Arcelik A.S. (BIST:ARCLK) Q4 2023 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by. I'm Poppy, your chorus call operator. Welcome and thank you for joining the ArchElic conference call and live webcast to present and discuss the 2023 financial results. At this time, I would like to turn the conference over to Mr. Özkan Çimen, Chief Financial Officer, Ms. Mine Şule Yazgan, Finance and Enterprise Risk Executive Director and Mr. Oktem Süleymez, Investor Relations Senior Lead. Mr. Çimen, you may now proceed.

0:35 Good morning and good afternoon, ladies and gentlemen. Welcome to our 2023 Financial Results Webcast. Before we go into details, I would like to inform that this presentation on 2023 year-end financial results contain the company's audited financial information prepared according to TFRS by application of IAS 29 inflation accounting provisions. Since the guidance information on 2023 interim financial results announced so far were presented without the application of inflation accounting, In order to enable investors and analysts to conduct a full-fledged analysis, supplementary historical information for key performance indicators used in prior periods investor presentations were provided as full year numbers in the appendix section of this presentation.

1:29 Such supplementary information is made available only for this period and contains unaudited financial information prepared for management reporting purposes. I will start with the highlights of 2023. We generated 257 billion TL revenue in 2023, which is flattish compared to last year. In Turkey, demand was quite strong in both the wholesale and retail markets across major product groups. However, consumer demand in our major international markets were weak throughout 2023. Our consolidated EBITDA margin was 7.8% in 2023 with a 145 basis points annual expansion.

2:17 The margin improvement was mainly backed by e-throw material costs and strategic pricing initiatives. Our networking capital to sales ratio as of 2023 year end was 24.2%. Our leverage was 2.67% as of 2023 year end. When we move to the next slide, in 2023, ArchEdit Delaware consolidated revenue of 257 billion Turkish Lira. Strong growth in unit sales in Turkey, strategic pricing initiatives across regions supported our revenues while Weak demand environment in our international markets impacted adversely.

3:12 Our consolidated profit margin for 2023 was 29.3%, up by 262 basis points compared to 2022. Margin improvement was supported by eased raw material costs and favorable EURUSD parity, Lower capacity utilization due to weak demand in international markets limited further expansion. In 2023, our EBITDA margin was 7.8%. Despite having higher OPEX to sales ratio, better growth profitability resulted in margin expansion.

4:00 If you move to the next slide, which is the domestic market. Wholesale and retail demand was strong in 2023. MDA 6 wholesale market grew by 14% in 2023 compared to a year ago as consumer demand increased by around 18%. Archalex units sold increased by 12% year on year in 2023. And we as a group maintain our strong leadership position by far as of 2023 year end. Sales in air condition market was significantly up by almost doubling in 2023 year-on-year, while Arcelik outperformed the market with 138% growth in the same period. TV retail market grew by 4% in 2023 year-on-year, and Arcelik's units increased by 7% in the same period.

5:00 96.2 billion TL revenue in Turkey, registering 23% year-on-year growth. Annual growth was mainly driven by strong unit growth in all major product groups and price increases. The share of domestic market in total business increased to 37% in 2023. If we look at the European market in the next slide, having 39% share in our Consolidated Revenues generated from Europe were flattish in Euro terms compared to a year ago. Consumer demand in Western Europe remained under pressure throughout 2023. However, the level of contraction eased towards the end of the year given the low base impact. On a yearly basis, consumer demand for MDA6 products contracted by around 6% in Western Europe in 2023.

6:00 When we look at Eastern Europe, consumer demand increased by around 2% year-on-year. Demand remained negative in other major countries in Eastern Europe, such as Romania and Poland. Having 23% share in total revenue, archaic revenues in Western Europe were down by 4% year-on-year returns, reflecting the overall demand contraction despite the price increases. In Eastern Europe, having 16% share in total revenue, Arcelik's revenues were up by 7% in 2023 on a yearly basis in Euro terms. Next slide, Africa and Middle East and APAC. The revenues from Africa and Middle East region is representing 8% of consolidated sales in 2023 and it was down by 6% annually in Euro terms. Considered demand in South Africa for MDS6 products contracted by around 6% year on year in 2023.

7:06 Our company DeFi's revenue were up by 3% in local currency. And in Euro terms, revenues were down by low teens percentage as a result of the depreciation of local currency against Euro. And DeFi maintained, continued to maintain a strong leadership position Despite operating in a declining demand environment, Beko Egypt registered 27% revenue growth in Euro terms thanks to higher units sold. Beko brand also increases market share and price index in Egypt market in 2023 compared to the previous year. Revenues from APEC region having 14% share in total revenue were down by 18% year on year in Euro terms And this contraction reflects the declining demand in the environment.

