Arcelik A.S. (BIST:ARCLK) Q1 2023 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by. I am Maria, your chorus call operator. Welcome and thank you for joining the Archulet conference call and live webcast to present and discuss the first quarter 2023 financial results. At this time, I would like to turn the conference over to Mr. Özcan Çimen, Chief Financial Officer, Mrs. Mina Şule Yazgan, Finance and Enterprise Risk Executive Director, and Mr. Öktem Soylamız, Investor Relations Lead. Mr. Çimen, you may now proceed.

0:31 Good morning, good afternoon, ladies and gentlemen. Welcome to our first CARTER results webcast. The month of February saw a devastating earthquake in the southern Turkey, which has left us all feeling deeply saddened. I would like to offer my condolences to all those who have been impacted by this tragedy. The first few quarters have presented a challenging operating environment and recently obstacles have continued to persist around the world. I want to express management's gratitude to our employees for their dedication and adaptability in contributing to Archelik's growth story. Here are the highlights of the first quarter.

1:18 Archelik recorded 39 3.9 billion TL revenue in the first quarter, posting 42% annual growth. On an organic basis, the revenue growth was 36% year-on-year. In the first two months of this year, MDS6 market in Turkey showed 13% increase in unit terms compared to previous year. This was primarily driven by the low Bayez effect. On the contrary, consumer demand decreased by a high single-digit percentage during the same period due to the negative impact of the earthquake. The demand for MDS6 products had been in a declining trend over the past few quarters in international markets, and this pattern continued in 2023 so far.

2:06 OPEX to sales ratio were 24.4% in the first quarter. Yearly increase of 171 basis points and quarterly increase of 222 basis points was mainly attributable to higher administrative expenses. 210 basis points of the quarterly gross margin expansion has been neutralized by the increase in OPEX sales. Thus consolidated EBITDA margin increased by 11 basis points in the first quarter compared to previous quarter and realized at 9.3%. On an annual basis EBITDA margin was down by 137 basis points. Networking capital to sales ratio increased to 22.7% as of first quarter mainly due to increase of our receivables.

3:04 Our leverage was 0.32 times higher compared to last year end due to increase in funding needs and as well as the FX conversion impact. If we move on to the next slide. In the first quarter of this year, Arcelik reported consolidated revenue of 39.9 billion TL, which is representing 42% year-on-year increase. The growth was supported by several factors, which includes price increases, depreciation of TL, and slight increase in white goods sales units in Turkey, and also The inorganic revenue generated by recent acquisitions.

3:50 Organic revenue growth was 36% compared to a year ago. Our consolidated gross profit margin for the first quarter was up by significantly 210 basis points, mainly attributable to shrinkage in material costs, favorable euro-dollar parity, and on a yearly basis the expansion in the gross margin was 28 basis points. The positive impacts of price increases and declining raw material costs were largely diminished by lower capacity utilization and depreciated euro-dollar parity on a yearly basis. Consolidated EBITDA margin for the first quarter was 9.3%, registering 11 basis points quarterly expansion, 155% 5 basis points yearly and 188 basis points quarterly increase in expenses were limiting factor behind the further expansion of EBITDA margin in the first quarter.

4:54 On a yearly basis, EBITDA margin was down by 137 basis points. If we move to the next slide, domestic market. Cycling a low base effect, Turkish MDA 6 market grew by 13% on a yearly basis in the first two months of the year. Our selling units grew by 7% in the same period compared to a year ago. And sell-outs were down by a high single digit percentage in the first two months of the year compared to a year ago. We remained our strong leadership position by far as of February 2023. Sales in air-conditioned market was down by 3% in first quarter on a yearly basis, while our units were contracted by 17% in the same period.

5:47 Cycling a low base, TV market grew by 18% in January and February on a cumulative basis, and our units increased by 6% in the same period. Domestic revenue in the first quarter was 15 billion TL, which registered 79% yearly and 20% quarterly growth. Annual growth was mainly driven by price increases and a slight increase in white goods unit sales. The share of domestic market in total business was 38% in Q1. If we continue with the European market, having 38% share in total consolidated revenue in the first quarter, The revenue generated from Europe was up by 9% in Euro terms and compared to EREGO, mainly to price increases and inorganic revenue contribution.

