Anadolu Efes Birack Ord

Ladies and gentlemen, welcome to Anadolu EFES first half 2024 financial results conference call and webcast. My name is Aslı Demirel and I am Investor Relations and Risk Management Director of Anadolu EFES. Our presenters today, Mr. Anur Alçuk, the CEO, and Mr. Gökçe Yanaşmayan, the CFO. All participants will be in listen-only mode during the first part of this call. Following this, there will be a Q&A session where you can submit your questions using the question box on your web screen. If you have questions, we kindly ask you to write them down before the Q&A session begins. This will allow us to review and address them. Unless explicitly stated otherwise, all financial information disclosed in this presentation are presented in accordance with inflationary accounting. 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. I'm leaving the ground to Mr. Onur Alturk, Anadolu FS here.

Also thank you, good morning and good afternoon everyone and welcome to Anadolu FS 2024 first half operational and financial result conference call. We are delighted to announce another quarter of solid volume momentum and robust growth achieving a high single digit increase in our beer group. This remarkable growth is further highlighted by a low single digit rise in our consolidated volumes. Despite the challenging macroeconomic environment and volatile cost landscape, yet we succeeded in delivering a solid expansion in gross profitability margin, which was supported by, of course, strong volume performance and revenue growth management initiatives, including pricing, focus on quality mix, and premium mix and effective discount management. On top of our strong top line results, through strict management of operational expenses, we were able to record a flat EBITDA margin. Last but not least, our robust financial discipline is clearly reflected in our consolidated net debt to EBITDA ratio, which stood at an impressive and healthy level of 0.8 times as of June 30, 2024, and comfortably within our targeted leverage ratio range. Additionally, we have achieved a net cash position in the beer group. When it comes to the second quarter, in the second quarter of 2024, our beer volume surged by 7.1%, with strong performances in Turkey, followed by Russia and Moldova, of course, driving this growth. Turkey beer volume rose by 2.8%, while our international beer volume saw an impressive growth of 8.2%. And Russia maintained its momentum from first quarter, with volumes rising in the low teens, proving continued strength. And CIS countries, however, faced challenges, which I will come to details, and with volumes declining by mid-single digits on average. Ukraine, on the other hand, had a successful quarter as well, mainly supported by last year's low base and recovery in consumer demand. And when we come to Russia, let me discuss Russia in more detail. The beer industry continued its growth momentum with mid to high single digit growth in the first half. The strong market growth can be attributed to a notable shift from other alcoholic beverages to beer. and of course new product innovations of our company and substantial market investments. We outperformed the industry by registering a low teens growth in second quarter which enabled us strengthen our position in the premium and core segments while also gaining of course share in the non-alcoholic beer segment. Aside from volume growth, we also sustained market leadership on both value and volume basis while gaining share in both metrics. And Staline Mernik-Izbocenka, Stella Artoa, Essa and Hoegaarden were successful brands in this quarter marking strong performances. When it comes to CIS and Türkiye, tuning to our CIS operations, Moldova registered mid-teens growth and our volume supported by industrial expansion as a result of increased spending behavior of consumers as well as expanding consumer base. On contrast, unfortunately, we observed softer performance in Kazakhstan and Georgia. Our Kazakhstan volumes suffered from weak industrial dynamics and some national disasters that the country has faced like floods, earthquakes that affected the country during the second quarter. And Georgia volumes were adversely affected by production bottlenecks. But when we look at overall CIS performance, our CIS volume down mid single digit in the average. Speaking of Turkey, building on a very high base from last year, 2023, as well as a solid performance in first quarter, Turkey sustained strong volume performance, registered at 2.8% growth and truly it's exceeding our expectations. Volume was supported by increased sales in Horeca, hotel channels and a favorable tourism season despite operating in a high inflationary environment we observed a decrease in consumer purchasing when we look at our soft drinks let's brief review on this one too in the second quarter of the year CCI's consolidated volumes increased by 0.7 percent And thanks to the contribution of Turkey, Iraq and Azerbaijan, Turkey's volume was up by 1.8%. Effective trade promotions, active consumer marketing, including UFA Euro Cup activations, have driven this growth. International volumes demonstrated a modest recovery, posting a 0.1% increase, which marks an improvement compared to the previous quarter. Iraq and Azerbaijan continue to deliver strong results with 15.1% and 11.5% growth respectively. In Pakistan, while volumes declined by 5.1% year-over-year, this still represents an improvement in volume performance when compared to the previous four quarters. Kazakhstan experienced a 10.2% decline in volumes. mainly due to the reasons that I mentioned for beer as well, but lower consumer confidence, the return of the foreign consumers to their home countries and high comparison base from the previous year. Now let's move on to our operational results. Actually, we delivered strong results in top line figures as well as bottom line. Throughout the quarter, despite our efforts for effective pricing strategy, a focus on favorable mix addressing value generation and Of course, tight discount management. The adverse impacts on top line primarily came from the implementation of TIS29 because of the mismatch between the inflation rates and the devaluation appreciation of reporting currencies in international operations against the Turkish Lira. The increase in UNLFS top line without the impact of TIS29 would be 65% growth. With strong gross profitability and strict control of operating expenses, there was significant EBITDA contribution from Turkey operations in both beer and soft drink businesses. However, the EBITDA margin was pressurized primarily due to the significant increase on raw material costs and transportation expenses in Russia. Our consolidated net income was recorded at 3.9 billion TL. Increased interest expenses along with a higher share of Turkish Lira borrowing and significant ethics losses from cash holdings had an adverse effect and led to a decline versus the same quarter of last year. However, these impacts were partially mitigated by deferred tax income resulting from the implementation of TAS 29. Free cash flow generation was flattish despite lower operational profitability which was supported by student capital expenditures and strict working capital management with improvement in payables performance. Consequently, as I mentioned in the beginning, the consolidated net debt to EBITDA ratio remained at a healthy level at 0.8 times, highlighting our strong financial position. And now our CFO Gökçe will give details on the financial metrics. Gökçe.

