Anadolu Efes Birack Ord

Ladies and gentlemen, welcome to Anadolu FS's second quarter 2025 Financial Results Conference call and webcast. I'm Aslı Demirel. I'm the Investor Relations and Risk Management Director of Anadolu FS. Our presenters today are CEO Mr. Onur Alçuk and our CFO Mr. Gökçe Yanaşmayan. The first part of today's call will be in listen-only mode. Afterwards, we will open the floor for a Q&A session. You may submit your questions at any time using the question box on your screen. However, we kindly encourage you to do so before the Q&A session begins to ensure you have adequate time to review and address them. Unless explicitly stated otherwise, all financial information disclosed in this presentation are presented in accordance with inflation 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 sequence statements. Now I'm leaving the ground to Mr. Onur Alturk, Anadolu Efes' CEO.

Thank you. Good morning and good afternoon everyone and welcome to Anadolu Efes' 2025 First Self-Operational and Financial Results Conference call. So in the second quarter, AllFS leveraged its diversified footprint, brand strength and agile operating model to deliver solid volumes in both beer group and total soft drink operations. We continued the growth trajectory from the first quarter, yet at a slower pace in the second quarter at the consolidated level, while beer group increased volumes by 5.3%, indicating improved momentum compared to the first quarter of the year. Strong volumes supported top-line growth, but the effect was pressurized due to our deliberate focus on affordability, especially in our soft drinks operation. Software top-line performance along with last year's high base affects pressured operational profitability leading to a decline in EBITDA margin. Consistent with our business cycle, peak season supported our free cash flow generation, yielding a positive cash generation. Lastly, with the cash generated in the second quarter, our net debt to EBITDA ratio was recorded at 1.9 times, reflecting a slight improvement compared to first quarter. So when we look at the closer look to the beer group in the second quarter, volatility across our footprint remained elevated, with intensifying competition in Turkey, evolving retail dynamics and retail landscape in Georgia, and a changing environment among players in Kazakhstan. Inflation especially in our domestic markets and geopolitical tensions applied pressure across the board. Beer operations delivered a solid second quarter performance with volumes up by 5.3%. The rebound was supported by contributions across all beer operations and countries. In Turkey, beer volumes recorded solid 5.9% growth, building on a softer first quarter result. Likewise, international operations volume rebounded in the second quarter and registered 4.7% growth. CI operations, CIS operations delivered low to mid single digit growth on average, while Ukraine contributed to a consolidated volume growth with low teens, supported by ongoing market recovery and low base effect of the last year. Turning to international beer operations, in Kazakhstan we recorded slight volume growth in the second quarter, marking a recovery from the first quarter. The improvement was driven by strong commercial execution of the Kazakh team and increased focus on cash and draft sales. Share of premium portfolio increased through the Miller and Corona brands. We also successfully launched Wukong U in the mainstream segments, a launch that exceeded our expectations and reinforced our portfolio strength. Meanwhile, Georgia delivered mid-single-digit volume growth, supported by accelerated export activities and the successful execution of domestic route-to-market initiatives. In Moldova, we sustained a strong momentum, delivering mid- to high-single-digit growth in the second quarter, marking our seventh consecutive quarter of growth. Growth was fueled by positive market dynamics and enhanced product mix. Furthermore, early shipment activities by dealers and distributors to meet the rising consumer demand during the high season supported the volumes in the quarter. Looking closer at the operations in Turkey, volumes grew mid-single digit in the quarter, making a meaningful contribution to our consolidated performance. Competition stayed intense, as I mentioned at the beginning, with promotions and deep discounts shaping the market dynamics. Ahead of the summer season, we introduced Miller Lime in the upper mainstream segment, enhancing our portfolio as well as our market presence. We continue to observe the change in channel structure with a continued shift in the consumer behavior, with demand moving away from on-trade channel towards off-trade and modern trade channel. Tourism, which normally supports our seasonal volumes, started softer this year and lacked expectations. That's why we are keeping a close watch on it in the third quarter as it remains a key contributor to seasonal volume performance. Last but not least, we observed promising initial results from our William Grant & Sons portfolio within the Turkey Esprit category, supported by ongoing portfolio enrichment initiatives, including the launch of new vodka and gin brands. In parallel, a dedicated sales team structure was established to drive further growth and execution excellence in the segments. When we look at the softening operations, following the increasing momentum in volume in the first quarter, softening operations delivered a volume growth in second quarter, yet in a slowing trend. At the consolidated level sales, volumes increased by 4.7% year on year, with Uzbekistan, Kazakhstan and Iraq as the main contributors. In Turkey, volume declined 5% during the period. The shift of the Eid holiday to the first quarter In addition, softer household spending, tighter trade promotions together with price adjustments weighed on demand. Moving to international operations, volume performance was stronger year on year, supported by Central Asian markets and Iraq. Kazakhstan recorded robust 16.7% growth, helped by a low base and effective in-market execution. Iraq posted another 10.6%, increase extending the solar trajectory since seen since second quarter of 24. Uzbekistan posted 44.8% growth supported by low base and consistent marketplace execution, yet in Pakistan volumes were down by 1.5% as the same calendar shifts seen in Turkey affected consumption and more importantly regional tensions impacted volumes negatively. And now, let's move on to our operation results and performance. As we have been discussing, in the second quarter, we delivered solid volume growths, however, with a favorable mix. However, deeper discounting in domestic beer and affordability-focused pricing in domestic soft drinks limited the top line, resulting in a decline in net revenue. While zero-based spending-driven disciplined expense management helped us to keep OPEX increase limited, margin declined year-on-year on the back of weaker top-line performance and last year's high base. Furthermore, the impact of inflationary accounting application also weighed on margins. Our on-let as consolidated net income was recorded at 4 billion TL. Earnings were supported by lower tech expenses, particularly in soft drinks, yet it was not enough to compensate softer operational profitability performance and lower monetary gains compared to the same period last year. The beer group, on the other hand, they were the year-on-year improvement in second quarter, underpinned by higher monetary gains and deferred tax income. Following a seasonality-driven negative free cash flow in the first quarter, the second quarter marked a return to positive free cash flow and consistent with our historical patterns before. In the current environment, strengthening free cash flow stands as a clear business priority for us. In line with this approach, we continue to take concrete steps to support cash flow generation. We launched a working capital optimization program across all our operations in the second quarter. The program includes initiatives such as effective receivables management, inventory optimization, alignment of sales investments with sales teams with cash flow timing and the review of supplier payment terms. Consequently, an improvement was observed in our consolidated net debt to EBITDA ratio compared to the first quarter with a ratio at 1.9 times. So, let me leave the floor for Gökçe for more detailed financials.