6:44 On an organic basis, the revenue growth was around 1%. Ongoing macroeconomic and political challenges remained in Europe, which impacted the demand in the first two months of this year. Considered demand was contracted by a high single-digit percent in Western Europe compared to a year ago. Germany, Great Britain, France, the three biggest markets across Europe were the ones that the MDA6 demand contracted the most in Western Europe. If you look at Eastern Europe, white goods market contracted significantly by around 20% in the first two months of this year compared to a year ago. And despite the price increases across the industry, both Western and Eastern Europe market share being contracted in value terms by low single digit percent and mid-teens percent respectively.

7:42 Having 23 percent share in total revenue, Archelux revenue were down by mid single digit in Euro terms, reflecting the overall demand contraction. and having a 15% share in total revenue, Arçelik's sales were up by 41% on a yearly basis in Euro terms, thanks to unit growth and price increases and also inorganic revenue contribution. On an organic basis, annual revenue growth was 16% in the first quarter. In total, Arçelik posted around 9% annual revenue growth in Euro terms in Q1. If you move to the next slide, Africa and Middle East and APEC. The revenues from Africa and Middle East region accounts around 9% of consolidated sales in June, declined by around 14% annually in Euro terms, mainly as a result of low sales in MENA. The ongoing micro challenges in South Africa also resulted in a significant decrease in consumer demand in the first two months of this year, cumulative basis compared to a year ago.

8:57 The company DeFi revenue were down by 4% in local currency due to lower insults, which was partially offset by price increases. In Euro terms, annual revenue contraction was around 15% reflecting the depreciation of local currency against Euro. As of February, DeFi maintained its strong leadership position. In Egypt, White Coast market in the first two months of this year remained flat compared to a year ago. Despite cycling a strong pace, Beko Egypt's revenue increased by 74% on a yearly basis in Q1 in local currency. But when we look at Euro terms, it's down by 1%.

9:45 During January, February this year, Beko increased its market share in Egypt in unit terms compared to the same period of last year. Revenues from APAC region having 14% share in total revenue were down by 18% in Euro terms on a yearly basis in the first quarter. This contraction was mainly as a result of lower contribution of actual business due to declining demand environment. In Pakistan, due to deteriorated purchasing power of consumers and recently imposed import constraints on raw materials, Revenue were contracted by around 32% in Euro terms on a yearly basis in first quarter.

10:31 And in local terms, the contraction was around 7% in the same period. In Bangladesh, revenues declined by 4% in local currency in the first quarter. and macroeconomic headwinds and early monsoon have negatively impacted the market in Bangladesh and continuous depreciation of local currency led to 19% annual revenue contraction in Euro terms in Q1. Next slide, we would like to touch on raw material prices. Material raw material market prices rose quarterly due to expectation of a better demand outlook resulting from the global easing of recessionary concerns and the lifting of COVID restrictions in China. In Turkey, metal raw material prices saw a notable increase mainly due to implementation of tax increases on steel products and also a sudden surge in demand and a decrease in supply following the earthquake.

11:37 Compared to a year ago, metal raw material prices contracted substantially thanks to declining demand. In the first quarter of this year, plastic raw material prices remained steady in comparison to the previous quarter. However, they contracted considerably when compared to the prices from a year ago. This was due to decreased demand and lower energy and logistic costs. And we want to highlight that through strict, proactive, and effective cost management in a timely manner, actually costs have been low compared to market levels. Next slide, sales bridge slide. In Q1, Turkey sales grew significantly by 79.3% organically on a yearly basis as a result of price increases and slightly improved white goods unit sales.

