Arcelik A.S. (BIST:ARCLK) Q1 2022 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by. I'm Jason, your Chorus Call operator. Welcome and thank you for joining the Arcelik Conference Call and Live Webcast to present and discuss the First Quarter twenty twenty two Financial Results. At this time, I would like to turn the conference over to Mr. Oskin Sheeman, Financial and Enterprise Risk Director and Mr. Austin Soilemon, Senior Investor Relations Specialist. Mr. Oskin Sheeman, you may now proceed. Good morning and good afternoon, ladies and gentlemen. Welcome to our Q1 twenty twenty two results webcast. I'm here with Aktam Solemev, our Senior Investor Relations Specialist. I will start with the highlights of first quarter.

0:49 Our consolidated net sales was $8,200,000,000 in this quarter, registering 117% growth on a yearly basis and 25% growth on a quarterly basis. Excluding revenues of the acquired companies on a like for like basis, organic growth was 84% on a yearly basis. In Turkey and Eastern Europe, consumer demand was quite strong in the first two months, mainly due to the expectation of further rising of product prices due to inflation. And in Western Europe, consumer demand were weak due to high base effect. And as expected selling were contracted in Turkey in the first two months of the year. Our EBITDA margin was 10.6% in the first quarter of the year, reflecting 127 basis points expansion on a quarterly basis, mainly due to price increases and lower OpEx sales ratio.

1:48 On the contrary, on a yearly basis, our EBITDA margin was down by three ninety three basis points as a result of significantly increased material costs and cycling highways. When we look at the OpEx to sales ratio in the first quarter, it improved by 108 basis points to 22.7%, while it was stable on a yearly basis. Our net working capital to sales ratio increased 27.7% in the first quarter compared to 26.3% at year end last year. It's mainly due to higher receivable days in Turkish operations and higher inventories, which is a result of increased material costs despite those are offset with the improvement in payable days.

2:42 The leverage increased to 2.81 in the first quarter of the year from 2.40 at the end of last year, mainly due to increased working capital requirements of our emerging markets operations, dividend payment that we made this quarter, shares both like continued and partially the ratio is impacted negatively because of the currency translation. So when we exclude the share buyback and the annualized EBITDA cash contribution of our recent acquisition, the leverage would go down to 2.24 times. If we move to the next slide, our net sales on a consolidated basis increased by more than double year on year to billion in the first quarter.

3:34 This substantial revenue growth came mainly due to the price increases across regions, Turkish lira depreciation and inorganic revenue contribution. Excluding the contribution of acquisitions, yearly revenue growth was still strong at 84%. On a quarterly basis again price increases and Turkish lira depreciation were the main drivers of 25% revenue growth. Consolidated gross profit margin was 30.8% in the first quarter, which is reflecting two zero eight basis point improvement compared to previous quarter. Through price increases and higher capital utilization, although material costs overall continue to increase.

4:22 And on the contrary, last year Q1 was above average levels where we have utilized long term purchase contracts coupled with price increases and again a high capacity utilization. And depreciating against U. S. Dollar resulted in three sixty eight basis points lower gross margin on a yearly basis. In the first quarter, EBITDA margin was 10.6%, up by two fifty seven basis points compared to previous quarters like for like basis. Despite the declining volumes, the margin expansion was achieved mainly to price increases, particularly the one that we have done in the late December, which was most effective in the first quarter, and improved OpEx base ratio.

5:12 On a yearly basis, EBITDA margin was down by three ninety three basis points, which is actually coming from the gross margin impact that I mentioned. If you move to the domestic market slide, in the first two months of the year, Turkish MDI six market was down by 11% on a yearly basis and Arcelik units were down by 12%. Despite declining selling units, sellouts were quite strong in the same period mainly as a result of continuous expectation of further hike in product prices. The continuing high inflation in Turkey is impacting the affordability and changing the customers' shopping priorities.

5:59 And moreover, increasing energy prices and supply chain problems may impact the demand negatively in Turkish mds6 wholesale and retail market. AC market was up by 26% on a yearly basis and Arcelik AC sales increased by 14%. Television TV sellouts were down by 13%, while Arcelik sold 6% higher compared to last year. Revenues from domestic market was considerably higher on both quarterly and yearly basis, delivering a 79% yearly and 42% quarterly growth. Domestic revenues reached $400,000,000 in the first quarter. And with the geographical expansion, the share of our domestic revenues is continued to decline. So we have 30% in the first quarter from 36% a year ago.

