1 of 2020. So if you look at Anadol EFS, on a consolidated basis, Anadol EFS has delivered very strong set of results, 13% volume growth, 36.5% revenue growth, which is about 27% on a constant currency basis and EBITDA margin expansion of about 500 basis points and again just under TL800 million of a positive free cash flow swing between Q1 of 2020 Q1 of 2021. If I can walk you through the breakdown of how our EBITDA and free cash flow has grown in the Beal Group. As you see on the EBITDA side, as I was saying, we've seen price increases across all markets. We've seen positive mix in terms of super premium to premium segments of our portfolio growing incrementally faster, which added up obviously a very strong revenue generation. Our cost of sales were up. This year, obviously, we're happy with what we have done in the Q1 of the year in general. And as a reminder, as you will all remember, we have been actively hedging our positions in the cost of sales. And just to give you an indication, in Turkey, we've hedged about 78% of our FX exposure. For aluminum and PET, we've hedged about 6 8% 43% of our exposure for 2021. And for Turkey, we have covered all our quality requirements. Nevertheless, we believe the cost devaluation for us in Turkey would be close to 20% and still the rest of if you look at the commodities, there is obviously a very serious price increase across the commodity space and these are the things we will need to manage in rest of the year going forward. The SG and A expenses, obviously, if you look across the businesses, except for Turkey, all businesses delivered operating expense margins much lower than last year. As we said in Turkey, we are consciously spending behind our brands, which we feel is the most opportune time for us to enjoy a very good season, hopefully rest of the year. And then the rest of it is mainly the currency conversion which was favorable, which in turn almost halved the EBITDA loss compared to the Q1 of 2020. And so a good performance that flew into the free cash flow if you look at the chart below. Obviously, the biggest contributor to free cash flow in this period the smallest period of the year was the working capital in all of our operations that was still very, very disciplined. We are in certain of our operations building inventory and stocks before the season to ensure that we can support the hopefully some demand growth in the summer season and rest of the year. We have realized the sale of ex liberal Gas Brewery land which flows into our cash flow. And even though we spend incrementally higher in capital expenditures in the Q1 of this year compared to last year, we've ended up with a positive free cash flow swing of almost just under TL700 1,000,000. The majority of this financial income expense and FX gainloss element that you see here is PLN 151 is the dividends we have received from Coca Cola Hcejek in the Q1, which is obviously quite unusual at this time of the year. Having said that, given the limitations and changes to the regulations in Turkey, obviously, the timing of that has changed year on year. On the next page, again, certain reminders, obviously, we don't carry any FX denominated debt internally or elsewhere in our portfolio except for the euro bonds, which matures in at the end of October 2022. And as Jan was pointing out, you must have seen our application as part of our review of refinancing debt in rest of the year. Just for clarification, because I'm sure it must be noted, we will be staying within our application limit of 1,000,000,000. However, what we look to refinance our existing Eurobond is only for $500,000,000 Obviously, as we said in consecutive calls earlier, we would very much like to make sure that we are prepared to capitalize on the most opportunistic time in the markets for that exercise. If you look at our indebtedness again, it's within our stated policy limits for Andal FS. It's down to 1x net debt to EBITDA from 1.5 a year ago. And on the group side, it's flat at 2x. That's pretty comfortable within our, as I said, policy limits, which we disclosed to be between 1 to 2x. In terms of the risk management, I already talked about commodity hedges, FX management and with the net investment hedge, our bottom line is pretty much protected to a great extent against currency potential currency volatility in rest of the year. So with that, I'll turn back to Jan to continue with the call. Thank you. Thank you, Aron. So for the rest of the year, so far, I mean, it's obviously, 2021 is no different than 20 20 in terms of challenges and ambiguities. I think the most concerning one is uncertainty around what's going to be next, how long this limitations, especially in Turkey will continue. So we have little clarity about what exactly lies ahead. I would say in our region, when we look into different countries, Turkey and then Ukraine, our number of cases are very high. Russia is more under control. We are being, let's say, the 2nd peak is behind. Number of cases are going down. Some sort of relaxation continues in the country. And Kazakhstan, similar. Versination is going reasonably well similar to Russia. Moldova and Georgia also, we see kind of normalization in terms of growth, in terms of number of cases and the restrictions. So again, there are clear uncertainties around how long this could continue, the NIVE variance and so on and so forth. So despite the fact that we were quite happy here to note about the strong start we had for the year, this is on one side, this is the small start throughout the year. And on the other hand, all these uncertainties, that is the reason we just keep our outlook similar. So we reiterate our 2021 guidance. We don't make any change as of today. I hope to report a much stronger results in the 2nd and third quarter and then we would obviously be discussing the guidance. But as of today, we reiterate and keep our guidance as of the beginning of the year. So thank you for your patience. We'll be happy to have questions. Actually, there is one about the actually, we already responded from Angeli Doshi about whether we will utilize a 1,000,000,000 or just consider the refinancing of €500,000,000 existing euro bond. Yes, we applied for a higher ceiling, let's say, that's for the approval purposes. Our intention is to refinance the existing $500,000,000 as of today. So if you have any further questions, please note in the Q and A side. Are there any questions? It seems now, Jan Vergheme, all the way. It seems you are quite clear enough. Thank you for your attention. Look forward to talk to you in the next calls. And thank you again. Thank you very much. Stay healthy. Thank you.