Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi : 3. Quarter 2022 Consolidated Financial Results

ANADOLU EFES

CONFERENCE CALL TO DISCUSS ANADOLU EFES Q3 2022 RESULTS

Company: Anadolu Efes

Date: 03.11.2022

Participants:

• Aslı Demirel, Head of Investor Relations
• Can Çaka, Beer Group President & Anadolu Efes Chief Executive Officer
• Mr. Gökçe Yanaşmayan, Chief Financial Officer

Aslı Demirel:

Ladies and gentlemen, welcome to Anadolu Efes' third quarter 2022 Financial Results Conference Call and Webcast. My name is Aslı Demirel and I am the Investor Relations Director of Anadolu Efes. Our presenters today, Mr. Can Çaka; the CEO and Mr. Gökçe Yanaşmayan, the CFO.

All participants will be in a listen-only mode. Following the first part of this call, there will be a Q&A session where you will be able to write-down your questions on the question box of your web screen during the presentation. For those who would like to ask questions, please write your questions before the Q&A session, because it takes some time for us to seem them on our 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 ground to Mr. Can Çaka, Anadolu Efes CEO. Sir?

Can Çaka:

Thank you, Aslı. Hello all. Like Aslı's usual disclaimer statement, let me start with my usual, we're proud statement as well. Putting aside the joke, we are really proud with what we are delivering and it's especially making it for the third consecutive quarter. And that is also much more important in a period where we have lots of challenges. As you would recall, in our prior calls we discussed this at the end of

last year, we discussed this, I mean right after the exit of the pandemic, the supply chain disruptions, inflationary environment, was putting a lot of challenges for every business, not only on ours.

And basically, we were expecting that to reflect into consumers' disposable income and further to their confidence as well as a declining mode. On top of that, certainly what's the happenings in the region has also put a lot of challenges and continue to put a lot of challenges. However, we were able to accelerate our momentum through the season actually the most important quarter for our business.

And we obviously during the first half, we benefited from obviously COVID impacted lower base of 2021 and yet on the third quarter, our last year's volume base was quite strong, so and you would recall, during August when we were talking about the first-half results, we were cautious, let's say reasonably cautious for the rest of the year. And today, we are for obviously much more clear. We had managed to perform this last year's high base with a very good momentum and we have received strong results in Türkiye, Kazakhstan, Georgia in Beer Group and when we look into the soft drink side, also that's supported by Uzbekistan.

So, on top of the volumes, obviously volume side was an important contributor to our business. But as we discussed, again pricing, would that be the most important part of the, let's say the performance for this year, given the increase in cost base and potential increases on the inflation would have an impact. So, we manage that very strongly.

We had much stronger topline growth, obviously that is supported with our timely and very smart pricing decisions. We have also supported our top line with the revenue growth management initiatives that we have taken through the year. And we are also constantly improving our effective discount management, promotion management all through the business line. So, we also benefited from the foreign currency translations or I may say the strengthening of the local currencies of our international businesses versus the domestic businesses, and that is obviously a result of our well-diversified geographic footprint.

So, with the support of the strong topline, we obviously achieved a much better operating leverage. We also backed our disciplined OpEx management and that also together with the use of hedge mechanisms that we are effectively implementing every other year, that also contributed to the operational profitability.

So, with the higher operational profitability and good momentum in payables performance and postponed investments to the last quarter, we had an outstanding level of free cash flow generation at the end of 9 months. Therefore, our consolidated leverage ratio has shown significant improvement as well and was realized as below 1x.

And having said that, payables performance, we expect it to be normalized, partly in the last quarter. And also, as we are discussing, as many businesses you are hearing from, the lead times are getting longer. That's why we are going to accelerate our CapEx for the 2023 and even beyond 2023. So, that will have an impact in the last quarter. However, with our very strong results seeing 9 months, they are ahead of our expectations, ahead of our initial plans, especially in the Beer Group that led us to improve our Beer Group outlook and that is also reflected into the consolidated results or expectations, guidance. And I will be talking about it at the end of the presentation.

So, looking a little bit more into the volume part, different markets and Beer operations, our reported volume declined by 1% this quarter, that's impacted by Ukraine obviously. However, if we exclude Ukraine

where we didn't have operations through the seven months of the year now, Beer Group sales volume grew more than 3 percentage points compared to last year, mainly driven by successful momentum, as I mentioned at the beginning, of Türkiye and Georgia, and partly Kazakhstan I would say.

