Arcelik A.S. (BIST:ARCLK) Q1 2021 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by. I am Geli, your course call operator. Welcome and thank you for joining the Arcelik A S conference call and live webcast to present and discuss the first quarter 2021 financial results. At this time, I would like to turn the conference over to Mr. Polatz Shen, Chief Financial Officer, Mr. Özkan Simen, Finance and Enterprise Risk Director, and Ms. Pinar Cahinci, Treasury Manager. Mr. Shen, you may now proceed.

0:30 All right, thank you very much. Welcome to our quarter one earnings call. So I'll start with the quarter highlights. As you may have seen, we have a robust upline growth of 67% with almost 13 billion Turkish lira revenue. We can say that there is a very strong demand in almost all of the markets that we are operating in. The gross margin is still very high on year-on-year terms. It has increased a lot. On quarter-on-quarter, it's slightly lower, mainly due to the higher raw material prices, but we have been able to offset the effect of this with cost management and pricing.

1:20 There is some improvement in OPEX to net sales ratio, both quarterly and yearly basis. And that also leads to a very good EBITDA margin of 14.6%. And the working capital has increased mainly due to the higher sales impacting the receivables and inventory levels and also the free cash flow. So our leverage also increased to 1.42 times our EBITDA. The main factors that have affected our sales and margins is I'll start with the revenue growth. There's solid unit growth both in Turkey and international workers which I'm going to explain a little bit further in the coming slides. And I have to say that there's strong Euro against Turkish Lira which also helped in Turkish Lira increase in our revenue.

2:24 On the gross margin side, the gross margin is 34.5%, which is almost 300 basis points higher than last year. Compared to quarter four, it's 1.4% less. And the capacity utilization is very high. One of the main reasons of this strong gross margin is the capacity utilization. Again strong Euro against US dollar also helped our profitability especially in the exports. The negative effect is the upward trend in the raw material prices quarter on quarter. On the EBITDA margin side we are at 14.6%.

3:14 The OPEX to sales ratio has gone down to 22.7%. And the savings are still continuing on the OPEC side. And the strong revenue growth also helped a lot to maintain this high margin. When you look at the quarter one performance of Turkey, firstly the market, as you can see on the MDA6 side, market has grown by 40%. And the air conditioners market has grown by 43%. The TV market has shrank by 17%. Archelic has outperformed the market with its sellouts and have been able to record 48% higher than last year on MDA6, 57% with the air conditioners and minus 2% with television which all of them are as I told higher than the market average.

4:15 When we look at the international markets on quarter one You can see on the left side that we have, I mean, almost all of the markets that we are operating in is growing, except Germany and Spain. But all the other markets have really recorded very high growth. In some of the markets, there is also base effect of COVID because of the lockdowns last year. But we can say that it's a very, very strong growth in all of the markets. On the West Europe side, the volume growth is mainly led by, on our side, I mean, for Arcelik, France and Italy, while Germany has been adversely affected by lockdowns.

5:05 On the Bangladesh and Pakistan, the year has started very, very effectively. In Pakistan, the currency appreciation also supported some, and on South Africa, There is very strong recovery versus the last year's double digit growth in volumes. But I have to say that there is a low base due to lockdown in March last year in South Africa. When we look at our performance, our international performance in quarter one, Europe has grown. I mean, West Europe has grown by 19% and East Europe has grown by almost 17%.

5:53 Strong double digit top line growth in all of the markets and in Euro terms. In UK in GBP terms, we have recorded the highest quarter one revenue ever. Our market share has increased slightly in both West and East European markets in the first two months period. The price index has also improved in the UK and Spain thanks to price increases. On the Africa side, we have been able to grow almost by 42% in Euro terms and 37% unit growth.

6:41 We have slightly gained market share in South Africa despite the price increases. And DeFi's export units to Sub-Saharan Africa countries has grown by almost 55% in quarter one on a yearly basis. On Asia Pacific, the growth is 46%. The contribution is getting higher and higher in Asia Pacific. And we have more than doubled the revenue in Pakistan, in Pakistan rupee terms. supported by the new launches and recovering consumer demand despite the third wave of COVID-19 together of course with the low base effect positive contribution from all the products except TV and also low base effect led to strong top line growth of 23% in Bangladesh in Bangladesh Saka terms again with the low base effect of COVID When we look at the raw material trend, which was quite negative in the quarter one, you can see below there that the metal prices index, this is the market price, not archillic prices.

