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Ladies and gentlemen, welcome to Coca-Cola Içecek First Half 2020 Financial Results Conference Call and Webcast. I will now hand over to your host, Mrs. Çiçek Özgünes, Investor Relations and Treasury Director. Please go ahead.
Good morning, and good afternoon, ladies and gentlemen. Welcome to our second quarter 2020 results. Today, our CEO, Burak Basarir, will talk about our operational performance; and then our CFO, Andriy Avramenko, will share with you the financial review. Following the closing remarks, we will start the Q&A session. Before we begin, please kindly be advised of our cautionary statement. The conference call may contain forward-looking management comments, including projections. This 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.cci.com.tr. Now let me turn the call over to Mr. Burak Basarir. Sir?
Well, thank you, Çiçek. Good morning, and good afternoon, everyone. Thank you for joining us today. Before starting today's call, I would like to express my solidarity with all of the people affected by the pandemic and extend our gratitude to all of the frontline heroes. I also want to recognize all of our people in CCI, who have been doing everything possible to make sure our business was uninterrupted. Without a doubt, this had been one of the most worst crisis we have to deal with, but we believe that the worse is behind us. Since many uncertainties still remain, we cannot provide a full year guidance in today's call, but we are confident in the resilience and agility of our business. We believe that our business' future is bright, thanks to our dedicated team, emphasis on digital capabilities and focus on sustainable quality growth. We have a business built on solid fundamentals. Our excellent brand portfolio includes some of the world's best-known brands with leading positions across our markets. CCI continues its relentless focus on excelling in execution to serve our customers. Our growth in digital capacity is one of the critical success factors to adapt successfully in the current environment. We are also happy to be one of the most aligned bottlers within the great Coca-Cola system. We have a solid track record of fostering a high performance with a growth mindset. We confidently rely on our disciplined and prudent financial strategy. Value generation is always our focus area and revenue growth initiatives, efficiency, tight working capital management and indeed, free cash flow generation continues to be the building blocks of our business. During the pandemic, we witnessed how resilient and agile our business was and how quickly it adapted to the unique operating environments. Let me move on to the next slide. Despite the unprecedented challenges, our long-term direction stays the same, creating value in everything we do along 3 main pillars: our people, our customers and consumers and our community we live in and as a result, creating value for our stakeholders. People have always been paramount. Therefore, taking strict health and safety measures during and beyond pandemic is our top priority. At the same time, responding to the changing world that continues to bring new technological developments, we have to focus on leveraging technology and reskilling, upskilling our people. Customers and consumers are at the center of our business. Even at the peak of pandemic, we ensured uninterrupted production and supply of our products. We continued to deliver people's favorite brands without any interruption. We have comprehensive business continuity plans to ensure we can continue to supply our customers and consumers going forward. In addition, to continue with our dynamic pricing and optimal mix architectures, we are adapting our business to changing occasions, creating new occasions, especially for building opportunities in the socializing, leisure and meet-at-home occasions. We are also accelerating the buildup of our omnichannel capabilities as well. CCI always thrives on being a good corporate citizen. During the pandemic, our support to communities has not been interrupted. I will touch base on community support initiatives in the following slides. At the same time, we maintained a solid balance sheet and generated significant free cash flow and further strengthened our liquidity position. Moving on to next slide. The solid results that we have achieved during these challenging times were made possible by a few characteristics that our company has: our focused mindset, the responsibility to the communities, agility to take measures and our uncompromising discipline for cash generation and efficiency. On the next slide, please. Our employees' health and safety and well-being are our top priorities all the time. In this respect, we made sure our employees are safe at work and made sure our consumers and customers are well ensured without any interruptions. We helped our communities and medical personnel with our products, provided hygiene kits to the outlets and medical equipment to health care centers. We produced and donated disinfectants and oxygen to medical facilities to support the fight with the pandemic. Also The Coca-Cola Foundation provided significant financial aid to our communities in our region. We have also supported small businesses and retailers across our geography. Let's move on to the next slide, please. Our business performance in terms of sales volume is closely linked to the size of our on-premise business in any given market and the level of lockdowns in the marketplace. Once again, a diversification of our business turned out to be our strength again, whereby the resilient performance of our international operations, mitigated by the relative