Earnings Call: Q1 2021

May 6, 2021

Ladies and gentlemen, welcome to Coca Cola Ichtek First Quarter 2021 Financial Results Conference Call and Webcast. I will now hand over to your host, Ms. Cicek Ozkanesh, Investor Relations and Treasury Director. Please go ahead. Good morning and good afternoon, ladies and gentlemen. Welcome to our Q1 2021 results webcast. I'm here with Bois Boisherer, our Chief Executive Officer and Andriy Abramenko, our Chief Financial Officer. Following Mr. Bosherer's and Mr. Abramenko's presentation, we will turn the call over for your questions. Before we begin, please kindly be advised of our cautionary statements. The conference call may contain forward looking management comments, including projections. These 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 at www.ccr.comcr. Now let me turn the call over to Mr. Burak Basherar. Sir? Thank you, Cicek. Good morning and good afternoon, everyone. Thank you for joining us today to discuss CCI's Q1 2021 results. First of all, let me start by thanking our employees for their relentless efforts and high motivation to deliver this robust and encouraging performance, which we will cover in detail in today's call. The ongoing COVID-nineteen pandemic continues to present a challenging operating landscape. Nevertheless, we are encouraged by our business results in the Q1, which demonstrates the adaptability of our business, strength of our brands as well as our superior execution capabilities and relentless innovation efforts. Leveraging our learnings, we have started to run into 1 on 1 momentum despite cycling a pre pandemic 2.5 months last year in the same period. Our sales volume grew by 18%. Growth was broad based, achieved with double digit increase both in international markets and Turkey. The sales were restricted during the quarters and on premise outlets were either fully closed or opened with low traffic. This negatively impacted the package size and the mix and number of transactions at the away from home channel. However, strong demand for our core brands enabled us to grow our number of transactions by 9% year on year. Icemix share remains lower than the pre pandemic levels as we are still managing through the restrictions. In the Q1 of 2021, net sales revenue grew by 43%, EBITDA almost doubled and the net income grew by more than 4% reaching TRY 403,000,000. Let me move on to the next slide, please. The Sparkling category continues to be the best performing category of the 1st quarters as it's been throughout 2020. Within Sparkling, trademark Coca Cola was the best performer growing 28% and Sprite, we closed 2nd with the growth of 24%. Although accounting still for a small share in our portfolio, Energy Drinks category grew by over 30% on a year on year basis, contributing to 15% growth of Steel category. Juice segment also grew by the mid teens. As discussed before, in line with our strategy to focus on smaller and more profitable packs, water category declined by 15%. It was also impacted by the limited on premise activity. Another remarkable performance within this category came from mineral water with low teens growth to enrich variety of new flavors in line with our innovation strategy. Regarding channel performance, the on premise channel was softer than last year and declined by 6% as we navigated through the pandemic. However, softness in this channel was more than offset by the strong performance of the home channel, in particular, traditional trade and organized retailers. Let me move on to the next slide, please. Accelerate and our quality growth is one of our primary strategic priorities. We are particularly happy to adhere to this priority despite ongoing challenges. We have driven growth within our strategic categories, core and premium sparkling, RTD Tea and energy drinks, as I mentioned in the previous slides. By rapidly adapting to the new trends, we followed occasion based marketing, offset challenges in a struggling on premise channel with focusing on the others. And while growing volume, we have managed to increase NSR per case with timely price adjustments and price RGM by using the data analytics and payment promotion and discount management. As a result, our NSR per case grew by 21% in the 1st quarter, taking our NSR growth to 43% on a year on year basis. Our EBITDA almost doubled in the Q1 of 2021, while increasing margin by over 500 basis points to 20.4%. Our frugal mindset in operating expense management contributed to the bottom line. On top of the net sales revenue per unit case growth, mix managements and commodity hedging initiatives mitigated commodity price increases. Let's move on to the next slide, please. By March, we have started seeing gradual normalization of restrictions with on premise outlets being opened between certain hours with limited capacity in Turkey. This has naturally positive impact that our sales performance in the March. Despite on premise closures, our effective sales focus and customer and consumer campaigns impacted our sales performance positively, recording over 20% growth rates in each of the traditional and organized trends. This performance is the testament of the adaptable to our business to changing and evolving consumer trends. Whatever the conditions remained favorable in the majority of the quarter, We have seen consumer confidence increase as well. These two