Thank you, Onur. Good morning, good afternoon to everyone participating in our conference call today. Onur just summed up the consolidated results of ANADOFS, so I would like to go into more detail about the beer group results. So, consolidated revenue for the beer group in the second quarter of 2024 was 23.6 billion TL, down 2.8% from the same period of the previous year. The revenue generated from international beer operations fell by 6.8% during the period, despite solid volume performance. Onur just explained this, but let me repeat because this is important. Simply, this is mostly due to the fact that inflation in Turkey outpaced the depreciation of Turkish lira relative to the currencies used in international operations reporting. Under IAS 29, last year financials translated in Turkish lira and are being indexed with inflation rate. And when depreciation of Turkish lira is less than the inflation, this naturally creates a decline in current year financials compared to the last year, even if local currency financials are same as last year. So in the second quarter, Turkey's beer operations generated 6.7 billion TL in sales revenue, a 9.4% rise. And in first half of the year, beer groups revenue increased by 1.6% to 41.1 billion TL. And in the second quarter, 2024 beer groups gross profit decreased by 3.6% to 10.9 billion with a 39 bps dilution in the gross profit margin to reach 46.2%. While international beer operations saw a decline in the second quarter, Turkey's beer operations saw a rise in the margins. This decline in international business was mainly caused by pricing difficulties in Russia, despite considerable cost inflation tied to foreign exchange-linked raw materials. So consequently, the beer group's first-off gross profit was recorded at 18.1 billion TL, with a flat margin of 43.9%. Next slide, please. Slide number 14, yes. In the second quarter, 2024, beer groups EBITDA dropped by 19.5% to 4.4 billion TL with 384 BEPS margin contraction from the same quarter the year before. The EBITDA margin of Turkey beer operation increased though in the second quarter and continuing the trend from the previous quarter. However, because of increasing transportation costs in Russia, international beer operations faced higher operating expenses. This along with lower gross profitability resulted in a decrease in the EBITDA margin. As a result, beer groups first of 2024 EBITDA was reported at 5.5 billion TL with 418 bps decline in margin. And beer group's free cash flow grew slightly from 7.2 billion TL to 7.4 billion in the second quarter. Better working capital management and a moderate increase in capital expenditure led to an improvement in cash flow despite decreased operating profitability and increased interest expense. I have to note that as of June 30, 2024, the beer group has a net cash position of 91.8 million TL due to first-house robust cash generation. So next slide, please. Slide 16. One more. Yes. I saw already, I think, referred to a disclaimer, but let me repeat. Danado Efes' financial statements are prepared in accordance with TAS-29 and this is the standard for financial reporting in hyperinflationary economies. As a result, all financial information disclosed on this call and in our earnings release are in full conformity with TAS-29. However, financial information presented on this slide particularly excludes the impact of TAS-29 and is presented solely for analysis purposes. So these figures won't be aligned to ANADO FSS financials and have not undergone an independent audit. So excluding the impact of TIS29, year group revenue was 41.1 billion TL with a growth of 74%. Again, excluding the impact of TIS29 EBITDA increased by 45% in the first half to 6.8 billion TL. And again, without the inflation impact, beer group net income was reported as 3.2 billion TL for the first half. So next slide, please. About cash and debt management. Again, at the end of first half, we had 57% of our cash in hard currency denominated in beer group and 60% in total consolidated on OFS, which is pretty much in line with our previous experience. And then our net debt EBIT ratio is quite low for an OFS. It's 0.8 time. And for the beer group, as we are in the net cash position, it's below zero. Next slide, please. And the following slide is on the risk management. So just let me provide you key figures here regarding hedges. We have around 89% coverage in aluminum exposure for the year of 2024. And we started to hedge for 2025. So the total coverage for the time being is 28%. And for the FX exposure for the year 2024, we are fully covered in Russia and 94% of our exposure in Turkey. So basically that ends my part of the presentation here. And I'm handing over to Onur. Thank you.