softness in Turkey top line volumes. Accordingly, on consolidated basis, our volume declined by 16% in the second quarter, while we were cycling 4% growth of 2019. Due to the closure of our on-premise channel, we saw a negative package mix on the top line volume growth. Thanks to our revenue growth management initiatives, we managed to grow net sales revenue per unit case by a strong 12%. Andriy will talk about financials in greater detail, but I want to highlight that despite the lower volumes and unfavorable mix, the immediate and the effective measures we have taken to manage our costs resulted in solid margin expansion in the period despite the challenges and the cancellation of cash designation, as you would remember from our earlier discussions. As a result, our net income was TRY 412 million, with close to TRY 590 million free cash flow through all of the tight measures I have been talking about. Let me move on to the next slide, please. Despite the extraordinary challenges we have been facing since March, all of our metrics were in line with our quality growth algorithm, except for the number of transactions linked to the declining share of IC packages, as you can imagine. In the second quarter, we -- when we -- when our consolidated volume declined by 16%, price adjustments in Turkey and international markets, along with higher share of sparkling, limited the decline in the net sales revenue to 6%. Strict cost management helped us to offset the negative impact of -- and the decline in volume and helped to overcome the effects of the cancellation of cash designation, resulting in a sizable EBITDA margin expansion. Let's move to Page 9, please. I want to cover category performances. As we have witnessed in previous challenges, sparkling is the most resilient category in our business. In the second quarter, the limited decline in the sparkling mitigated the softness in other categories. The sparkling category's resilience was driven by a strong Coke brand, which declined only 6% in the second quarter and only 1% in the first 6 months. In Iraq and Azerbaijan, sparkling grew in this incredibly challenging second quarter. Stills category posted 27% decline on a year-on-year basis in the second quarter. And the water category declined by close to 50%. This was mainly coming from Turkey operations. The exposure on the on-premise channel is more than that of international markets. So let me move on to the next slide. As you would recall, we had a solid start to the year, recording double-digits volume growth in January and February with the substantial contributions across the board. Later in March, when the COVID-19 hit the world, we saw a significant decrease in volumes due to closure of on-premise accounts and lockdowns in most of our markets. As you can see in this chart, the drop in sales in the on-premise channel impacted overall volumes, and we had a severe impact on our mix. We quickly adapted to the new channel mix, focused on multipacks at-home market, which resulted in gradual growth in IC share from its bottom in April, even before our on-premise channel reopened. We have seen our volume improve gradually every month since the peak of the crisis, where we have seen 31% decline in consolidated volume, followed by 27% decline in April, which improved to a 10% decline in the month of June. This performance was a result of improving trends in the on-premise channel and higher sales in the home market channels across our geography. So let me move on to the -- Page 10. As I mentioned before, the volume performance was closely linked to the size of our on-premise business in each market. Having the highest exposures to the on-premise channel, Turkey was impacted the most negatively in terms of volume and mix. From its bottom in April, when the volume declined by 40%, volume decline was limited at 15% in June, supported by the opening of the on-premise channel. What I want to highlight here is that excellent revenue management performance. Despite the negative mix effect, our revenue per UC grew by 14% in May and 27% in the month of June. This was achieved by our revenue growth initiatives and dynamic pricing approach. Like the other operations, sparkling in Turkey was the most resilient category during the second quarter. So let me move on to Page 11. Our international operations were more resilient on the back of their lower exposure to the on-premise channel and higher share of more resilient sparkling in the total portfolio. The consolidated volume of international operations was down by 9% in the second quarter and by 4% in the first 6 months. In Pakistan, volume was down by 10%. Shutdowns on on-premise outlets and the curfews had significantly impacted the market. In Iraq, an 11% decline was mainly driven by curfews and lockdowns. However, in Iraq, we saw a resilient sparkling performance and recorded a 2% growth in the year. Central Asia was the most resilient region. In Kazakhstan, volume was down by 7%, while sparkling category declined only by 2.5%. In June, Kazakhstan recorded a growth compared to the same period of the 2019. In Azerbaijan, the sparkling category recorded a growth this year in a very challenging quarter, while the total volumes declined by 9% due to softer stills and water categories. Excellent market execution and revenue growth management resulted in FX-neutral revenue growth every month at an increasing rate: after a slight decline in April, in May, 3%; and in June, 5% revenue growth per unit case that we have seen in our international markets. Now I will hand over to Andriy to take you through the financial results in more detail and then I will take over for closing remarks and for your questions. Thank you.