Thank you, Onur. Good morning, good afternoon to everyone. As Onur covered on Adolfo's financials, I'll quickly give you more insight to the beer group performance for the second quarter and first half. But before I start, I want to remind again that the figures disclosed are on a pro forma basis in my presentation too. So meaning that they exclude the financial results of Russian operations as of January 1st, 2024 to ensure comparability. So in the second quarter, beer group sales revenue declined by 1.2% on a pro forma basis to 15.6 billion TL. Although volume performance was good, international beers operations revenue was also recorded with a decrease of by 6.5%. Actually due to similar impact we have observed in prior quarter. In general, Turkish lira depreciates less versus local currencies of international operations when compared to the inflation rate in Turkey. which creates a negative impact on TAS29. Excluding TAS29, international beer operation revenue grew by 24.2%. 9.4 billion was the revenue from Turkey beer operations in the second quarter, representing a 2.4% increase. We've seen an improvement in revenue per hectolitre versus first quarter of the year, have increased. Thus, on a pro forma basis, beer group revenue decreased 4.3% to 23.9 billion in first half. Beer group gross profit declined 2.9% on a pro forma basis again to 7.7 billion TL in the second quarter with a slight margin contraction of 82 beers. However, gross margin remains at a remarkable 49% level. The gross margin decreased as anticipated after the first quarter's exceptionally high gross profitability, mostly because of Turkey's beer operations, while international beer operations remained very strong. In the next slide, please, I'll give you an update of EBITDA. Yes, with an EBITDA of 3.2 billion TL, beer group had a 20.7 EBITDA margin in the second quarter. which indicates a 327 bps decrease. The strong bays in the same period of last year, especially in Turkey, and negative effects of TIS29, which I have explained, are the reasons for the margin drop. The primary cause of margin dilution in domestic business was the increase in general and administrative expenses. Strong performance across CIS operations where profitability margins exceeded 30% level helped to somewhat offset these effects. Consequently, Bir Group EBITDA in first half was 2.7 billion TL with an 11.4% margin. In the second quarter of 2025, Bir Group generated free cash flow of 3.7 billion TL which is one of the year's highest contributing quarters. Lower operational profitability and the negative impact of rising interest expense were the causes of the year-over-year decline in free cash flow. This year's CAPEX includes extraordinary items like capacity expansions in Türkiye. However, in absolute terms, the increase remains below revenue growth. while certain markets like Kazakhstan achieves saving versus budget. We are also focused on enhancing working capital management, particularly in Turkey and Georgia, where we currently see double-digit working capital to sales ratio. In other countries, this ratio remains at a healthy 0 to 5 percent range. All of these led to an improvement in the net debt to EBITDA ratio, which, as of June 13th, was recorded at 3.7 times. We expect the net debt EBITDA ratio to remain at the current levels by year-end. While a low FSCOT-related leverage is already low at below two times, year-group ratio is higher, and our mid-term objective is to bring it down to our comfort range. Next slide, please. But to give you an idea about the financials without TIS-29, again, just a reminder, first, all the low FSS financial statements are prepared in accordance with TIS-29. However, financial information presented on this slide excludes the impact of TIAS-29 and they are solely for analysis purposes and they won't be aligned to another office's financials and have not undergone an independent audit. So, excluding the impact of TIAS-29, year group revenue in the first half was 24 billion TL with a growth of 30%. And excluding the impact of KS-29, it may increase by 22% to 4.4 billion TL. And net income was reported as 1.1 billion, excluding the CTA impact coming from scope change and consolidation of Russian operations. Next slide, please. Cash and debt management. So as of June 13th, We had 60% of our cash in hard currency in beer group and 58% in consolidated and UNOFS. And net debt ratio again was 1.9 times for UNOFS and 3.7 times for beer group, both showing a slight decline versus first quarter. Next page please. So risk management part. Updating the key figures. Here our hedge percentage increased to 91% of our exposure for the year for aluminum. And for FX, we are almost fully hedged with 95% of coverage. So that ends my part of presentation. And I hand over to Onur.