Thank you. So actually, as we have highlighted in our presentation, our first half results have shown resilience across both business lines, particularly in the beer group. And reflecting on the performance of the first six months and considering potential future challenges, we have decided to revise our guidance for both the beer group and CCI. For the beer group, we have made an upward adjustment to our top line figures, although we maintain our cautious stance regarding the downside risk of EBITDA margin. On the other hand, for CCI, we are making some downward revisions due to the lower purchasing power expectations and cautious consumer sentiments. so let me summarize as follows we improve our beer volume growth slightly expectation to meet single digit growth with very good momentum achieved in russia and turkey beer operations on the other hand our soft drink operations are revising volumes to flats or to low single digit growth due to prolonged sensitivities in middle east and expected decline in purchasing power therefore on consolidated basis we now expect our volumes to grow by low single digits, which was low to mid single digits growth previously. And following this one, we improve our beer revenue growth expectation from low 20s to low 30s on a fictional basis as a result of improved volume guidance. Meanwhile, due to softer volume performance and slower pricing executions, we now expect our soft drinks operations revenue to grow by low 30s. on a fixed neutral basis, which was low for this growth previously. And finally, while our consolidated profitability expectations remain mostly the same, the ongoing operational challenges present a risk our soft drink consolidated EBITDA margin, which was previously expected to remain flat, is now anticipated to either slightly decline or remain flat. So this ends our presentation actually. So thank you for interest and patience. We appreciate your attendance now. Aslı, I think we are ready to take questions.

Yes, Onur Bey. Thank you very much. There are already a couple of questions. So let me start with the first one. It's regarding the the process in Russia. Can you give an update on the Russian JV acquisition? What does the rejection of the transaction by Russian authorities mean? There are some more questions about Russia. Maybe I read all of them and then the answers can be given by you and Gokcebek, if that's okay. Can you disclose what percentage of your group cash is held in Russia? And can you provide an update when you expect to repatriate dividends from Russia?

I think there are lots of Russia questions as far as I understand. Actually, I am we are unable to provide any further details beyond what has already been disclosed on this matter and the current structure of the deal as you already know did not receive necessary approvals so only I what I can say is only now if there are any new developments on this regard they will be duly announced to public I think there are more more Russian questions but In addition, what I can say is in the interim period, the business will continue to operate as usual under the management of Anadolu FS. And the financial part, what was cash? Cash, I guess.

Maybe I can take it. I think the question was about the EBITDA and cash share of Russia. So in EBITDA, Russia's share is around, you know, 60 to 65% of peer group and slightly less than 20% in our consolidated financials. So this is about the BTA. And with the actual cash, you know, we don't want to go into the details of this question, but currently we have around, you know, 820 million cash in beer group as of June. And Russia's share is quite similar to last period that we were giving examples.

Thank you. What is the share of Russia operations in the EU with EBITDA and cash balances?

That I answered.

Yes, there are. Okay.

Lastly, I think the question about Russia's performance and the reasons. You can take this one. Russia is stated to be holding well despite sanctions with respect to consumer consumption. What are your remarks on demand, price challenges, competition, product and channel mix? I think this was a good one. Let's summarize the operation outlook in Russia. We have some reports and we have three actually sources of Russia's beer markets. We are witnessing an upward trend in the industry and the second quarter keeps on like this one of course first quarter was again a solid growth so the shipments data show increase around nine percent market growth Nissan data also shows around six percent the Ronstadt data seems a little bit more almost ten percent year-to-date on year-on-year results so that when you look at the average of these three resources it's around eight percent market growth and actually we are outperforming the industry and we are gaining market share both in volume and value and of course the source of the growth as in the question is mainly supported by increase of consumption, internal consumption and of course the performance of the global and premium brands like Budweiser double digit growth, Stella Artois again double digit growth WhoGarden double-digit growth, ESA double-digit growth, Spartan as well. So, also as asking the question, the drivers behind this market growth, beer market growth is mainly due to consumer shifts that we observe from wine, RTDs, ready-to-drinks and vodka to beer and also indulgence categories growth due to unpredictable social environment effects and innovations of course and our teams marketing investment, our rich portfolio in Russian business helps us a lot in this manner.