factors had a positive impact on 12% sales volume growth in the quarters, demonstrating the strength of our core portfolio, trademark Coca Cola grew by 27% in the Q1 of 2021, taking total Sparkling growth to 20%. Energy, Juice and RTD Tea categories were also very strong, growing by double digits. Water category declined by 14% in line with our value focus. NSR per case unit unit case grew by 19%. This was assisted by improving pricemix and higher share of Sparkling Beverages, offsetting the negative impact of IC Packages' lower share. Our disciplined OpEx management contributed to 50% growth of EBITDA excluding other items along with margin expansion of others over 100 basis points. Let me move to next slide and talk about the international business. Once again, our international operations performed very well in the Q1 of the year, growing sales volume by 23%, NSR by 51%, EBITDA by over 100%, we present 106%. Pakistan, the largest international operation, was the main driver of the volume growth along with the very strong performance in Jordan. I will discuss major international markets in more detail in the following slides. In the international segment, the real volume growth was achieved in the traditional trend. Although these countries grew by 30%, their share in total is negligible in international segment. IC share was lower than last year's due to restrictions around on premise outlets. Looking at 2 categories, Sparkling grew by 28% on the back of 28% growth of trademark Coca Cola and almost equally strong Fanta and Sprite. Iced tea grew by high teens and juice category by mid single digits. In line with our value approach, contraction in water category continued, declining by 16% in the Q1 of the year. Contraction in water category was mostly visible in Iraq, And let me move on to the next slide and talk about Pakistan, which is accounting 29% of our total volume, grew by 41% in the 1st quarters despite cycling 7% growth a year ago. This stable performance came as a result of the successful restructuring of our Pakistan route to market since 2019. As we discussed before, we increased efficiency in production and warehousing as well as our Agility route to market system in Pakistan. Over the years, we have decreased the tendency on wholesalers and increased the share of sales through distributors substantially and enabling us to penetrate markets more effectively and effectively. All in all, we have conducted successful consumers, customer and shopper initiatives, followed a customized and regional marketing strategies and continue to grow ahead of the industry growth. We also work very closely with the successful players in the e commerce industry to ensure our visibility in digital platforms and availability with correct pricing. We took some price increases in IC packs, include efficiency of discount management and focused on shortlist of clearly prioritized SKUs. As a result of our NSR in Pakistan grew ahead of sales, volume and EBITDA margin expanded substantially, delivering in line with our quality growth algorithm in this competitive market. Let me move on to the next slide. As you might remember, last year's Q1 was very strong in Kazakhstan, resulting in a high base cycle. Despite this and despite the continued pandemic related restrictions, Kazakhstan sales volume grew by 4% on a year on year basis. Sparkling grew by 2% and Stills by 22%, driven by a very strong ICE performance. In Iraq, we have taken around 15% price increase after the devaluation at the end of December 2020. This was the first price adjustment we have taken in Iraq for a long time. This price action along with the positive category mix helped us expand profitability in Iraq significantly. We are deliberately deemphasizing the large packs of water in Iraq as they are not profitable enough. This strategy is naturally having negative impacts on our sales volume, while improving profitability in line with our quality growth algorithm. In this respect, in Q1 of 2021, our total sales volume in Iraq grew by 4%. Although sparkling was up by 17%, water declining by 48%. The 16% growth in trademark Coca Cola was particularly encouraging considering the price increases that we have took. I will now leave the floor to Andrey to go over the financial results. Andrey, please? Thank you, Burak. We made a strong start to the year. We made a strong start to the year, seeing steady sequential monthly improvement. In the Q1, our net sales revenue grew by 43%, driven by strong volume growth in all markets, higher share of Sparkling, timely price adjustments and revenue growth management initiatives. The positive impact of currency translation also helped. However, excluding the FX impact, the net revenue growth was still very solid at 33%. Gross profit grew ahead of net sales revenue, reaching TRY 1,300,000,000, while gross profit margin expanded by 2 47 basis points to 33.8%. This expansion was mainly attributable to international markets, where in addition to net sales revenue per unit case growth, lower procurement prices in some commodities helped to control costs. As disciplined OpEx management continues to be our norm, our OpEx to sales ratio continued to decrease leading to 7 57 basis points of EBIT margin expansion in the Q1 2021. As encouraging as this result is, we have to keep in mind that there can be some seasonality and different timing of certain expenses. Therefore, this expansion in EBIT margin should not be indicative of the coming Our full year guidance remains as flat EBITDA margin for 2020, a year when we delivered the highest margin in our history. Net income grew by 4 fold to TRY 403,000,000. On top of strong operational profitability, our prudent financial risk management enabled net FX gain, therefore, assisting the growth in the bottom line. Next slide, please. The net revenue per unit case growth is a real backbone of our solid results. Timely price adjustments and lean SKU management through continuous portfolio rationalization are integral parts of our strategy to realize sustainable growth in per unit case metrics and ensure delivery of our quality growth algorithm. 