6:55 If you move to the European market in the next slide, the share of European total revenue was 38%, which is down by almost 5% versus a year ago as a result of higher growth in the other regions, especially in APAC and Middle East. In Western Europe, consumer demand has declined in the first two months of this year by low to mid single digits with the contraction in majority of the countries due to highways effect. And Germany was cycling a low base, which posted close to double digit growth on a yearly basis. Despite lower units, the market grew in value terms, mainly as a result of increases of prices and leaning towards premium segments.

7:42 Having 27% share in total revenue, Arcelik sales were up by 8% in euro terms. In Eastern Europe, consumer demand grew more than 25% in the first two months of the year, and this is excluding Ukraine's figures. Growth was mainly attributable to pull forward demand in Russia due to the appreciation of ruble. And markets also grow in value terms, both in unit growth and price increases, having 11% share in total revenue, Arcelik sales were up by 11% in euro terms. If you look move to the Arcelik results in Africa And Middle East, APAC In the next slide, having a total of 11% share in our consolidated sales, Africa And Middle East region posted around 48% quarterly and around 59% yearly growth in Q1 in euro terms.

8:44 This strong revenue growth is mainly driven by significantly higher Middle East revenues. DeFi in South Africa units sold in domestic market contracted on both quarters and yearly basis, mainly due to some logistic problems in the country and the highways of the same year of last year. If I posted mid to high single digit revenue growth in euro terms in the first quarter of the year on a yearly basis, mainly due to the price increases. In Egypt, sales more than doubled both quarterly and yearly, and we have 155 higher year on year and 175% quarterly revenue growth in euro terms in the first quarter.

9:36 FX sales having 19 share in total revenue grew by 136 in euro terms and in the first quarter versus a year ago because of the contribution of Arcelik A S Unsp.-Adr. In Pakistan, together with price increases, sales increased by around 23 in euro terms and the local currency growth was 28%. Mandalay sales growth was lower compared to the other regions with 3.8% in the local currency. If you go to the next slide, which is about raw material prices. In this quarter, average metal and plastic prices in the markets have increased mainly as a result of the conflict and war between Russia and Ukraine, which also triggered the increasing energy prices, which also impacts the plastic prices and all the other raw material prices.

10:38 Metal prices have been up particularly starting from late February. And we have made some contracts. Therefore, we were not that affected in the first quarter from the recent cost inflation as a result of Ukraine and Russia conflict. And additionally, the metal Rome front, executed second quarter's purchases just before the war started. Therefore, the material cost impact in the coming quarter will be limited. However, after that, we will start to feel the negative impact of all the material increases in our costs. For plastic raw materials, energy, oil and natural gas are the main inputs of plastic raw material production.

11:28 Ongoing rise of energy prices further accelerated by Russia Ukraine war as oil prices jumped. We do not expect the prices to go down as quickly as they went up. And the contract is on a monthly basis, therefore, in the second quarter and afterwards, we will start to feel the pressure here. If you go to the sales bridge slide, in Q1, Turkish sales grew by 78.8% year on year organically And international sales grew by one hundred and eighty one hundred and thirty eight point five percent. And out of this growth, 5.6% was organic, 81% was the FX impact and 5351% is coming from the acquisitions.

12:22 And on the right hand side, you can see our original sales breakdown and with the recent acquisition of Arcelik A S Unsp/Adr factory, the share of Turkey in total sales has gone down by 6% quarter on quarter. If you move to the next slide, which is the summary of financials. I mentioned that the revenue is billion. Cost inflation was quite obvious in the first quarter of this year and we compared to a year ago. Together with lower capacity utilization and tertiary depreciation, our gross margin was narrowed down to 30.8%, registering three sixty eight basis points contraction on a yearly basis.

13:14 So I need to underline that the last year's quarter performance was well above the average of in terms of gross margin. In Q1, consolidated EBITDA margin was 10.6% contracted by three ninety three basis points on a yearly basis. We have been able to keep the OpEx sales ratio at 22.7. And despite stable OpEx sales ratio on a yearly basis, the EBITDA margin declining in the first quarter was a reflection of the cost inflation and higher base of the first quarter of last year. Compared to this quarter on a comparable basis, EBITDA margin was expanded by two fifty seven basis points, mainly driven by 111 basis points improvement in OpEx base ratio and price increase.

14:10 Net income before minority share was $1,224,000,000 in Q1, with a net profit margin of 4.3 which is 168 basis points better versus a quarter ago and on a comparable basis, four thirteen basis points lower on a yearly basis, mainly due to higher interest costs coupled with the gross margin impact. So if you move to the next slide, our net debt has increased by around billion, mainly due to share buyback, which we continued in this quarter as well. Dividend payment was again in the last month of this quarter.