Thank you very much, Onur Bey. There is a question about William Grant and Sal's collaboration. My question, it comes from Ertan Bey. My question regarding William Grant & Sons. Any progress on operations and impacts on 24 financials? Thanks in advance.

Thanks for the good question. Actually, William Grant & Sons operation started in Turkey almost three weeks ago. So, we were dealing with supply in the first quarter. So, it's too early to say anything or comment on this one, but for the three weeks we are distributing William Grant & Sons. As you may also know, as On The Face Turkey, we have an agreement with William Grant & Sons, one of the biggest scotch distillery around the world, to distribute and to marketing their products. And we distributed mainly in VC category. Glenfiddich, Monkey Shoulder and Grants both in key accounts chains and of course in on trade and off trade channel and also one of the most premium gin brands Hendrix also we started to distribute but not only these categories also we will distribute vodka and tequila as well so it's building on and the impacts on 24 financials that was asked as far as I can see we are expecting low single digits in the revenue for this year of course but we have to think about and this is just going to take six months but in upcoming years we are seeing a huge potential since the category growth of whisky and gin organic growth in Turkey is in CAGR around 30 percent for the last five years. So we are expecting exponential growth in this category.

Thank you very much. Taking into account macro difficulties Turkish consumers are facing, what are your recent consumption trends in Turkey? Do you see any shifts between alcoholic beverage choices? Can you enlighten us?

Well, thank you for the question. Actually, our category in Turkey is resilient. I think first quarter and second quarter top line growth, especially volume growth. And that I have to emphasize that volume growth is the most important thing in an influential environment. So we are betting on volume growth and of course effective pricing. But our category seems to be resilient in the first half. at least and when we look at our third quarter I think in our previous conference calls we mentioned that we were expecting a very good tourism support which we gained actually so tourism is helping us a lot on the other hand although we revised our expectations for the rest for the year to go still we have we are observing some early indicators of purchasing power problems of Turkish consumer especially in the on-trade channel. These are all indicators and after the tourism season we can evaluate these indicators better. Yet again the portfolio of Andolu FS seems to be adequate for all kinds of consumer demands. so I am expecting actually what we observed about the shifts from other alcoholic beverage categories wine seems to be suffering and also with the high prices of absolute prices of spirits actually until now it helped us to grow the category beer category So again I am optimistic for the rest of the year but I am in a caution stance of course. That's just because of the purchasing power that comes from our pocket money analysis. Yet again we are expecting to be solid in the upcoming months of the year.

Thank you very much, Onur Bey. Actually, there is one more question about Turkey, but it's already partly answered. Can you speak about expected pricing and profitability for Turkey business in the second half of the year? Anything if you would like to add, it's more than welcome.

Well, as we are all familiar, we are increasing our prices in Turkey at least two times a year because of the tax when we look at Turkey operation as I stated before our volume has exceeded expectations here it almost achieved a three percent growth when we look at the pricing that is asking the question we started the year with 35 percent increase as you can easily remember in January and in July we have taken another almost 18% increase following the second excise increase of course and recently we also implemented an intermediate increase targeting selected products in the premium segment it was around ranging let's say let me give you an interval it was 5% to 11% so effective pricing as I mentioned is our in our agenda and revenue management actions are in plan and we are also evaluating since the because of the dynamics of macros and everything we are evaluating price increases and our prices mixed management in terms of channel and product every month so but until now 35 percent increase in January and 17.7 almost 18 percent increase two months ago so that's the Turkish market but again I'm optimistic because of the hotel channel because of the Horeca channel because of the tourism region performances yet again on the other hand we are carefully observing consumer confidence index purchasing power

Thank you very much, Onur Bey. There are too many repeating questions, therefore I'm not reading them. Anything?

Are there Russia questions, Aslı, the repeating ones?

Yes, there are too many repeating Russia questions which you already answered, therefore I'm not reading them once again.

Maybe there are newcomers, but just let us repeat that again. Actually now we are unable to provide any further detail beyond what has already been disclosed until now. The current structure of the deal did not receive any necessary approvals. If there are any new developments, In this regards, they will be duly announced to the public immediately. But for now, that's all I can say.

Thank you very much. There seems to be no more questions other than what we have already answered. But if there are any unanswered ones, you can directly reach us by email. So... I think we can end the call right now.