13% growth in NSR per unit case was significantly higher than the 9% increase in COGS per unit case, which led to gross margin expansion. Similarly, tight OpEx management resulted in OpEx per unit case declined by 8%, leading to 50 percent growth in EBITDA per unit case. Next slide, please. As discussed in the previous slide, the real contribution to EBITDA margin expansion mainly came from 2 factors. 1st, top line to unit case growth, which was above the cost to unit case growth second, continued tight OpEx management. International markets like Pakistan and Iraq, where profitability was previously challenged, have shown significant improvement in their margins. As Bharat mentioned in the operational review, focused RGM initiatives as well as efficiency measures in Pakistan and price increase in Iraq led to this profitability improvement. Some OpEx items also continue to be below normalized levels due to the pandemic related restrictions, such as travel and meeting expenses, and this has also helped to contain OpEx at low levels. Along with the strong operational performance, the negative working capital has also helped to generate strong free cash flow with solid improvement from previous year. All these factors help to sustain our leverage ratio at historically low levels. Onto the next slide, please. We have a healthy balance sheet with strong liquidity. On top of that, in line with our conservative approach, we continue to keep our net loan FX position, protecting us against currency fluctuations and mitigating our risks. Our consolidated net debt is only US202 $1,000,000 0.48 times of rolling 12 months consolidated EBITDA. Next slide, please. Finally, I want to talk about our cost breakdown and hedging initiatives. We get this question quite often. Therefore, I wanted to give a picture of our COGS split into FX and local currency as well as the hedging levels of major cost components. On a consolidated basis, our cost of sales is approximately 3 quarters local currency and one quarter currency based, though this varies from market to market. For example, in Pakistan, share of hot currency is a single digit, while in Iraq, it is the highest in our portfolio. Only few of our markets have an organized derivative market. Therefore, hedging through financial markets is predominantly done in Turkey. In some of our other markets, as much as regulations allow, we cover our FX exposure by holding hot currency cash in our accounts. In Turkey, on top of the financial hedges, we also have dividend income flow from international operations in U. S. Dollars, which also cover our FX based raw material exposure. Looking at the cost of goods sold breakdown by ingredients. Around onethree of our cost base is concentrate, which is mostly based in local currency 20% to 25% is sugar, again, mostly regulated and local. Portion of imported and or FX denominated sugar is not significant, and most of it can be hedged through financial markets. In this regard, we hedged 100 percent of our sugar exposure in unregulated markets for 2021. Another onethree of our COGS is packaging. Here, resin has the highest share. We hedged around 62% of our 2021 exposure on resin. Cans, although a small portion, is the most straightforward item to hedge, and we have 74% hedge covering the whole year. The recent significant increase in commodity prices is not expected to have a major impact on our 2021 results given our hedge position. However, we continuously monitor the pricing environment, and we are looking to lock inappropriate price levels for 2022 and beyond once we see opportunities in the markets with a proactive approach. With this, we came to the end of the financial section. I now hand the floor to Burak for his closing remarks. Burak, please? Well, thank you, Andrey. First of all, let me say that we are reiterating our full year 2021 guidance despite very solid Q1 results. There are still many uncertainties related to the path of pandemic and vaccination process in our geographies. Therefore, the solid performance in the Q1 encourages us, but does not lead to a guidance revision. We are looking beyond the pandemic and making sure that our immediate steps are in line with our strategic priorities and result in creation of sustainable value for all of our stakeholders. Our strategic priorities focus on 5 pillars: accelerating quality growth, being the best in FMCG execution, winning with our people, digital for industrial leadership and winning with our stakeholders. Beneath these priorities, we are also focused on the following: building a balanced portfolio with a focus on our