15:03 Working capital funding of our emerging markets operations increased and negative currency translation impact all had an effect on our net debt level. In the first quarter of the year, a total of SEK 1,000,000,000 cash out for the shares buyback and additionally SEK 1,300,000,000 for net dividend payments. And the remainder is coming from the working capital funding of Turkey, Pakistan, South Africa and Bangladesh operations and Turkish credit appreciation. As a result of the increases in net debt, our leverage was increased by 0.42 times to 2.81 times as of first quarter.

15:52 On the right hand side, you can see our loan and bond portfolio. As of March, we have 37,600,000,000 equivalent debt, 29% of total portfolio is in Turkish lira. And the average Turkish lira interest rate was 19.2%, which is up by 150 basis points compared to last year end. And we have lower interest rates in our portfolio in Turkish lira, and we expect our Turkish lira effective interest rate to increase as we roll those interest loans with the new borrowing rates, which is higher than the current rates.

16:37 As of March, we have TRY 16,700,000,000 cash in our balance sheet, which is well diversified between currencies around 66% of our total cash is in the hard currency. If you move to the next slide, we can see the net working capital sales ratios here and the EBITDA margin. And consolidated EBITDA margin was contracted on a yearly basis, as I explained. CapEx sales to ratio is 2.7%, which is flattish compared to last year's same quarter. Net working capital sales ratio increased to 27.7% as of March from 26.3 mainly due to increased receivable days in Turkish operations and temporary increase in other items.

17:31 The increase in inventories was mainly attributable to the increase in material costs and unit contraction in some of the markets. But the negative impact of inventories was well balanced with our improvement in payable days. We have delivered negative free cash flow of 1,800,000,000, which is mainly coming from the working capital requirement. And the final slide is related to our guidance. We have made adjustments on our revenue guidance while keeping all other items unchanged. Based on our most recent forecast, we increased our Turkey sales growth expectations from 35% to 60% in Turkish lira terms.

18:23 Our international sales growth expectation increased from 20% to 25% in euro terms. And our consolidated sales growth expectation is to adjust 60% to more than 80% in Turkish lira. And this change may not reflect price increases that we have already done so far due to rising costs. Okay. So now I've complete my presentation here, so we can have your questions. Our first question comes from Sinaldermitars from AtaInvest.

19:09 Congratulations for the results. My first question is about the domestic side. I see that you are increasing your guidance. And we again, we see significant growth in first quarter. Could you give us some at least indication about the volume trends? How was that volume trends and pricing trends in domestic markets and also in the international side? And I see the inorganic growth impact. It looks like it's lower based on the FX currency, when it translates into dollars.

20:01 Did you see any seasonality in the inorganic growth side in first quarter? That's my first question. And the other question is about the indications for the second quarter in terms of at least the margin trends so far. How does it go in domestic and international side? Thank Thank you, you. General Bey. When we look at the Turkey domestic performance, we have increased the sales prices last days of December last year, which has a positive impact in the first quarter. And we also continued to adjust our prices in the first quarter as well. So that impacted the total growth of Turkey business, which because the price increases were higher than that we were planning to do because of the increasing cost material impact.

21:10 So therefore, we need to adjust our Turkey revenue guidance reflecting the impact of those price increases. When we look at the quantity side of our business, we started to feel that there's a contraction compared to last year and the sellouts both in sell in and sellouts. The reason mainly there is a high base impact and also the increasing prices are also impacting the demand side. Therefore, we are cautious about the Turkish markets while considering the further price increases because we are monitoring the sellouts very closely. So we need to we feel that the cost pressure, if it continues till the end of this year, there will be a contraction further contraction in the which is reflecting to the quantities.

22:19 And if you ask the growth international markets, international FX impact was around 81%. So if you exclude the acquisition and the FX impact, it is 5% growth. And we have seen growth in many in all of the markets, but the growth has slowed down. And when we look at the competition, everybody was trying to increase the sales prices to reflect the cost to the customers. However, we see that the competition is also selective of making those price increases to sustain their to sustain the demand and to continue of the growth.

23:16 Therefore, as I said, similar comments to Turkey market, as long as the cost pressure is there and the competition is hesitating to reflect to the prices to keep their market share, there will be some pressures on the margin. Or if we increase the prices further, there will be a possibility of contraction of those markets, which is to reflect to the quantities. And the colors in April, May, do you see any restocking or destocking in the markets in domestic markets?