8:04 The market price index from Q4 to Q1 on the metal side has almost from, it goes up from 90 to 108. On the plastic prices, went up from 109 to 138 which are very high increases and we have seen some of this effect in quarter one but we have been able to offset this with our price increases in many of the markets and also the cost effectiveness that we have been able to produce with high capacity utilization ratios. But of course, it looks like there's more to come in quarter two and further. So we are also making our plans accordingly for the coming quarters. So I'm going to pass the word to Özkan to continue from here.

9:01 Good evening. So I would like to mention about the sales breakdown. When we look at the Turkey sales from 2.8 billion to 4.7 billion with an increase of 69%. And international sales have increased by 66% from 5 billion to 8.3 billion. And compared with last year's first quarter, we don't see a change in Turkey sales. It's almost the same with 36% of total sales. The Western and Eastern Europe shares have declined due to the fact that Africa, Pakistan, Bangladesh and Middle East shares have gone up compared to last year.

9:50 Pakistan and Bangladesh continue to grow and recover as in the last quarter and also Africa was strong and also supported with the sub-Saharan exports in Africa region. We move to the next slide. You can see the breakdown of the growth. 67% in total growth coming from almost similar rates from domestic and international growth. And the currency impact in the international growth is 36% which leaves us 30% organic growth in international markets.

10:36 I'll move with the income statement. As in the last quarter, we have 13 billion sales, which is slightly less than last quarter, actually, due to the seasonality impact. We have high growth profit of around 34%, 5%, which is 1.5% lower than last quarter. mainly impacted by the material increases that are in the coast. And compared to last year, we have a strong gross profit margin, which is around 300 pages points higher, mainly due to price increases throughout 2020, as well as the strong Euro-dollar currency, which helps to improve our margin.

11:34 And when we come to the EBIT line, we don't see similar impact because the OPEX was lower compared to last quarter. Therefore, we had similar EBIT margin as in the last quarter of 12%. And again, in the EBITDA level, we reached to 14.6%, almost the same as in the last quarter, which is five points higher than last year, including the one-off income. So in the bottom line, we have achieved 1.1 billion TL, which is 8.5% of sales as net income, which is the same level in last quarter, but around 800 million TL higher than last year's first quarter.

12:28 I will continue with the cash and financial debt position. We have 18.2 billion TL equivalent debt portfolio. And we have 10.2 billion TL cash, which is mainly in US dollar and euro currencies. And then we look at the breakdown of long and short debt portfolio. 11 billion is short, and 8 billion is long debt. And if you look at the debt maturity profile, most of the portfolio is due in 2021. This is mainly to the bond that is due in September of €350 million.

13:19 And we also have TR-based loans for working capital needs of domestic markets. We are evaluating the options of either long-term loan or Euro bond depending on the market rates. We are getting prepared whenever we feel the best rates in the market and best conditions. So we are considering issuing a bond or getting a long-term loan. If you look at our cash flow breakdown, as you will see, we have a beginning balance of 12 billion and the ending balance is 10 billion, so 2 billion TL cash out.

14:15 And when you look at the cash out items, the CAPEX level is almost the same level as last year if we exclude the currency impact. And we have paid out 1.5 billion dividend. And in the other line, around 400 million, mostly coming from the interest payment of the borrowings. Those were partially financed with the additional bank borrowing of 1.3 billion. And in the net operational cash flow, you see minus 1.7, which I will mention in the coming slides. If you look at the detail of the free cash flow, we have a strong EBIT of 1.9 billion, but the receivables and inventory levels have increased compared to the last quarter.

15:10 As you will recall, we had the lowest working capital to face ratio in the last quarter, with a rate of 20.5%. And we mentioned that our inventory levels were at minimum, so those were not the sustainable levels, and we were expecting an increase in the inventory levels to support our growth. And in addition to the increase in the inventories, Due to the increase of sales in domestic markets, the receivables have also gone up. At the right corner, you will see the impact of ethics in our receivables and inventory. So around 3% of the increase of working capital to space is coming from the FX impact from receivables and FX impact of inventories.