Actually, before moving on to the Q&A session, again, there have been some questions about Russia operations. Let's clarify the area for everyone. There has not been any material change regarding the Russia issue since our last discussion, during the past conference call. Therefore, we have not included a separate page on Russia, as it is not incorporated into our financial results. uh unfortunately we will not be providing any additional details beyond what we have shared in first quarter results conference call if there are any questions on the floor now we are we are more than happy to take the other questions thank you

There are a few questions on the floor. Let me start with actually reading some of them. Some of them are recurring. Therefore, I'm mixing some parts of the questions with some other parts of other questions. So first one comes from Evgenia. What's the reason for pool tourism season? How far off are you in terms of your targets in Turkey?

Well, thank you. Let me handle this one. Thank you for the question, Evgenia. Actually, we have been observing a decline in the number of tourists that is coming to Turkey. And there has been a few reasons for this one. Especially strong Turkish Lira, the FX rates probably affecting the number of tourists coming to Turkey. But we are still observing, as we all know that we have a very good market share in tourism regions and in the hotels. So we are still observing the August performance. But, I mean, since what we are observing so far, we can expect a softer tourism season in Turkey for September. It seems that the number, we cannot compensate the declining number of the tourists.

Thank you. Another anonymous question is regarding the Russian business. However, the question is regarding if there is any progress on this issue, since Onur Bey mentioned that there are no material changes since our first quarter conference call. I'm skipping this part of the question, so I'm coming to the guidance part. Can you provide guidance for the year in 2025? What's the expected revenue and EBITDA for the business this year? Let me clarify one thing. We have not provided any official guidance for this year, so what Onur Bey is going to comment is going to be an unofficial guidance, where we usually share with our analysts as well as our investors during our meetings. So, Onur Bey,

Thank you. Thank you for the question. Also, thank you. I mean, from a broader perspective, we expect our business to have flat to modest market growth across our operating regions. However, our focus remains again on outperforming the market in every geography. In nearly all our operations, we aim to grow revenue above inflation. That's why we are very much focused on the effective pricing. and this pricing advantage and favorable mix will be the key for our for our growth we are also committed to growing ebitda in absolute terms to we anticipate some margin pressure at the same time strong free cash flow generation and delivering will remain top priority as i mentioned as i mentioned in my presentation free cash flow will be number one priority and thank you very much

Or whoever takes the question, what's the capex currently as a percentage of sales in the beer segment? And what free cash flow do you target in the beer business extraction on an annual basis?

For the capex, I can take it. So for the beer group, the capex spending ratio is approximately 7% to 8% of sales revenue. Of course, this is excluding Russia. In CIS region, the capex spending ratio is within the high single digits. In Turkey, it slightly exceeds 10% because of our capacity investments and due to Euro-based market investments such as coolers. So this is the picture excluding Russia.