In Russia, the markets slowed down after the peak season with a mid-single digit decline in the quarter. The market was affected by high price adjustments, as we all had at the beginning of the year. And that is slightly offset by the favorable weather conditions, especially in August, but yet the current pricing level is putting pressure on the consumer demand.

Cycling a high base of high single-digit growth last year, our own volumes performed slightly below the market, yet some of our key brands in core segments in Russia performed and contributed throughout the period, that's a positive sign, that's a positive momentum, which we are following very closely.

We are obviously very dedicated to our strategy of focusing on volume and profitability balance, and moving towards our long-term goal, so in terms of increasing our return on investments in Russia specifically. As I mentioned in our previous quarter calls, we are aiming to resume operations in our Chernigiv brewery in the Ukraine. And as we speak now, that our brewery in the central part of country is operational. We are producing beer and starting to get out from shelf space in the country.

Other than Russia and Ukraine, in other CIS operations, particularly Kazakhstan and Georgia, sustained their growth momentum. The average growth in CIS was low-single digits in the third quarter. Kazakhstan grew by slightly year-on-year basis, thanks to especially having support from both the premium and affordable segment in our portfolio.

Only in Moldova our volumes declined around low-teens. That is partially based on rising inflation. Moldova has one of the highest inflation in the region and putting a lot of pressure on the consumer demand, as a result of the consumers' purchasing power affected with the higher inflation, higher necessity spending.

Mid to high-teens growth achieved in Georgia, supported by positive market momentum as a result of the strong season performance. But we gained market share also in Georgia in both beer and soft drinks operations, and both soft drinks and beer contributed to the volume growth.

And finally Türkiye, we recorded a significant growth of 24%, even exceeding the strong growth achieved in the first half. Obviously, that is supported by the recovery on the on-trade channel as well as a very good tourism season in Türkiye through the season those all supported, but also we are very pleased with our successful new brand launch. That was at the beginning of the summer period and that showed contributed with solid volume potential, gaining significant market share. And at the same time, our core brand Efes Malt also showed a resilient performance through the quarter.

So with all said, our consolidated sales volume grew by slightly higher than 1% on a reported basis. With the contributions of the Soft Drinks operations, we reached to more than 36 million hectoliters in the third quarter, bringing our 9 months volume growth to 9%. We do discuss partly Beer Group volumes anyway. Excluding Ukraine was only down by 1%, supported by the continued strong momentum in Türkiye and Kazakhstan and Georgia in the third quarter, offsetting the volume decline, as I mentioned, in Russia. So in 9 months, excluding Ukraine, beer volumes grew by more than 3%. Soft Drinks. I will likely touch base with Soft Drinks on the next slide.

And a few words, obviously I'm sure you have heard our colleagues earlier this week cycling a historically best quarterly performance of the last year. Our Soft Drinks consolidated sales volumes grew by 7.5%, with solid growth achieved, especially in international operations. The consolidation impact of Uzbekistan offset the volume decline in Türkiye.

Good news also on the sparkling category, continued its high momentum and grew by almost 11% on the back of strong Coca-Cola and Fanta performance. The Stills category recorded a similar growth rate, around slightly higher than 7%, with strong ice tea and energy drinks performance. Water category declined around 14%, that's in line with the Company's focus on the small packs and value generation strategy, and again cycling of a high base of last year.

Türkiye domestic volumes declined by slightly less than 8% due to the impact of high inflationary environment and lower consumer confidence obviously, and also to some extent lower can purchase compared to last year's summer season also contributed to this. And international operations recorded almost 20% volume growth on a reported basis. Pakistan, Kazakhstan and Uzbekistan were again the main contributors to the growth of international operations, and Uzbekistan was the fastest-growing operation among CCI countries, recording more than 40% growth rate.

So with that said, obviously I'm trying to emphasize the revenue growth over the volume growth, so as the disruption in let's say, as we cannot operate in Ukraine, we were expecting the volume performance impacted, obviously high inflation and higher price taking, also we expected certain limitations on the consumer demand.