8:00 And in Pakistan, compared to a year ago, revenues declined by 2% in local currency and 30% in Euro terms in 2023 annually, mainly due to the unfavorable economic conditions impacting the demand adversely. And in Bangladesh, revenues were flat in local currency year on year. The unit contraction in major product groups were offset by price increases. However, in Euro terms, revenues decreased by 16% due to depreciated DACA against Euro. Next slide. Throughout 2023, drivers such as decline in global demand, increased policy rates, decreased energy input costs, Decreased logistic costs resulted in significant decrease both metal and plastic raw materials prices.

8:56 Then we move to the sales bridge slide. In 2023, Turkey revenues grew by 23% on a yearly basis, thanks to strong unit growth in major product groups and price increases. International revenues decreased by 10%. Organically, international revenues were down by 13% in 2023 compared to a year ago, while inorganic revenue contribution was 2.9%. On the right-hand side, you can see our regional sales breakdown. Turkey's share in total revenue was 37% in 2023, while the share of Western Europe declined to 23% from 26% compared to a year ago. and the share of Eastern Europe was 16 in 2023.

9:47 So I will lay the floor to Mine to continue with the financial summary.

9:55 Good morning and good afternoon. Here is the summary of our 2023 year-end financials on a consolidated basis with the application of inflation accounting. ASEC's consolidated revenue were 57.1 billion TL in 2023, flattish compared to a year ago. Archetic posted consolidated gross margin of 29.3% in 2023. Margin expansion of 262 basis points on a yearly basis were mainly attributable to declining material costs together with strategic pricing. Expansion in gross margin is reflected on consolidated EBITDA margin, and Açelik delivered EBITDA margin of 7.8% in 2023, marking an annual margin expansion of 134 basis points despite higher PECS to sales ratio.

10:51 Next, financial expenses increased by 3% in Turkish share terms in 2023 due to ongoing high-cost funding environment. As a result of inflationary accounting, Archetic booked around 9.9 billion TL monetary gain in 2023. Consequently, Archetic posted net income of 8.4 billion TL in 2023. Net profit margin expanded by 54 basis points annually and realized at 3.3%. Next slide, please. Our debt increased by 9.3 billion Turkish Lira compared to last year and mainly due to working capital funding and Turkish Lira depreciation.

11:36 As of 2023, our cash and equivalents increased by 8.4 billion Turkish Lira compared to 2022 and reached at 48.8 billion Turkish Lira in our balance sheet with well diversification between currencies. 34% of our total cash is USD denominated, while 37% is Euro denominated, and Turkish YRT was 10%. As a result, along with improved annualized EBITDA, our leverage was down to 2.67 times at the end of the year, from 2.71 times at the end of last year. On the right-hand side, you can see our loan and bond portfolio. As of 2023, we had 101.9 billion Turkish Lira debt. Turkish Lira share in total debt was 15% as of 2023 year-end. USD and Euro shares were 18% and 54% as of year-end respectively.

12:43 Next slide, please. On the upper left corner, you can see the EBITDA margin breach. Decreased material costs led higher gross profit margin, which also resulted in 145 phases expanded EBITDA margin in 2023. On the lower left corner, you can see our capex to sales ratio, which was 5.1%. On the upper right corner, networking capital to sales ratio has been shown. The ratio lost 24.2% as of 2023, increased by 120 basis points year-on-year, mainly due to increased receivables. Finally, on the lower right corner, due to increased working capital and capital expenditures, it generated negative free cash flows around 21.8 billion TL.

13:36 We want to emphasize that Bangladesh, Egypt and money-stay investments are still underway and have not been contributing to the sales and EBITDA yet. So I'll leave the floor once more to Mr. Özkan Çimen to walk us through our guidance for 2024.

13:55 Thank you, Mine. So we tried to forecast 2022 Based on the IFRS inflation accounting application. So we expect our Turkey revenues to remain flattish in Turkish lira terms in 2024 based on our strategic pricing initiatives, a promising demand environment for a whole year and the impact of inflation accounting. and our international revenues we expect to increase by around 2% year-on-year in Euro terms and EBITDA margin is expected to be around 8% for this year and we expect low 25% net working capital to face ratio and in the CAPEX we expect to be spending around 300 million Euro which includes the new factories ongoing investments in Bangladesh, Egypt and also our investment in Manisa factory.