12:32 Our international sales increased by 25.7%. Organically, international sales were down slightly by 4.2% in the first quarter of this year compared to a year ago. The contribution of FX conversion impact in the annual international growth was 24.6%, while inorganic revenue contribution was 5%, 5.3%. On the right-hand side, You can see our regional sales breakdown. Turkey's share in total revenue is 38% in the first quarter. Western Europe declined to 23% from 2007. And Eastern share has increased to 15% from 11%. I will leave the floor to Mine for financial summary.

13:27 Thank you very much Ozkan Bey. Good afternoon and good morning. Here is the summary of our first quarter financials with yearly and quarterly comparison given on a consolidated basis. Consolidated net sales grew by 42% on a yearly basis in the first quarter despite weakening demand environment. Together with slightly increased white goods sales in Turkey, Turkish Lira depreciation and Art Pricing Initiatives were among the key factors, pillars of the growth. Organically, revenue growth was 36%. On a quarterly basis, Archadex consolidated revenues increased by 2%. The consolidated growth margin was 31.1% in the first quarter of 2023, increased by 28 basis points on a yearly and 210 basis points on a quarterly basis.

14:22 The improvement in the gross margin was mainly attributable to lower raw material costs. Higher G&A expenses increased OPEX sales ratio, which then have pressured our EBITDA margin in the first quarter of this year. Consolidated EBITDA margin was realized at 9.3% down by 137 basis points compared to a year ago. Arshadik posted net income of 1.3%. 159 million Turkish Lira in the first quarter of 2023. Net profit margin was suffered by 144 basis points compared to a year ago and realized at 2.9%. The contraction mainly reflects the decrease in operating margins and higher financing costs.

15:12 We can move on to the next slide. Our net debt was increased by 5.7 billion Turkish Lira compared to 2022 year end mainly due to increased working capital funding. As of 2022 year end, we have 29.3 billion Turkish Lira equivalent cash in our balance sheet with well diversification between currencies. 49% of our total cash is USD denominated, 30% is Euro denominated. Turkish Lira share was 6%. As a result, our leverage was up by 0.32 times compared to 2022 year-end. That includes 0.20 times of FX conversion impact. On the right-hand side, you can see our loan and bonds portfolio. As of first quarter 23, we have 57.9 billion Turkish Lira equivalent debt.

16:14 18% of total portfolio is in Turkish Lira terms, while Euro and USD share was 50% and 21% respectively. Our Turkish direct effective interest rate was 24.2% as of first quarter. If you move on to the next slide, on the upper left corner, you can see the breach of EBITDA margin. Despite slightly improved gross margin, higher OPEC sales ratio driven mainly by higher generic expenses has resulted in annual contraction in consolidated EBITDA margin. On the lower left corner, you can see our CAPEX sales ratio. CAPEX sales was 3.9% in the first quarter.

16:59 On the upper right corner, Networking Capital sales ratio has been shown. The ratio was increased to 22.7% as of first quarter 23 from 21% at year-end, mainly due to higher receivables. Finally, on the lower right corner, due to increased working capital requirements, we generated negative pre-cash flow of around 3.2 billion Turkish lira. I leave the floor to Mr. Özkan Çimen once more.

17:32 Thank you, Mine. For the guidance, we are keeping our guidance as we have announced in the beginning of this year. The revenue of Turkey around 45% growth. International growth is around 6% in FX terms and EBITDA margin will be around 10% and working capital sales ratio will improve around 24% and CAPEX is expected to be 300 million euro. So this was the end of our presentations. Now we can go to the Q&A session. The first question is from the line of Zakovic Daniel with Barclays.

18:17 Please go ahead.

18:19 Hello. Thanks very much for the call. So I just wanted to ask about your recent Eurobond maturity that you repaid. Was this repaid just using cash or did you access Any bank financing and at some stage would you like to replace this Eurobond in your capital structure? Thanks.

18:46 Thank you for your question.

18:48 The Eurobond maturity was beginning of April and we paid it partially with the cash in our hand as well as we had some short-term ethics loans from the market. The window to reissue the Eurobonds was not available. Therefore, we are following right now in the short term or midterm to have that option again. But right now, it is partially financed with short-term loans.