16:10 As I said, this has impacted our working capital negatively and in the end we have a free cash flow of 2 billion TL. But I would like to mention that we do not expect further increases in the inventory levels because we have decided to get prepared to the market and produce the inventory for selected product groups. Therefore, we do not expect further deterioration in our working capital in the coming quarter. So I will give the floor to Polat for 2021 guidance.

16:53 With those strong results of Q1, there was a need for a change in the guidance, upwards change. On the revenue side, We decided to increase our guidance for Turkey to around 25% growth. On the international side, we are expecting more than 10% growth. It could be higher than that. We try to make sure that the numbers are going to be not too ambitious, but we can easily say that we are going to outperform this over 10% growth for international markets on the FX side.

17:49 On consolidated Turkish lira terms, we are expecting more than 30% growth in the overall year. On the profitability side, mainly, I mean, we have recorded 14.6% of EBITDA margin in the first quarter. But we can see that the increases in the raw material prices looks that it's going to continue, especially in quarter two and quarter three. So our margins are going to be affected from this one. So our expectation for the whole year for the EBITDA margin is going to be 12%. This is an increase we guided in the beginning of the year as 11%. Now we have increased almost by 1% on the EBITDA margin side. On the working capital to sales ratio, there is no change.

18:45 We are keeping our 25%, as Özkan has just explained. We moved up to 27% in the first quarter, but our expectation is that our receivables are going to come down a little bit. in the coming quarters. We do not expect a big change in the inventory levels. So the working capital to sales ratio is expected to be around 25%, which is an healthy level for our city. On the CAPEX side, there is no change as well. We are going to keep our guidance in the beginning of the year, which was 220 million euros. So this is all from our side, the presentation. We are ready for the Q&A session right now.

19:32 So we can move on to that part. The first question is from the line of Demetar Kemal with Ata Invest. Please go ahead.

19:42 Thank you for the presentation and congratulations for a very good result. My first question is about Outlook in second quarter. There was impressive performance in both domestic and international sites. To what extent do you expect this trend to continue in the second quarter? Your inventory levels and the selling and sell-out rates, how much prepared are you to the current trends, especially in the international sites? What are your expectations? And other questions about the macrochip issue. Does it have any effects on your product and the white goods side and the consumer electronics so far?

20:33 How do you manage this situation and how long do you think it will take to normal levels? And how do you compare yourself with your peers, international local peers in terms of procurement capabilities? Thank you.

20:51 Jamal, thank you very much for the question. I'll start with the first question that you asked. Yes, the performance on both domestic and international was really very, very strong in the first quarter and we are almost finishing April now and we can see that our order books are closed right now and we are going to be able to use our factories with high capacity utilization until the end of quarter two as well. and right now we do not have any any information which would make us think otherwise for quarter three so it seems like the the demand will stay strong and as you said at the end of the year our inventory levels were not at healthy levels Now we have increased our inventory level a little bit, but the sales are increasing at the same time.

21:57 But when we look at the sell-out performance versus inventory level, we are better than the Q4. So we are ready for Q2 very strongly. And the sell-out looks like will go on. We are very closely following the situation in the countries because you know in some of the countries the vaccination is complete like Israel in some of the countries you know the normal life is normalization is coming up like you know UK so we are trying to watch the trend in those countries so that we can understand how our sell-out is going to be affected from the changing environment of COVID so that we can get ourselves ready for that.

22:53 So right now, we haven't seen any negative, we don't have any negative expectations for sell-out as well for at least quarter two. That's something that I can say very surely. For quarter three, of course, things change very quickly, but right now we do not have any data that we can say otherwise. On the chip issue side, yes, as all the industries, we have been affected as well. It's not as severe as the automotive industry, but I have to say that we are changing designs, we are trying to come up with solutions, how we can really get rid of the problem of chip shortage.

23:42 Till now we haven't been affected as Arçelik. In any of our factories, our factories did not stop because of ship shortage. But the situation is really tough and I can't say from today that it's not going to happen in the second or third quarter. It may happen because the shortage is still there. and we may be affected but even there will be some effect some stoppage due to chip shortage I don't think that this is going to be very severe for Arçelik it will be you know very local and very small which could be considered as negligible right now so we do not really see a huge problem for Arçelik but it may be a problem locally in some of our Thank you.