15:01 So this was the end of our presentation. Now we can go to the Q&A session. The first question comes from the line of Tili Kiran Hanzadeh with JP Morgan. Please go ahead.

15:14 Thank you very much for the presentation. I have one quick question and two questions. The first one is a technical question. Are you going to provide more details about the inflation adjustment rather than the I can see that because of the monetary gain you are reporting net income otherwise it seems like that you are in net loss I think and is the impact I mean is this large monetary gain sustainable in 2024 or that's a kind of one-off monetary gain that we should be observing?

15:58 Thank you for the first part. Actually, we have provided some of the lines of the P&L in our appendix to give a better understanding of what if the inflation adjustments were not done for revenue, EBITDA, and net income. I think this would help to make your analysis. And regarding the other question, So what I can say is actually, if you look at the gross profit margin, we have been seeing, without the inflation adjustment, we have been seeing an increase from around 2%, from 30% to 32%. And net income margin is almost the same as a percentage, around 2.2%, if there were no inflation adjustments.

16:51 And if you look at the specific question of monetary gain and loss, This is mainly coming from the impact of non-monetary items revaluation, mainly inventories and fixed assets as assets of Archelik. So as long as we will continue with the inflation adjustment, there will be a similar as a percentage of sales valuation coming as an income in our P&L going forward. But at the same time, There will be a depreciation impact which is lowering our EBIT margin and also inventory revaluation cost increase which is also lowering our EBIT and EBITDA margin. So all in all those two impacts is roughly around 2.5% so that if you compare our previous EBITDA margin versus the current 8% levels that is the two main drivers of why we see a lower At the same time, we see a higher monetary gain loss coming from mainly stock and fixed asset valuation.

18:13 Ms. Kilkiran, are you done with your questions? The next question comes from the line of Demirdas Cemal with Ada Invest. Please go ahead.

18:40 Thank you for the presentation. Actually, I want to underline the same points Hazade mentioned. You know, I believe we see the similar disclosure in all coach group companies, by the way. And as analysts, I would have expected more transparency, at least at the court holding companies level. So it's a little bit disappointed for me, but rather than not giving anything, that also helps at least, you know, in terms of transparency. But overall, I think, you know, the companies like EPSI Brother trading in the US market, they are applying IFRS 29 and they are giving more details to better understand, you know, at least, you know, the full year or the fourth quarter.

19:29 But unfortunately, I think our standards, to be honest, are lower. And I hope, you know, the next year things will change. If it doesn't change, we will spend a couple of quarters for analyzing and trying to understand because it will be, you know, it's not going to be apple to apple competitive. And again, you know, at least this kind of disclosure is better than nothing. So thank you at least for giving. The first question is, without IFRS figures, you shared the net margin, but as a consensus, we are using the after minority. So I would like to ask, what was the net income margin after minority for 2023? That's my one question. And the other question is about the domestic market side.

20:38 Again, in your guidance, I guess you are giving real term, the growth in real terms for 2024. What might be the mix with the volume and price side? Maybe could you reveal some color on that? Because could we assume that in real terms we are not going to see price increases or there will be some volume declines and we are going to cover it with some price increases? So Turkish side is important. I see the January numbers are good for the sector. I would like to understand how you see the trend. for the sector-wise on that side. And of course, in the international side, when do you think you are going to get some signals about the recovery?

21:28 And the last but not the least, the verbal, you know, verbal Beko-Arcelik merger in European operations, how should we expect that? I think we are not putting into these numbers But what might be the effect of that and when possibly we are going to see this deal to be, you know, this merger to be concluded? Thank you. Thank you very much for your patience.

21:57 Thank you, Cemal Bey. Let me start with the minority question. First question. So in the appendix, we are provided 2.2 for 2023 if the inflation were not adjusted. and the minority after minority it will be around 2%. Regarding your second question of the Turkish market, the market actually for the last year it was doing very well. Some of them was related to the expectation of price increases of the consumers. So that they would like to spend now rather than spending later so that was a demand impact that continued for the last quarter and also we also see that in first month as you mentioned the market is growing and the figure that we mentioned which is a flat figure in the guidance is actually in real terms so that includes You can assume that it will be the prices will be in line with the inflation.

23:06 So we are expected inflation is around 40%. So that 40% price increases with no unit growth or very limited unit growth, let me say, will to deliver that result in Turkey market. and since it is a good market right now and for the last couple of months you may ask why there is no increase in the quantities because we are cautious of our concern about the potential impacts that might come in the second quarter or the later quarters which might be mainly impacted with the purchasing power of the households or any regulations that might be a potential impact We look at the international markets. I tried to explain that there were 5%, 6% market shrinkage in many of the countries.