But again, I think the important factor or important criteria for us was to be able to support the topline growth. And as I mentioned at the beginning, we had, let's say, a conscious decision in terms of taking pricing even earlier starting to the year. And with those smart decisions and also with revenue growth management initiatives and again, very effective promotion management through the quarter, we had an outstanding performance in our topline this year, which contributed to the very strong profitability filtering through our P&L.

Our consolidated net sales revenue increased by 153%. Obviously, we benefited from the translation of international operations into TL, however even we exclude the FX impact, on a constant currency basis we have very strong growth rate.

Price increases implemented obviously in order to cover the cost inflation, excise tax increases also again those were very timely and together with the hedges, together with the, let's say, increased inventories at the beginning of the year to lower the cost base or smoothen the cost increases, those are all helped us. And we also supported the topline with the revenue growth management, as I tried to mention, including smart sizing, SKU privatization, focusing on certain elements, and in that perspective and obviously our emphasis for the last couple of years, improving our discount and promotions management, we're making it much more effective much more linked to the volume performance as well. Those are all working properly and supporting the topline growth.

The growth achieved in Beer Group was around 147% in 3Q. Almost same contributions in Türkiye and international operations. And while volume growth was contributed to some extent, being especially in Türkiye, international beer benefited from price adjustments and strong ruble against TL as well. So and on the Soft Drinks side, sales revenues increased by 156% in the third quarter. The Uzbekistan consolidated accounted for 20% of reported growth.

So all said, in terms of the volume and revenue, those translated in an exceptional profitability expansion. I would like to mention again; we are very pleased to deliver such results in 3Q. As we went through before, Anadolu Efes revenues grew more than 150% and Soft Drinks margins performance was impacted partly with the high base of last year as well as from the pressure from FX volatility and commodity and energy price inflation.

However, despite all these factors, the EBITDA expansion that we delivered on the Beer Group was much stronger. Our margin expansion was more than 930 basis points and that translated into more than 250 basis points expansion at Anadolu Efes consolidated level. Net profitability reached TL2.1 billion in 3Q, more than tripling its level what we had last year. Strong improvement in the operational profitability led to a solid improvement in the net profitability, obviously overcoming the impact of the higher financial expenses. Gökçe will anyhow will give you much more color on this.

And finally, before I leave the ground to Gökçe for further elaboration on the financial performance, obviously, we have a very strong all-time high free cash flow generation around TL7.1 billion in 9 months of the year. And as I noted at the beginning, we improved our let's say, our guidance while we are improving our performance and balance sheet health.

So, let me leave the ground to Gökçe. And I'll be back with the guidance at the end of the presentation.

Gökçe Yanaşmayan:

Thank you, Can. Good morning and good afternoon. Welcome to our conference call for third quarter results of 2022. Obviously, I'm also very happy and proud to present very strong set of numbers in 3Q. Let me get into the Beer results and underline them a bit more and elaborate on them.

In 3Q, we are looking at a volume decline of 13% almost, though this number would have been 1% decline only if we were to exclude Ukraine operations. Yet Beer Group sales revenue has significantly increased by 147% and reached TL12.3 billion in 3Q. We see similar growth in Türkiye and international beer operations. While international beer revenues expanded by 148%, Türkiye's revenue grew by 145%. That actually means that we have maintained our revenue growth momentum and achieved an increase of 128% year-on-year in 9 months and reached TL27.3 billion.

On the cost side, we have observed inflationary pressure in our cost base more than previous quarters, primarily in packaging materials and energy prices. Actually, the cost pressures shift from commodities to energy. And the level of pressure varied from one country to another operating country. However, as a general comment, I can say that, effective use of commodity and currency hedging together with successful pricing strategy helped us to outperform the increase in topline.

Gross profits grew by 188% and reached TL5.6 billion while gross margin expanded by 645 bps. This resulted to a growth of 163% for 9 months, with a margin improvement of 562 bps. Another good news, Beer Group EBITDA performance was ahead of gross profitability. EBITDA grew by 309% and reaching to TL2.9 billion. As a result, 9-months' EBITDA were up by 289% to TL5.4 billion, with a margin improvement of 814 bps. Free cash flow also expanded in 3Q and reached to TL759 million and in 9 months we are looking at a free cash flow generation of TL5.8 billion versus TL1.5 of last year.