19:23 Okay, thanks very much. And maybe just a question on market conditions. In Europe, things have been relatively weak. When do you think, in terms of volumes, when do you think things might improve? And then also on your EBDA margins, when are you expecting some improvement there? Thanks.

19:45 Thank you. Ongoing macroeconomic and political challenges is continuing to impact consumers' lives in Europe, which is actually impacting the demand. So we have weak demands in key countries. Demand is also impacted by high inflation and interest rate environment and also the consumer confidence and purchasing power is also impacted. The key markets Germany, Great Britain and France were the ones mostly impacted and we have seen contraction in those markets and for the coming periods we expect demand for appliances for the rest of the year We have started to see the benefits from lower raw material costs and especially freight costs which are going back to pre-COVID levels. But on the other end is still the energy prices and also labor inflation is still an important cost element.

21:17 We are working on cost efficiency projects to improve our mix along with strategic pricing. And also we are focusing to lower our fixed costs to create efficiency. and we have seen the partial results in March where we have higher EBITDA margins compared to January and Feb and we expect that trend to continue in the coming months and therefore we are not changing our 10% EBITDA margin guidance.

21:49 Thanks very much. The next question is from the line of Demisaj Cemal with Atta Invest. Please go ahead.

22:00 Thank you for the presentation and fair results. My first question is about the pricing environment, especially in the Asian markets. Do you see additional competition from the China side, maybe due to lower price costs? I would like to understand that. Apart from low demand, do you see any increase in supply from the competitors? That's my first question. The second question is about the financing items below the operating line. Again, for this quarter, I see higher credit finance charges from trading activities. you know i look all together the financial expenses and together and i still see that figures high uh you know when we include them into financial expenses uh you know similar to port quarter when do you think we should see some decline uh in you know in that site the the ethics cost and the you know the the Working Capital Financing side. That's my second question.

23:21 Thank you.

23:23 Thank you, Cemal Bey. Competition is actually tough. Everyone is trying to capture or preserve the market share. Especially in core markets where the demand is declining, the price levels are significant We see almost in all markets all the competitors acting on pricing promotions on some categories selected categories or even all categories and Chinese are also active so in Asian markets where they are closed they have more dominance of course and that pricing environment is not only in Asia but impacting all over the world.

24:17 So what we are doing is we are trying to improve our mix, try to reposition our product portfolio so that we have a better range and better competitive pricing and providing better products to the consumers with increasing features. So therefore that's our aim to improve our market share or at least preserve market share with a better margin. Regarding the financing expenses, since the beginning of the second half of last year, The interest rates all over the world is increasing and this is impacting our financing costs not only in Turkey but also in Europe where we have some loans and also in other countries like Bangladesh, Pakistan where we are having loans. The cost of borrowing has increased so that impacted our financing expenses for the interest line.

25:24 And on the other hand, we have factoring costs, which is also increasing with the increasing interest rates. Therefore, you see a higher credit price financing charge in our P&L. On the other hand, Hedging costs increased dramatically compared to last year in Turkey, where we needed to balance our open ethics position. Nowadays, it is 40% or 45% to hedge it. Therefore, our hedging cost is also another element of our financing item, which has increased On all these together, impacting the total financing costs, shall we expect an easiness in the market?

26:17 Actually, with the increasing trend of interest rates, it's unlikely to see it in the short term. But what we can improve, we can improve our working capital, which we are working constantly. And as a person to choose sales, we are improving it. We are working on our inventory and receivable levels to optimize. We will see some benefit of that, but on the other hand, there will be negative impact coming from the interest rates.

26:47 Thank you. And the third question regarding the taxes, effective taxes, you recorded again, you know, tax income. I would like to understand maybe some details on that. Did you have additional asset revaluation or any incentives? in that number. And another question related to this factor, regarding the new implementations after earthquake, the tax authority asked to pay 10% from the tax incentives, the investment incentives the companies are having.

27:39 Did you record any one-off costs related to those taxes on previously earned incentives in this quarter? Thank you.