24:09 In domestic markets, we are closely monitoring the inventory levels. We see we haven't seen a major increase in the inventory levels, but there are some categories, product categories, which have higher inventory levels. So we are careful on those. But there is no major increase in the inventory levels as of today. Okay. And the last question is about maybe financials. I see some PPE sales loss from those sales around TRY 22,000,000. And I see a loss from Wolfpack. How should we think for the following quarters?

24:55 And what was the reason behind that loss for the asset sale? And again, the Wolfpack side, you record losses. Could we expect that figure to turn to positive in the following quarters or in the following years? Thank you. Giovanni, I couldn't hear the first part of your question. Could you please repeat? The first question is, we see some loss. It's not that significant, but still higher compared to previous years. 22,000,000 loss from sales of assets. Expenses from investments is, I think, 21%. What was that asset sale? And the other question is from the associates income associates, we see 50,000,000 loss in the rollback, possibly due to currency changes.

25:52 But I wonder how could that be in the following quarters. At some point, do we expect that figure that loss from associates figure to turn to positive? Thank you. Let me start with the Wolfpack. It is actually since it's a joint venture, we are reflecting the performance of that 50% of that performance to our P and L. And in the first quarter, price increases were not in place. Therefore, the loss coming from the Worldpac business was higher, but these will be compensated with the price increase we have already done in the market. So the coming period quarter will be better in terms of results.

26:48 And for the asset sales of €22,000,000 let me get back with that after the call with the details. Thank you. Thank you very much. Our next question comes from Hansard Keulikarin from JPMorgan. Please go ahead. Thank you very much. I have three questions. The first one is on margins and the second is also related to this. How much margin headwind do you expect from raw material contract renewals for the second half of the year? I think you already renewed the second quarter, but not the third and the fourth quarter. And second question is what is the timetable for these renewables for the second half?

27:36 And the third question is how much increase do you expect in interest cost this year due to rollover of Turkish share loans? I mean what is the current interest rate that you are accepting on Turkish share loans? Thank Thank you. You. And in terms of raw materials, we have a contract for three months as long as we can do what's especially for the metal part and plastic parts, as I said, is a monthly renewable monthly contracts with the suppliers. So that means we have some room of risk management when it comes to metals, but plastics, we are open to fluctuations each and every month. And when we look at the coming months, we can say that in terms of metal prices, we have not been that impacted of the huge increase after the Russian and Ukraine crisis.

28:36 So we will benefit some margin there. However, as you know, our purchases do not directly reflect to the cost of goods sold because of the inventory and production process. So there's a time lag there. And we have already started to feel the last year's pricing cost increases in our P and L and we will benefit the contracts of metal this quarter. However, the plastic price increases will be impacting us every month. And we are trying to balance it with price increases, but every day it's getting difficult to reflect to the prices all the material costs and not only the material costs, but we have the energy cost increase as well.

29:36 So we are trying to balance it and I can say that we will be able to keep our EBITDA margin at the levels of 10.5 as in our guidance carefully reflecting to the sales prices as long as we can do and partially managing it with alternative suppliers and long term contracts as long as we can do. And in terms of interest costs, the current interest rates for Turkish lira borrowing is around 23% to 24%, whereas as you can see, our balance of portfolio is around 19%. So that means we will be the overall interest rates will be increasing as we roll the new loans and the total amount is around 5,000,000,000 to be rolled.

30:43 Thank you, Eskombe. Our next question is a follow-up from Simal Demirtas from Adr. Invest. Please go ahead. It's from the again, I have a question in some details in the other operating expenses activities, its credit finance charges from trading activities. I see a significant jump in first quarter around TRY $241,000,000 versus 55,000,000 in the fourth quarter. That's a significant jump in that figure. I don't see any big deterioration in financial expenses, and I don't see any I see some improvement in the FX position, like the FX gains, the last €60,000,000 But I wonder what was that what was the factor behind that credit finance charges increase in the first quarter. It's significant compared to previous quarter?

31:52 We are using the benefit of discounting in case we are comparing it with the financing cost. And in case we see an opportunity, we are discounting the receivables partially. And some of the dealers prefer to pay in advance. So this is more related to that part. Okay. Thank you. And gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Oscan Chiman for any closing comments. Thank you.

32:43 So I would like to thank everyone, especially our colleagues to drive the Q1 performance in this very volatile environment. So thank you everyone for joining our call.