strategic categories of core and tactical brands as well as continuous innovation through new offers addressing affordability and premiumization mix management and precise RGM, for example, use of advanced data analytics for highly tailored price promotion and assortment digital transformation by building an ecosystem of solutions and infrastructure leading to growth, efficiency and productivity. While doing all of these, we keep on investing in our people, in our communities, tracking our sustainability targets closely, creating value for the community and the planet. So now we're ready to take your questions and I also your belief in our company and your time in attending this call, so we can open the floor for the questions. Questions. The first question comes from Ajay Mandej from Uniti Securities. Please go ahead. Hi, thank you for the presentation and congratulations on the strong results. My question is about the EBITDA margin generation on a segment basis on country basis actually. So you just mentioned that in Iraq and in Pakistan, given the price adjustments, there was a significant improvement in your margins compared to the last year's averages probably. So as far as we know that the most profitable business country is in Central Asia. And then Turkey, Pakistan and Iraq, it's the ranking should be like that from highest EBITDA margin to the lowest as far as I know. So is there a change in the ranking of your EBITDA margin performance? And is that sustainable going forward with possibly increasing cost base in the last quarter of this year? It would be great if you give some color regarding the levels of the of your international margins going forward, not just in 2021 and for further time horizon? Thank you. Okay. I'll take this question. This is Andre. So thank you for the question, first of all. I know we get a lot of questions in terms of the performance within each country. As you know, as a policy and as a competitive policy, we do not disclose EBITDA and EBITDA margins per country other than Sweden for Turkey and International. So I will not be able to give these numbers. But in terms of the rankings, directionally, you're right. And so we continue to, I think, improve our margins or focusing on improvement in our margins across the portfolio. Now when we look at the this year, and we mentioned very clearly in the guidance that we look at the sort of flattish EBITDA margin for this year compared with last year, besides the fact that we are cycling very high basically highest we achieved at CCI in terms of the margin. There are commodity pressures this year. The OpEx and other costs were uncharacteristically low last year with all the austerity measures that we took during the year. So with all of that, we are cautious. But if we look at the performance of this year, I would say that the rankings should not change dramatically among the countries. And second, all the countries, while they have certain variation in terms of kind of foreign denominated and local denominated costs, from the cost structure perspective in terms of sugar packaging and other ingredients, they are very similarly structured. Therefore, as commodity pressures intensify and OpEx pressures intensify, they will they may be kind of experiencing the similar impact. So I didn't expect any significant change in rankings of kind of our markets in terms of their profitability this year. Okay. So another from another aspect, we know that in your total portfolio, the percentage of sparkling beverage has increased by 400 bps to 81 as far as I know. So with the normalization in this portfolio, probably in the second half of this year in 2022. Could there be additional margin pressure with the generalization in the portfolio or revenue mix? I understand your question. It's about Sparkling and Steel's kind of mix and its impact on the profitability or the margins. In terms of as we go out, if we come out of the COVID situation significantly by the end of the year, then for the period that sort of post COVID period, if you wish, when and if it comes. We expect for the longer term, obviously, an acceleration in the steel portfolio also and potentially significant acceleration as it happened in previous kind of downturn and upturn cycles when we go into crisis, then the consumption of sparkling beverages is relatively higher than steels. But when kind of the economies grow and consumers start going out and experimenting with their consumption, the consumption of steel beverages potentially could grow faster than even growth of sparkling beverages. So that effect is expected. And our guidance on the total margin evolution this year accounts for that. Okay. Thank you very much. Thank you. We have no further questions. Dear speakers, back to you for the conclusion. Well, once again, thank you very much for joining our call. I Once again, thank you very much for joining our call. I understand when the results are good and great, everything talks to themselves. So thanks a lot for your time and interest again leaving us. So we're going to keep doing our best to make sure the Q2 and the rest of the year performs well and hope to positively surprise you as CCI like we always do. So be safe, stay safe, and thanks a lot again for your interest in our company. Thank you very much. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines. Thank you.