24:40 Thank you. And the follow-up related to your tax rate, you see you have around 15% effective tax rate in first quarter. And there's a case of some increase in corporate tax in Turkey. It's not, I guess, it's not approved yet or just became official or not, I don't know for the time being. What are your expectations in that sense? Do you expect some increase or because of your some incentives, you are likely to keep your effective tax around current level for the rest of the year? Thank you.

25:28 The profitability is very high, so we are going to get affected from this change. According to our calculations for the year end, we expect our tax rate to be affected around 300 basis points. Of course, this is just a kind of a calculation with a lot of assumptions, but this should be more or less what we can expect from this new regulation in Turkey. Thank you. Thank you. The next question is from the line of Kilikiran Hazade with JP Morgan. Please go ahead.

26:11 Hello. Thank you for the presentation. I have three questions. The first one is about your pricing. You mentioned about continued strength in demand in all markets. I mean, would it mean that you may be able to pass some of these expected raw material cost increase to your prices in all markets, or you don't see any upside in the pricing at the moment after all these price increases so far happened? And the second question is, you achieved a very low OPEX over sales ratio after the savings. I mean, is this a new normal that we should be reflecting in our model? I mean, something around 22, 23% of sales going forward. And the third question is about India. We didn't talk about this for a very long time.

27:00 Is it something becoming sizable? After the launch of the business, any update on this one, please?

27:07 Thank you. For the pricing, yes, we have increased some prices, some of the prices in some of the countries, but we continue our efforts And it seems like, not seems like, our plan is to increase prices where we can in order to offset the effect of this raw material price increases. So that is a kind of a must for all the competitors. because this is the situation for everybody and you have seen the raw material trend which I've shown in the in the presentation so this looks like a must and we will continue doing that until the trend will change to the other direction so that is our expectation on the opex to sales side yes there is a there is a decreased but Q1 has been a you know it's not a time that we are spending too much I have to say but our expectation is to keep the OPEX to sales ratio lower than the years before I can't tell you an exact number for your model, but what I can say is it should be less than the previous

28:38 years. That is our expectation as well, because to be honest, the COVID situation is really helping the savings on the OPEC side. On India, India has started the operations and they have They are really selling whatever they can produce right now. It's a very, very strong market for us and we are now working on how we can really increase our sales in India more. To be honest, we are very happy about the results and we have been fulfilling all the capacity that we have.

29:25 So it seems like the capacity is not going to be enough for us in the coming years. So we are working on a plan with our partner there, how we can increase the capacity and how we can also invest in other products. So India is going well. That's what I can say right now.

29:49 Thank you very much, Polanski. The next question is from the line of Lanka Sashank with Bank of America Merrill Lynch. Please go ahead.

30:02 Yes, thank you for the presentation and the opportunity to ask questions. I just have one question on your working capital to sales guidance. When I look at Q1, I think it was around 27% and you have mentioned an increase in inventories and receivables. Just wanted to understand your full year guidance is around 25%. So I just wanted to understand the direction from here because it does seem like your guiding for working capital to sales ratio could be lower than 25% for the rest of three quarters. And assuming your sales do keep increasing in Berkeley, I just want to see how you're going to get to that number. Thank you.

30:46 I will take this. So as you said, we had an increase of working capital from 20 to 27. However, that 20 level with the level of inventory was very low. And we expect the normal level of inventory to be higher. That will take us around 25%. And when we look at the period and exchange rates compared to Last year, the main impact is coming from the currency impact, which is a temporary impact. That's what we estimate. So we don't expect further increases in the inventory level. So that will take us around 25 and in addition to that we expect the receivable days to normalize because in Q1 we have longer term sales which impacted our receivable value so in Q2 we expect I would like to add something to that answer actually and we have already seen that in the beginning of the year when we were guiding for the whole year

32:15 that we were at 20% level at Q4 but we guided the year at 25% so we continue doing that actually we did not change anything so the cash flow is not kind of a surprise to us so that was something that expected so in the coming quarter you can simply say that it is a seasonality effect and some, let's say, special issues for this year, which is the low base effect of the Q4, especially on the inventory side. So that is, in a nutshell, the situation on the networking capital side. Thank you. The next question is from the line of Gurbay Berna with BGC Partners. Please go ahead.