24:18 In Europe, as well as all other parts of the world. And yet we haven't seen the recovery in the market. January was slightly better than expectation. However, February is mixed. So we would like to see more data coming from the market to see, to comment that it has been recovering or is about to recover. So that our growth in Europe or international market is limited. with 2% revenue growth, which partially will come from quantities or mixed improvements and partially from the pricing initiatives that we might take in some of the markets, given the conditions of the competition.

25:05 And the last question was related to Whirlpool Arch Elite merger.

25:12 You might have followed from the CMA announcement that It was announced on the 8th of February that there was a provisional decision to clear the deal that has been made. But now they are following their own procedures that they are going to continue to review any of the comments that they might receive. And their official announcement date is 26th of March. And we will see whether it will be similar to the provisional decision or will that include any other conditions. But for now, we can say that the provisional decision is a green light, but we are waiting for the official result.

26:02 And when potentially we can close the deal, if it is by the end of March, potentially we might close it in April. But before saying that is the exact date, we need to have the official announcement of 26th of March. And what will be the impact of that, you ask, the potential impact? As we have earlier announced that the volume that Verpool is generating for the last year was around 3 billion euro. and we might assume that that will come on top of Arcelik's consolidated results. But of course, starting from April or later month, which we will see at the end of March.

27:00 Thank you, Özkan Bey. And maybe one last question I would like to ask about the inflation accounting side. The purpose of this inflation accounting was I would like to touch one other point. The statutory financials we have. So it's the starting point by the end of 2023.

27:49 So we are now in a period that we are likely to see the positive impact of the tax financials, the inflationary accounting and tax financials, right? Because the purpose was the companies were paying higher taxes. Fikri Ozdemir, Fikri Ozdemir, Fikri Ozdemir will actually be positively impacted from this action, taking the inflationary accounting in statutory financials starting by 2024. I don't know if you have any preliminary studies on that.

28:54 Actually, I will rephrase your question that you are potentially asking the tax implications of Inflationary Accounting when it's applied in 2024. Is that correct understanding?

29:08 Yes, exactly. You know, I know the CFRS impacts to some extent, maybe, you know, but in real terms, right, you are going to be paying some real money. And will that, you know, changes? Because we have two financials, right? The one is the CFRS 29 and the other is statutory. So the real money you are going to pay, is it going to be lower or higher?

29:36 That's my question. Yeah, so there will be the tax accounting and tax treatment will be different because the indexes will be different as well. And we are trying to understand what will be the potential impact, but basically what I can say We have an incentive that is coming from our COPEX incentives that will be spent faster than if there were no inflation accounting for tax purposes. So that means our effective tax rate might increase going forward. And what I can say that the impact in 2024 will be limited, but We need to look at the application details in more detail to understand the potential impacts going forward

30:27 after 2024. Thank you, Mr. Campos. The next question comes from the line of Campos Gustav with Jefferies. Please go ahead.

30:43 Hello. Thank you very much for the results in the presentation. I'd like to ask two questions. The first one is on your debt maturity profile. Now you have somewhere around 1.9 billion euros coming up to maturity this year. And I would like to know, out of this 1.9 billion euros, how much are you planning to roll over and maintain it as a short financing? And how much are you planning to do with long-term refinancing, if you could elaborate on the avenues as well as the effects mix of this refinancing strategy?

31:29 That's my first question. Thank you.

31:32 Well, I'll take the question. Well, most of the short-term loans also stem from our cash pool that we're running in the UK and also company credit cards. So these seem to be maturing loans, but they are the loans that we're utilizing currently on a continuous basis. But other than credit card utilizations and cash pool utilizations, What you rightly mentioned is that during this year we are planning utilization of two long-term loans which would lead us repaying the coming maturities and replacing the maturities with longer tenors. So most probably it would be around 200 to 300 million euros to be replaced with long-term when the maturities come during this year.

32:31 Okay, so you're mentioning two to three hundred million euros that would be refinanced and how long would those loan maturities be?

32:44 Well, there are a couple of loans that we're discussing. One of them is supposed to be five-year tenure and the other is supposed to be around eight to ten years.

32:58 Okay, sounds good. Yeah, thank you very much. My last question would be around your working capital. Would you mind providing some details on the dynamic that you've seen working capital from the third quarter to the fourth in terms of receivables, inventory days, as well as what's your strategy moving forward? Apologies if it sounds a bit of a detailed question.