27:54 The per-tax income is mainly driven from the assets of Arçelik Turkey entity. We are continuing our investment and the investment incentive is creating tax assets. Therefore, the positive amount that we see in our P&L coming from the deferred tax asset is mainly attributable to that investment in Turkey and also partially relation of those assets in Turkey. Right now, we are working on the The amount of tax to be paid based on the recent regulation announced and we do not foresee a major impact in our financials for the tax coming from the earthquake regulation.

28:52 It will be around 100 million TL levels.

28:59 Thank you and you didn't record in first quarter possibly you might record in the second which is not a very significant number.

29:07 Yes it's not a significant number and it will be offset with the tax asset as well so therefore it will be neutral we can say it will be neutral.

29:18 Thank you. The next question is from our webcast participant Max Nekrasov with Citi and he asks What were the key drivers of C. 90% year-over-year increase in G&A expenses in 1Q23?

29:41 Actually, first of all, as we are in the inflationary environment, that inflationary environment requires an increase in the labor side, so that in first quarter we have increased in all the countries that we operate the salary levels. and also the inflationary impact affected most of the fixed costs, which are linked to consumer index. Those have also increased. And on the other end, we have some one-off costs Our SG&A, mainly attributable to the project that we are working right now for the partnership with Whirlpool. There are some consultancy legal costs and also in relation to Earthquake there were some Grants, which might be classified as a one-off cost.

30:44 So those impacted around 0.4% to sales are SG&E. But the main impact is coming from the inflationary adjustments that we need to make either through contract regulations or, as I said, the labor cost increase. Thank you. The next question comes from the line of Luis Gomez Antonio with 91. Please go ahead.

31:17 Hi there. Thank you for your time. I just wanted to ask you regarding your refinancing of the remaining loans that you have due this year from your debt maturity chart. You have 62% of your debt is due this year and, you know, a third of which is the bond that you said you just repaid. I just wanted you to kind of outline, you know, what you have to pay, what's going to remain short term and you're going to roll and so forth.

31:46 Okay. Mina, would you like to take this question?

31:49 Yes, sure. Thank you for the question. After VUE pays the bond, now we have relatively smaller size falling into the first year, first following year. So we may tell that 54% of the remaining debt will be following in the next one year considering the remaining part of our loan portfolio after repaying 500 million euro bonds.

32:23 And so do you intend to repay it or are you just going to roll it?

32:28 The bond matured in April and we repaid the bond but the upcoming maturity is Most probably, most of them are available to be rolled over. So we gotta assess when the maturities come one by one, if the market allows us to roll for further maturities or remain as short-term loans.

32:55 Okay, thank you. You're welcome. The next question comes from the line of Lanka Shashank with Bank of America Merrill Lynch. Please go ahead.

33:09 Thank you for the presentation and the opportunity to ask questions. I have two questions, if I may. The first one is related to your hedging policy towards raw materials. I think the consensual view is with China reopening, there could be an increase in plastics and metal prices towards the later part of the year. So just wondering how you're positioning for this potential raw material price increase given you know in the last two quarters you've seen prices come off a bit which has obviously benefited you that's the first question and the second question is can you provide us an update on the the transaction that was complete the whirlpool that was announced the whirlpool european business where are we right now I think the guidance given was second half foreclosure, so would appreciate any color. Thank you.

34:02 Thank you for your questions. Regarding the hedging of raw materials, actually we do not do financing hedging because it is more costly than hedging with your own resources. What I mean by own resources is Either we have contract terms with the suppliers from one to three months or we have inventory in hand to use as part of an hedging policy. So considering the expectations in the market, our purchasing team closely monitors the best options We are making long-term contracts or short-term contracts or increasing the inventory levels as an aging policy.

34:57 For the Whirlpool potential deal, we announced it in mid-January and right now We are in the process of getting the approvals from the authorities and we are answering and responding to the authorities' questions. And we expect the process to be completed second half of year, close to the end of year. But right now, there is nothing that we can share because the process is still going on with the authorities.