33:01 Good evening and thank you for the presentation. I have a few questions. The first one is about the revenue growth guidance for Turkey. You have raised it to around 25%. And in the first quarter, revenue growth in Turkey is around 69%. And you already mentioned that on the white goods side, your shipment to the dealers was around 48%. What kind of market and pricing do you expect in the remainder of the year? Because the guidance, at least on the whiteboard side, implies revenue growth in the teams for the remainder of the year. So I was wondering whether what we saw in the first quarter was basically shipping inventory to the dealers and the retail demand, whether it was as strong or perhaps not as strong. That's my first question.

34:01 My second question is on the net debt to EBITDA figure. It's 1.4 as of the first quarter. Should we expect it to be around these levels in the remainder of the year or maybe slightly lower perhaps as working capital normalizes? And my final question is about capex. You've been mentioning that the capacity utilization rate is very high, and that's actually helping reduce production costs to some extent. Do you see the need for major capex at any of the plants in the maybe next two, three years? Thank you.

34:46 All right. I'll answer the first and third questions and Özkan will answer the net debt part. On the revenue growth guidance of Turkey, yes, we guided for 25%, but as you correctly pointed out, our sell-in was stronger than sell-out in the quarter one. As I told you know at the end of Q4 our inventory levels were not healthy and it was the same in the channel as well for our dealers as well so they didn't have any inventory. So some of these sales, some of this increase of this 69% whatever has been due to filling the inventory levels to a healthier position let me say. So our expectation for the coming months, and I have to say that Q1 of last year was not a strong Q1 in Turkey.

35:54 And Q3 and Q4 especially were very, very strong. So we also have thought about this. And when we were guiding 25%, were thinking about the high base effect of Q3 and Q4 and also the Q1 was a bit The growth was mainly due to inventory level, let's say, getting the inventory level to a healthy situation for both dealers and ourselves. So 25% looks like a sensible guidance to us, which I think that personally, you know, as Artelik, we try to guide The numbers that we really feel that we are comfortable with.

36:47 So I see upside potential more than downside potential on this growth guidance that we have given today. On the CapEx side, yes capacity utilizations are high, but we really have to see how much of this demand is going to be sticking. before we really make huge decisions on capacity increases. So in almost all the factories and all the products, we are looking at the situation very closely. But right now, the capacities that we have looks like they are enough for 2021. So the capacity, the CAPEX requirement that we have guided looks like it's going to be enough for that.

37:34 But for the next years, we really have to see the demand level after COVID before we can say that we are going to be investing in any capacity increases in any of our factories.

37:51 For the net debt level, it has increased to 1.4 from the level of 1 last year, mainly impacted from the dividend payment as well as the working capital change. So throughout the year, we expect a similar rate, which might be 0.1% lower or higher. So we think that 1.4 level is the level that we can keep throughout the year, unless there is no change for acquisition options. As you know, we are about to acquire the company, so the level will depend on the timing of the acquisition as well.

38:41 Thank you very much. And just because you mentioned that, can you also give us a quick update on the Hitachi situation?

38:50 Yes, actually we are still working on the closing requirements. We are trying to fulfill them. So we are in line with our partner, partner to be, together. So according to our plan, our expectation is to get this done until the end of this quarter two. and all the closing adjustments and all the closing requirements will be fulfilled by then. We don't really see an important let's say bump throughout the road. So it seems like things are continuing according to plan. That's what I can say.

39:39 Thank you very much. And your guidance does not include Hitachi again, correct?

39:44 Yes, definitely.

39:46 Thank you very much. The next question is from one of our webcast participants, Gupta Anuj with Goldman Sachs. How much 48% increase in TRMDA market is matched by end consumer demand? Looking at WC, it seems you have loaded huge inventory to dealer network.