33:28 Thank you. No, no, that's okay. Thank you for the question. Actually, we have been decreasing our networking capital needs each and every year, and this year we have taken significant actions to lower our inventory levels. When you look at our inventory days and our inventory amounts, you will see a decline, and that decline continued in each quarter, including Q4. and in the meantime we have also been able to increase our payable days to the suppliers and the only negative part of our working capital allocation is the receivable level when you look at our balance sheet and especially in the last quarter you will see a slightly increase in our receivables however this is partially related with the mix and partially related with the The factoring program that we are using. And for the last quarter, we have utilized it less compared to the previous quarter. So therefore, our receivables increased a little bit.

34:36 All in all, we have been able to improve our working capital. However, there's a slightly increasing working capital to sales ratio, but which is still lower than 25 to 30% levels when you look at for five years of the history of the company. And we continue to focus on working capital, so we are taking serious actions to optimize our working capital to support our cash flow.

35:07 All right, sounds good. Yeah, thanks again. We have a follow-up question from the line of Kilikiran Hanzadeh with JP Morgan. Please go ahead.

35:20 Özkan Bey, I'm trying to understand your international revenue guidance. When you are looking for 2% growth in currency terms, does it mean that you don't assume any volume decline or it includes around 5% volume decline and also some price adjustment that comes to 2% growth in FX?

35:44 Actually, we haven't assumed much of a unit decline, so that will come partially from unit increase and partially from price increase. And right now, when you look at all the markets, it is not that easy to increase prices, and most of the competition is running promotions for that unit to reply, not to lose the top line. So this will continue for a while. Our growth is limited with price increase as well as a limited unit growth. But we don't expect negative unit growth in 2024. All right.

36:28 Thank you very much. And the second question is, in your EBITDA margin guidance, did you assume any headwind or tailwind from FX molds or maybe Is it possible to share your main FX assumptions such as EURUSD and Turkish EUR?

36:44 Yes. As you highlighted, EURUSD is an important element of our profits. So we are assuming that it will be similar to the current levels or a little bit higher. So that when you compare to last year, there was a significant change and we expect those current levels to continue with a little bit in favor of EUR. So that our margin is slightly better than, will be slightly better than when you look at the Eurodollar going forward.

37:19 Can you also comment on Turkish? Do you assume any appreciation in real terms or any appreciation in line with the inflation?

37:28 So we are assuming that it goes hand in hand with the inflation.

37:32 All right. Thank you very much. The next question is a follow-up question from the line of Demetaz Cemal with ARA Invest. Please go ahead.

37:47 Thank you again. Again, my question is about the impact of inflation accounting. As far as I see from your numbers, unlike many other companies, your ROE improves to 14% based on my calculations. versus last year, 12%. But when we look at the historical level from our side, it was also a concern for us, the low level of ROE around 8%, let's say, in the last 12 months, last 12 months for the previous quarter, by the end of nine months, 2023 results. You know, last one year before the fourth quarter result, we see big, you know, at least improvements from, you know, versus pre-IFRS and after IFRS results in 2023 figures from, you know, 8% to 14%.

38:54 But when I look at the comparison after the IFRS and before the IFRS 2013 figures, I see lower. In 2020, adjusted numbers, I see 12% ROE for 2022. For the pre-CFRS side, we see 17%. So when we make the adjustment, we see decline. But for 2023, I see 14% versus 8% in the previous quarter, 12 months. I would like to understand what's your perception about the real ROE of this company because that's the basic coming of this inflationary conflict so maybe it's a good you know it's a long introduction but what's the real in your view the ROE of this company is it the real one you think now 40 percent just I want to understand you know what was in your mind because that was the Thank you Cemal Bey.

40:13 I don't have that detailed analysis as we have gone through right now. What I can say is that we shouldn't be referring to 2022 for the benchmark of an ROI calculation. If you were to select one of those years, 2023 would be a better year. We see the better result in 2023, which actually delivers the true performance of the company, considering that all the assets have been revalued on top of what have been revalued for the last year. And also the margin improvement when you look at the bottom line reflects the fair value compared to last year. And I can say that I haven't gone through the details in detail, but maybe we can reply to that later.

41:27 Thank you.

41:35 And could we just think that 14% real ROE could be a good figure for you, maybe in general?

41:45 Yes, we can say that. Thank you. Thank you for that. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Cimen for any closing comments. Thank you.

42:04 Thank you for listening and the questions. So this year, as you have highlighted, there are material changes in the representation coming from the regulations. And if there are any questions that have not been replied in detail, You can reach us for any detailed questions or we will be happy to answer later on. Thank you.