Regarding the free cash flow part, would you like to talk?

Sure, of course. I mean, with the free cash flow, we've seen the improvement versus first quarter. First quarter numbers were much lower than what we currently have. So we improved our cash flow. And I think towards the year end, we will keep improving our cash flow. However, I do believe that we will still remain on the negative zone by year end in terms of cash flow.

Aslı, actually let's underline this part. We said that our number one priority will be our cash flow. So maybe, I mean, mentioning what proactive steps that we have taken might be helpful for all of us. First, we continue to focus on long-term growth by investing in high potential categories such as the spirit business in Turkey. Now we are trying to expand it. And also we want to expand our footprint in markets like China, Belarus and Azerbaijan. So this is for the top line. And also we have enforced a zero-based budgeting and spending approach, applying freeze and release mechanism for both OPEX and CAPEX in all our operations. We have launched a core working capital project to enhance cash conversion across all our operations again. And contingency and scenario planning efforts are underway in all geographies with the goal of enhancing cash generation. through a combination of top line growth and a tighter expenditure management. That is that we are now on it. And of course pricing for 2025 PRG initiatives including pricing optimization will be playing a critical role especially in Turkey and Kazakhstan. So maybe these are the justification that why we are saying free cash will be our number one priority.

Thank you very much, Onur Bey, for the detailed explanation. Another question for Gökçe. Can you please provide some idea about free cash flow of beer business, excluding Russia, in 2024, whether this was positive or negative, and how could it change in 2025? Actually, some parts of this question have already been answered. Maybe, just to clarify.

Well, I mean, for the last year's number, we can say that it was very flat-ish. You know, close to zero, I would say, even. This year, as I said, we will go to zero. And the aim, as Onur explained, very detailed projects going on to be on the positive side by the end of next year.

Your cash balance excluding CCI increased significantly in the quarter. Can you explain why? Have you considered reducing your outstanding cash balance?

Yes, I think that's been corrected later on. That's very specific to the situation in Turkey. We were foreseeing volatility in the market. end of June. Therefore, we have intentionally borrowed in advance. That's why you are seeing a bit increased cash balance at the end of June, which is covering our needs for June, July and August actually. That will be normalized in the coming quarters.

a rule for optimizing capex in order to support free cash flow. But Maxim, I think Onur Bey has already mentioned about it. Maybe you have written it before he answered the questions.

But additional maybe numbers there is that Turkey's capex to network innovation is declining. So, I mean, I think was single digit and this year with our forecast, we have to end with high single digits with slightly below

double digit therefore i think it's also on the right direction you can add that a net leverage is 3.7 uh times for the beer group where do you expect net leverage to be by the end of 2025. i tried to cover this in my presentation but let me repeat that i mean um on this

current circumstances we expect to finish the year with the current levels of leverage however we have to also maybe explain a bit more here that you know depending on the dollar movement or or increases our leverage may increase a bit further as dollar increases accelerates but our current assumption is current levels should be up year-end numbers

Onur Bey, a question regarding capacity expansion. What's the reason for capacity expansion in Turkey? What was capacity utilization rate before? Should we also expect CAPEX in other countries as well?

Also, thank you. I think we have mentioned about our capex. So far we have a very optimized capex actually in all our operations. 2K capex ratio might be a little bit, seems to be a little bit higher than the average. That's because of our capacity increase projects. We are still optimistic for the upcoming years for Turkish beer markets. When thinking average beer consumption per person is still a huge room to grow and also the alcohol drinking population is just 25% of the total population in Turkey. So we have to invest for future and of course our utilization rates are high. And we need to still make some pre-stockings in the summer season. And also that we don't want to cause any health and safety issue. And of course there will be a maintenance schedule for our operations, for the machinery and for the lines. So that's why we have to invest in our capacity in Turkey.

Could you please disclose the contribution of Turkey non-inflationary accounting to VEA Group? Maybe it's better to disclose this for the year end because there is seasonality.

For the full year or overall we can give a range of maybe 45 to 50 percent of contribution we expect in the environment that you know we don't have Russia in our in our financials.

This seems to be the end of the questions, if I have not missed any. But there are some recurring questions, therefore there's no point to reread them. Thank you for listening and participating in our conference call.

Thank you, thank you very much for everybody for their participation and the questions. Thank you, also thank you.

Thank you, see you in the next talk.