35:39 Thank you. We have a follow-up question from the line of Demirtaş Cemal with Ata Invest. Please go ahead.

35:51 Thank you again. My question is again about the domestic demand side. Domestic market has been strong in main consumption sites in autos and white crews, electronics altogether. For the rest of the year, what's your base case scenario? And could we assume that like domestic sales were more profitable compared to international revenues? Could you give us some color on that? How do you see, at least as a color, second and third quarter, do you see any change in domestic demand side? Thank you.

36:32 Thank you, Cemal Bey. The first two months there was a decline in the market but also at the same time we were able to reprice our products and as a quantity change we expect the year to be almost flat in terms of quantities. But the second half of year actually we are We are a little bit cautious on what will be the demand side because of the macroeconomic environment that we are facing right now. So, as you said, Turkey's domestic market is more profitable and normally the levels of Turkey should be around 25 to 30%, whereas in this quarter it was 38% because of the strong performance of Turkey.

37:32 But we do not expect that percentage to be at the same level in the second half of the year. So that means share of Turkey will be lowered, quantity increase will be even zero as flat, and that will definitely impact the Total Margin because Turkey is more profitable compared to other sites. However, we are also improving our mix in the other markets that we operate and there will be a balancing factor even though Turkey's sales are back to 25-30% level.

38:15 And one last question about the currency impact. You know, now in Turkey, it's one of the head of the elections. That's one of the key questions. How would the Turkish companies be impacted from any Turkish lira devaluation? How is your exposure? I see from the, you know, the presentation, but how do you just see that picture? Because you are international, you have been competitive international players. But recently the cost base is increasing because of inflation for most of the exports oriented, you know, like the strong export oriented companies we have been pursuing.

39:01 What's your perception about that? Do you see what should be the net effect of any, you know, the CR depreciation on your financials or on your, you know, the operations overall and related to that? Do you see some normalization in Bangladesh or Egypt regarding the devaluation in those countries? As I understand, there were some devaluations in those countries. Do you think there will be any recovery in those markets in the rest of the year, maybe in third or fourth quarter? Thank you.

39:42 Thank you, Cemal Bey. As you said, we are operating in different markets where ethics regulations in some period of time is creating obstacles to run your business. However, we are trying to mitigate those as much as we can do with the instruments available in the market. For Turkey, we have been trying to hedge our position as much as we can do, but right now the regulations or the policies do not allow us to fully hedge ourselves. So that means we have some open position in Turkey, which is around €150 million.

40:29 If the rates were at a different level, being an exporter, we would have benefited a higher gross profit. That would actually balance the currency risk that we are holding right now. So in terms of a devaluation which might happen in Turkey, there will be a fixed loss in the financing line. But also at the same time, being an exporter, we would have higher sales coming from a higher FX rate that would partially balance that FX loss. But right now we are experiencing a higher interest, Turkish Lira interest cost in our financing line, but the rate, FX rates are stable, therefore we are not benefiting that margin impact. On the other hand, Euro denominated production cost is getting costly compared to one year ago or two years ago.

41:44 That is something that we need to manage. Regarding Bangladesh and Egypt, in Egypt there are the regulations of restricting import payments. Therefore, the companies importing and selling in the market, the operations are impacted, sales are impacted. But we are trying to solve this with extended payment terms to Arcelik so that our company in Egypt continues its operations. And that is the expected depreciation of local currency, around 20-30%, which we are trying to balance with pricing.

42:31 And Bangladesh has a similar case. The import payments are restricted. That is impacting our quantity of production. because of raw material availability. But we are trying to solve this with discussions with the authorities as well as the banks and we are trying to continue our operations with minimum interruption.

43:00 Thank you. Thank you, Özkan. Ladies and gentlemen, there are no further questions at this time. I'll now turn the conference over to Mr. Çimen for any closing comments. Thank you.

43:13 I would like to thank you all for participating in our earnings calls. We hope to see you in the next call. Thank you.