Thank you, Burak. Good morning, and good afternoon, everyone. Thank you for taking the time to be with us today. Burak already talked about the solid performance we had in the second quarter despite the challenges. Let me get into more details now. Our consolidated net sales revenue grew by 3.7% in the first 6 months, while second quarter revenue was down by 5.8%, reflecting the impact of the pandemic. Our cost of sales per unit case increased by 13.7% in the second quarter, some portion due to termination of cash designation accounting methodology. Otherwise, efficiency measures in production and lower prices in certain raw materials contained the fixed cost per unit case pressure of the lower sales volume, and therefore, increase in cost per unit case was below NSR growth per unit case. Our gross profit margin contracted by 54 basis points in the first 6 months and by 84 basis points in the second quarter. Without the impact of cash designation, gross profit margin would have increased by 134 basis points in this challenging second quarter. Second quarter EBIT margin expanded by 136 basis points as a result of cost of goods management and no increase in per unit case OpEx due to discretionary spending freezes and cost reduction initiatives in response to the pandemic. Accordingly, EBITDA margin increased in parallel to EBIT margin growth, confirming our quality growth mindset. Without the impact of cash designation, increase in EBITDA margin would have been 346 basis points in second quarter 2020. Our net income in the quarter was solid at TRY 412 million, equal to the last year. Besides improved operating profitability, lower net financial expenses helped the bottom line. Termination of cash designation benefited net financial income expense line as the FX gains incurred from hard currency deposits were now recorded under this line. In addition, there was a noncash benefit from valuation of the put option in Iraq. Moving into the next slide, [ please ]. I want to talk briefly about our per unit case performance. Our consolidated net sales revenue per unit case increased by 7.5% on an FX-neutral basis despite negative mix. This was delivered by revenue growth management initiatives and dynamic pricing approach. Our gross profit per unit case grew by 5.4%, attributable to higher gross margin in international markets, where gross profit per unit case grew by 18.7% in second quarter on FX-neutral basis. As we discussed before, gross profit of Turkey operations was impacted by the termination of cash designation accounting treatment. Without that, gross profit per unit case in Turkey grew 10%. EBIT per unit case rose by 16.9% driven by significant efficiencies and savings achieved through immediate reaction to the pandemic environment. Now moving into Slide 15, please. As we discussed earlier, we recorded 84% (sic) [ 84 ] basis point consolidated gross profit contraction in second quarter. The full impact was due to the termination of cash designation accounting treatment. Without that, our gross profit would have grown by 134 basis point in this incredibly challenging quarter. Efficiency measures in productions and savings in the procurement of certain raw materials, along with higher average selling prices, resulted in the solid gross profit performance. Responding immediately to the pandemic, we took serious measures to decrease our OpEx and accordingly, in the second quarter, our consolidated OpEx decreased by 16.2%. The main savings areas were marketing, group meetings, travel and lodging. Turkey and international markets realized similar OpEx reduction as a percentage of net sales revenue. Accordingly, our EBIT margin recorded 136 basis points expansion, which would have been 354 basis points without the impact of cash designation. EBITDA margin impact was similar. Moving on to Slide 16, please. We recorded TRY 412 million net income in the second quarter of the year, taking our first half net income to TRY 539 million. Second quarter net income was equal to the last year's. Improved operational profitability, lower net financial income expense and a onetime noncash gain from revaluation of Iraq put option helped the bottom line. High share of FX-denominated cash and hedges in place helped us to mitigate the negative impact of higher taxes, mainly due to lower deferred taxing. Moving on to Slide 17. We are particularly pleased with CCI's balance sheet strength. With prudent financial discipline, we maintained our net debt-to-EBITDA ratio at 1.1x, same level as at the end of December 2019 before the pandemic and before the 15% devaluation in Turkish lira against U.S. dollars. This was possible through increased hard currency cash balances and lower FX borrowings compared to the year-end. Our balance sheet FX exposure is covered by FX-denominated cash and financial hedges in place. In addition, we have net investment hedge accounting, matching a portion of our U.S. dollar borrowings with our U.S. dollar-denominated assets abroad. So with that, we actually had a FX loan position at the end of June 2020. Excluding net investment hedge, our FX position is around USD 290 million, less than 1x of our EBITDA. Moving on to the next slide. Our solid balance sheet and available liquidity position -- sorry, our solid balance sheet and available liquidity position help us to manage challenging scenarios, given the uncertainty of the pandemic. We have a manageable debt repayment schedule, which can be funded by our existing cash balances. We have significant headroom under our financial covenants, and we don't have any refinancing need until 2023. Moving on to the next slide, please. As we mentioned many times before, free cash flow generation is always a core priority for our business. This challenging quarter was no different. As soon as the pandemic hit our markets, we implemented cost reduction measures and cut all uncommitted CapEx other than our planned investments in digital. On the net working capital side, we deliberately wanted to support our customers with a disciplined and sustainable approach. The higher share of international markets with lower receivable days increased. And accordingly, we did not see a deterioration in consolidated receivable days despite challenging market conditions. The main benefit we saw from inventory management is with reduced number of SKUS, we managed days inventory outstanding below last year's. Working capital has always been and will remain one of the top focus areas for us. However, we will see some normalization in the coming quarters. As a result, CCI generated free cash flow of TRY 585 million in first half 2020. Moving to Slide 20. I'm not going to talk about 2020 as we have majority of our key raw materials well hedged. What I want to highlight is at the peak of the pandemic, when commodity prices were at the bottom, we locked in nearly half of our sugar price for 2021, half of aluminum need and 15% of resin. For aluminum, we even started hedge for 2022 and locked in 10%. Now I hand over to Burak for his closing remarks.