40:09 No, there is no huge inventory load to network. Again, I'm going to explain once again the inventory issue. At the end of Q4 2020, the inventory levels were almost nothing, almost close to nothing in the dealer side. So what we have done is we had to put this inventory to their warehouses again so that they can healthily sell. I don't really see a kind of a you know a push and artificial kind of increase in the inventories this is the level that should be actually so this is what we have seen on the dealer side so out of this 48% yes some of the sell-out is less than that but what I can say is we are at a better situation right now because Not having the inventory in the warehouse of our dealers is costing us market share at the end of the day.

41:18 So that is not something that we want and we have taken the necessary precautions in order not to face this problem. That is what I can say. Thank you. The next question is a follow-up question from the line of the Mirta Kemal with Atta Invest. Please go ahead.

41:39 Thank you. My question is about the revenue breakdown in terms of white goods, consumer electronics and others. We see impressive growth in the white goods and others, but limited growth in the consumer electronics, around 18% in Turkish Lira. It looks like it's a weak number. Do you see any specific reason behind that? Or is it something temporary or for the rest of the year we expect a new recovery in the consumer electronics side? As far as I know that part is more affected from the chip issue globally. What was the reason behind in your perspective? Thank you.

42:28 In the presentation I have showed, especially in Turkey, the market growth of the TV business in Turkey. The market has shrank by 17% compared to last year's first quarter. So the main reason is that actually the market is shrinking. Our sales have decreased by only 2% in terms of units in Turkey. And the situation is not really so different in the other country that we operate a lot, TV, which is Germany. The market actually wasn't growing there as well. So it's a market condition rather than anything else.

43:17 So the chip issue has not been a problem for us in the TV business till now. But the market is shrinking. In the coming quarters of course we should be aware that there is European Championship coming up. So there may be some increase in the Q2. So we are trying to get ready for this, especially on the sell-out and sell-inside. So Q2 expectation is a growth rather than a shrinkage for TV business. And consumer electronics, most of the number is TV for us. So this is the situation on the consumer electronics side.

44:05 And another question about the raw material costs. You see the prices increase to significant levels for HRT, around 1,000 right now, and it was 500 last year. And for the rest of the year, how do you make your procurement? For instance, that might be the strong price, the HRT price might continue until September or beyond. What are your expectations? You need to make some price increases and it depends on the volumes, the mount side. So, you know, that was the major concern about, you know, the Arch Units.

44:51 That was overshadowing the strong performance of the company. I just want to do any calculation on that, assuming that prices will stabilize at current levels or a little bit lower. What could be the impact on your margins? I think these are all included in your margin guidance or just any guesstimate.

45:15 Yeah, I've just told you that actually, yes, you have answered the question actually. Our guidance is 12% EBITDA margin guidance is really capturing all of this. On the raw material side, our expectation for quarter two, we know the prices of quarter two and it increases and we know that it's going to increase. It is going to be, you don't expect a change on upper strength in quarter three as well, but it is going to slow down. The pace will slow down for the increase. But starting from quarter four, our expectation is the raw material prices to stabilize. So we have taken into account all of these changes for raw materials. At the same time, we are planning some price increases in some of the markets that we operate in and most of the markets that we operate in. And this 12% EBITDA guidance is capturing all of these assumptions that I've just explained.

46:22 Thank you. Thank you very much. We have a follow-up question from the line of Gurbey Berna with BGC Partners. Please go ahead.

46:31 Thank you for taking my question. I just wanted to clarify something you mentioned earlier about the impact of the increase in the corporate tax rate. You said there would be around 300 basis points impact, if I understood correctly. Is this the impact you would observe on the net profit or is this your effective tax rate? It was around 18% last year. Does that mean that it's going to go up to 21% this year? Thank you.

47:08 It is the effective tax rate.

47:11 Okay. basis points versus last year? No, not last year.

47:16 What I'm saying is if, I mean, this year's tax rate is going to be maybe different than last year, mainly due to the profit distribution around the countries. So I do not know right now, from now, what will be the effective tax rate of today. But this change is going to be affecting us around 300 basis points in terms of effective tax rate. If it is going to be 15% this year, it has to be 18%. If it's going to be 18%, it's going to be 21%. That's what I tried to tell, actually. Oh, OK. Thank you very much. Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Shen for any closing comments. Thank you.

47:58 All right. Thank you very much for everybody spending their evening to our city. So if you have any further questions, our investor relations team is happy to answer tomorrow or from tonight. Thank you very much for joining the call.