Messages

Tuncay Özilhan

CHAIRMAN

Dear Stakeholders,

2018 was not an easy year for neither the world nor the Turkish economy. Trade wars between the U.S. and China, the U.S. Federal Reserve’s interest rate hikes, increased borrowing costs and ongoing political uncertainties have negatively affected the global growth rates.

In the World Economic Outlook Database published in January 2019, the International Monetary Fund (IMF) downgraded its global growth forecasts for 2018 and 2019 due to the soaring risks, revising them down to 3.7 percent for 2018 and 3.5 percent for 2019. The IMF has also lowered its growth forecasts for Turkey and many other developing countries, predicting that Turkey’s economy will grow 3.5 percent in 2018 and 0.4 percent in 2019.

Turkish economy made a moderate start to 2018 and gained a strong growth momentum of 7.2 percent in the first quarter. However, in the second quarter, the growth was affected by the developments in the global economy and slightly slowed down to 5.3 percent. The rapid depreciation of the Turkish lira, interest rates hikes and high inflation rates created uncertainty in financial markets in the second half. Despite these fluctuations, the Turkish economy grew by 1.6 percent in the third quarter of the year and thus grew by 4.5 percent in the first nine months.

For 2019, the main risks to the Turkish economy will again be the reflection of global developments, regional issues, high inflation and the current account deficit.

WE ARE DETERMINED TO MAINTAIN OUR FINANCIAL DISCIPLINE

As always, Anadolu Efes is committed to creating value and maintaining its financial discipline. And having this discipline matters even more in these difficult times. To continue to create long-term shareholder value, Anadolu Efes created a diversified and solid business model that will benefit from the growth potential of its operations, invest in its employees, put technology at the core of its operations, improve the revenue management with an increased weight of premium products, boost efficiency and manage its balance sheet firmly.

We serve nearly 700 million consumers in highly dynamic and competitive geographies with macroeconomic, political and geopolitical challenges both in our beer and soft drink operations.

According to the United Nations' data, in the countries we operate, 48 percent of the population is below 24 years of age and annual average population growth is 2.4 percent. According to the IMF’s data, these economies grew, on average, by 2 percent annually between 2010 and 2018, as their gross national product totaled $7,500 billion.

In 2018, we sought ways to manage fluctuations by taking the necessary measures to reduce financial market-related risks both in Turkey and in the other countries we operate. As profitability remained a priority for us, we continued to apply hedging initiatives for our operational foreign exchange exposures to soften the exchange rate impacts. We also took new initiatives to increase productivity and reduce costs. In 2018, we maintained our determination to create free cash flow both in our beer and soft drinks operations. Our strict financial discipline contributed to our strong liquidity, as we managed to overcome the fluctuations in Turkish markets that took place especially in summer.

In 2018, the Turkish beer industry saw slowing demand due to consumer distrust. Additionally, the exchange rate fluctuations led to inflationary pressures, which resulted in rising special consumption taxes, and thus, rising beer prices.

EXPANDING OUR PORTFOLIO REMAINS OUR FOCUS

Nonetheless, we maintained our strategy of expanding our portfolio in 2018. We continued to come up with innovative ideas to attract the attention of consumers while enriching our portfolio with global and local brands in Turkey. At the end of June, we launched the world's leading beer brand, Budweiser. In July, “Varım” brand was introduced to the market as a new beer with low alcohol content. Our hard work in 2018 paid off and by January 1, 2019, we added Corona Extra, one of the world’s top 10 beer brands, Leffe, the Belgian beer with a legacy of 800 years, and Hoegaarden, the well-known wheat beer, to our portfolio.

In addition, following the “Efes Pilsen” relaunch last year, freshness continued to be a key point for us and we recorded significant progress in this field throughout the year.

AB INBEV EFES B.V. WAS FOUNDED

We completed the merger process with AB InBev earlier than we expected, in the first quarter of 2018. Accordingly, we combined our operations in Russia and the operations of Anheuser Busch InBev SA/NV (AB InBev) in Russia and Ukraine under the management of AB InBev Efes B.V.

We consider this merger a milestone for Anadolu Efes and we are proud to be the second largest player in Russia, one of the world's largest beer markets. With this new structure, we will have a balanced and complementary brand portfolio that will be present in all important segments of the Russian beer market and be able to create cost and expense synergies.

We successfully carried out our international beer operations thanks to our strong performance in Russia, the country with the 12th largest economy worldwide, in Ukraine, that draws attention with its economic reforms and is expected to grow by 3.3 percent in 2018 and 3.5 percent in 2019 according to the World Bank's data, and in Kazakhstan, that grew its economy by 4.1 percent in 2018. The 2018 FIFA World Cup in Russia exceeded our expectations in terms of beer sales and consumption.