Thank you, Andriy. As I said earlier, we have a fantastic business built on solid fundamentals. We believe in the future of this business, even more so today because we saw how quickly and effectively we reacted to such an unprecedented challenge, protected our people and our business and delivered robust results. We believe the worst is behind us, and now we look at the opportunities that lie ahead beyond COVID-19. We have a passionate, fully accountable and a high-performing team. We have an excellent platform for growth, and our operating geography offers vast opportunities. On top of that, our brand portfolio includes the world's best, most loved brands. Our full alignment within the Coca-Cola system gives us a huge advantage. We have years of experience in tackling a challenging external environment and deliver exceptional results. Our balance sheet is strong and flexible to support the pursue of future growth opportunities. And no matter what we do, we will always do it in socially and environmentally responsible way. Now I think we can open the floor for your questions. Thank you very much.
[Operator Instructions] Our first question comes from Alexander Gnusarev, VTB Capital.
Congratulations on your results. You have pulled great results in the pandemic overall. I just wanted to ask a couple of questions, if I may. The first question, if you could comment on that. How is your dynamics in July and first days of August? Did you enter the positive zone in terms of sales?
Just -- I mean, obviously, it is -- it shouldn't indicate how the rest of the year should look. But when we look at the July figures and the month of August, we're seeing the positive trend is still continuing. But again, the things are pretty reactive in all of our markets, thinking about the second wave issues and everything in the COVID-19, how things can change easily. But looking at July and August, we've seen the same positive trend continuing.
So there is an improvement against June figures. Did I get that right?
Yes. You can interpret my answers like that, yes.
And the second question, just for my understanding, what is the approximate share of on-premise consumption in your geographies? I mean it's like 20% to 30%, which will rise by each specific geography, right?
So in Turkey, it's like close to 30%. It's roughly about 25%. Pakistan is roughly about 20%, and Central Asia is around 15%. So on a [ consolidation ], it should round up about a 20%-ish.
[Operator Instructions] Next question comes from [indiscernible]
Congratulations on your strong results. I just want to have an idea about the EBITDA margin generation for the rest of the year. In the second quarter, as far as I understand, you deferred some of the discretionary OpEx or COGS items to the other quarters. So how we should see for the rest of the year? Should we see, again, the deferral of these expenses for the third quarter, for example? And this could -- could this lead to a wider margin contraction, particularly in Turkey? Could you please just give an idea about your expenses and the -- and its effect on the EBITDA margin overall? And secondly, could you also provide some information regarding your Central Asia operation because as of July, I hear that also in Kazakhstan, some partial curfews already started. We also observed similar volume trends as we have seen in the second part -- at the beginning of the second quarter.
Okay. Thank you for the questions. Now we'll talk about -- first about the EBITDA in the second half of the year or third quarter. First of all, we'll not be able to guide you precisely on EBITDA margin for the third quarter and fourth quarter in this complex environment. What I can say is that -- what I can comment is in terms of the spending. What we have done in the second quarter is a sustainable reduction, right? So as we grow or improve growth trend in Q3 and Q4, obviously, there will be extra expenses as they should be in terms of related to growth, investment in the market and so on. But I would not interpret it as a delay of expenses from Q2 to Q3 or from Q2 to Q4. I hope this helps with the expenses question. And the second question was in terms of the performance of Central Asia. From what I understand, obviously, there is an increase of cases in Central Asia, in some of the countries. However, markets are resilient. Our business is strong and important part also that in this case, it's actually a good thing that our immediate consumption share in Central Asia is quite low. And so -- and our business are very strong in terms of the market share and presence and execution capabilities. So I see it as a continuation as -- their contribution into improving trend will continue.
We have no other questions at this time. [Operator Instructions] We have no further questions. Mr. Basarir, back to you for the conclusion.
Okay. Thank you very much, everyone, for joining our call, taking the time and trusting in our company. So we will do our best, as always, in the third quarter and the rest of the year. So stay safe and take care of yourself, and hope to talk to you soon. Thank you very much. Buh-bye.
This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines. Thank you.