We continued to be the leader in other international markets. Thanks to our successful product portfolio and market execution in Kazakhstan, we outperformed the market despite the intense competition and reinforced our market leader position. Ukrainian operation which was added to our business following our merger with AB InBev, performed well beyond expectations and grew in 2018. We also continued to be the second largest brewer in this market.

Our soft drinks operation volumes in Turkey peaked in 2018 and achieved their highest growth rate since 2012. Similarly, we observed a high single digit volume growth in our international operations. Thanks to our profitability and diversity-oriented portfolio strategy and efficient cost management in our soft drink operations, we maintained our high-quality growth. Thanks to our effective pricing strategy and successful execution, we have maintained our position as the market leader in many countries. Our growth continued in Pakistan, an important market with a population of over 200 million.

We conduct our soft drink operations in developing countries where gross domestic product and population growth increases rapidly with growth opportunities. In addition, our operating geography of 400 million people with lower average beverage consumption per capita than developed countries offers us distinct possibilities.

Today, one of the most important issues in terms of energy and economy is the change in oil prices and its impact on macroeconomic indicators. High oil prices lead to an income transfer from oil importing countries to oil exporting countries and thus aggravates the global income inequality. In this sense, the positive balancing effect of both operational and geographical diversity of our portfolio is well reflected on our finances. We clearly saw this in 2018. For example, our successful brewing operations in Russia, Kazakhstan and Ukraine balanced the challenges we faced in other markets.

We are delighted to continue to achieve strong results in such a challenging year like 2018. We will maintain our liquidity ratios at high levels by making our operations simpler and more efficient in order to tackle these challenges. Our debt structure with long maturities and large amount of cash held in foreign currencies protect us against the exchange rate fluctuations. In the coming period, our focus will remain on our tight working capital management and generating strong free cash flow.

Thanks to all these efforts, our total revenues increased on a pro forma basis by 28.1% to 18.7 billion Turkish lira. Consolidated EBITDA (BNRI) rose by 24% on a pro forma basis to 3.1 billion Turkish lira. 23% of the total sales revenue of our beer group came from domestic operations while the contribution of our international operations amounted to 77%. 44% of the total sales revenues of our soft drink group came from domestic operations and 56% from overseas operations. Thanks to our tight balance sheet management, effective capex policies and our profitability oriented approach, we created consolidated, strong free cash flow of over 1 billion Turkish lira in 2018. Despite the fluctuations in the economy, we managed to keep our Net Debt-to-EBITDA ratio at 1.5 by the end of the year due to our strict financial discipline.

WE TAKE A FIRM STAND ON SUSTAINABILITY

Anadolu Efes exports its products to more than 70 countries and is the 16th largest brewer in the world. Today, we serve around 700 million people worldwide and are the sixth largest brewer in Europe. We also remained the sixth largest bottler in the global Coca-Cola system through our subsidiary, Coca-Cola İçecek. We owe these achievements to our sustainable business model, which is sensitive to people and nature, supports socio-economic development and aims to create a positive impact for all our stakeholders. In 2018, we once again became one of the 50 companies listed in the BIST Sustainability Index.

In 2018, we conducted a stakeholder analysis and accelerated our sustainability efforts. We have updated the Anadolu Efes Positive Impact Plan, which forms the basis of our sustainability strategy in the light of global and sector trends. We transparently share with the public the positive impact we have made on the environment, society, our employees and the value chain. We will also continue our pioneer role in this field.

We view social investments as an integral part of our sustainable business model. We support local economies and appreciate the role of agriculture in a local economy, thus support the sustainable agriculture of barley and hop, our two main ingredients. Moreover, we believe in sustainable tourism and are excited to continue our “Tourism is the Future” project that was launched in 2007. We also continue to contribute to social development in fields such as sports, cinema and theater.

STRONGER TOGETHER

We are a large family committed to our work. Our employees, dealers and distributors in all countries, our sales points and all our business partners are an important part of this family.

As Anadolu Efes, we operate in a dynamic geography full of opportunities. We’re making a strong start to 2019 with changes in top management. As we celebrate our 50th anniversary this year, we will continue to be a leading power that contributes to the development of the Turkish economy. I would like to thank our employees for their dedication and our distinguished Board members, stakeholders, dealers and distributors, suppliers and business partners as we always feel their support in our achievements.

Sincerely,
Tuncay Özilhan
Chairman