Arcelik A.S. (BIST:ARCLK) Q3 2024 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by. I'm Vassilios, your chorus call operator. Welcome and thank you for joining the Archelik conference call and live webcast to present and discuss the third quarter 2024 financial results. At this time, I would like to turn the conference over to Mr. Baris Alparslan, Chief Financial Officer, Ms. Minesule Ashgan, Finance and ERM Executive Director, Ms. Delal Alvage, Capital Market Compliance Senior Lead, and Mr. Cesar Ercan, Investor Relations Senior Lead. Mr. Alparslan, you may now proceed.

0:39 Thank you very much. Good morning and good afternoon, ladies and gentlemen. Welcome to our third quarter 2024 financial results webcast. This presentation contains the company's financial information prepared according to TFRS by application of IAS 29 inflation accounting provisions. Let me start with the highlights of the third quarter. We generated 105.4 billion TL revenues with a gross margin of 26.4% in the third quarter, reflecting a 13.8% sales growth year-on-year in real terms. Inorganic growth due to Europe and MENA transactions closed as of April 1st enabled that growth. In Turkey, we observed a weaker demand in both wholesale and retail markets across major product groups in third quarter. However, international demand slightly improved in Q3.

1:30 Among all major markets, Europe and Africa performed relatively better. Our OPEX over sales ratio is 26.1% for the quarter. With the impact of the acquired European operations, our operating expenses have increased roughly 1.5 points year-on-year, predominantly caused by increasing personnel expenses and sales and marketing expenses. We have recorded a slightly weaker adjusted EBITDA compared to the previous quarter with a margin of 4.6% for the period. Our adjusted EBITDA calculation excludes all one of income and expenses such as income related with the change in contingent liabilities, transaction expenses regarding Europe and MENA deals, and restructuring costs. Our net working capital over sales ratio as of third quarter is 22.7% reflecting a substantial improvement year on year with the contribution of these transactions.

2:25 Our leverage is 4.29 as of the third quarter, corresponding to an increase both quarterly and year-on-year due to the increase in our borrowings and weak EBITDA. We include our adjusted EBITDA in the calculation of leverage ratio for the period. In Q3, we delivered a 13.8% of revenue growth year-on-year, recording 105.4 billion consolidated revenues in Turkish lira terms. Inorganic growth had a significant contribution to the growth in the quarter, where we were faced with a slowdown in demand in local market. However, growth in international demand slightly contributed to this growth. Our gross profit margin for Q3 is 26.4%, which is 2.9 points lower on a year-on-year basis.

3:14 This is due to challenging pricing environment, unfavorable product mix in the quarter, and increasing raw material costs year-on-year. We recorded an adjusted EBITDA margin of 4.6% quarterly due to lower gross profitability and mainly higher OPEX as explained. In a third quarter in Euro terms, local sales showed an increase by 10.5% on yearly basis. Growth was mainly due to price increases in Euro terms. However, real figures in Turkish Lira reflects a 10.5% contraction in local market year on year. This is simply because the growth in CPI for the period was substantially greater than the change in the FX rate. International revenues increased substantially by 58.1% in Euro terms on a yearly basis with contribution of inorganic growth. Contribution of acquired entities to the consolidated sales revenue was 656 million Euros for the quarter. Organic sales volume increased slightly, but challenging pricing environment in international markets remained unchanged.

4:21 Figures in Turkish Lira shows 28.9% growth in international markets. On the right-hand side, you can see our regional sales breakdown. Turkey's share in total revenues declined to 30% in Q3 in comparison with 39% of share for the same quarter of last year. Western Europe's share in total revenues jumped to 34% from 23%. Where STIS and Eastern Europe market has 18% share in total revenues, heading up to 52% with the impact of the transaction. Revenues generated in APEC region declined by almost 3 points and constitutes 9% of total shares in third quarter. Africa and Middle East region generates almost 8% of total revenues, corresponding to roughly 2 points decline.

5:11 Due to slowdown in local demand in the third quarter, year-to-date growth figures declined in comparison with the first half MDA6 market demand. In the first eight months of the year, sales volume grew by 6.6%. Despite our relatively lower growth, we sustained our strong leadership in the market. Volumes in the air conditioning market still reflects a substantial growth over 20% in the first eight months of the year, following a robust growth in the first half due to a low base impact and early summer this year. In Q3, we have compensated the underperformance we had in the air conditioning segment in the first half due to strong air conditioning sales this quarter. Retail TV sales volume decreased by 12.8% year to date, which is slightly below the market. With 10% decline in local revenues year-on-year, we generated 32.1 billion TL revenues in Turkey with declining volumes in MDA 6 segment, strong unit growth in air conditioning, and flattish TV sales. The share of domestic market in total business decreased by 7 points and ended up at 30% of total revenues as of the third quarter.

6:25 Moving to the European market, Having 52% share in total consolidated revenue in the third quarter, revenues generated in Europe increased almost by 90% in Euro terms with the contribution of acquired entities compared to the same quarter of last year. Consumer demand in Western Europe has started to show significant recovery signs in the quarter. In key markets such as UK, Italy, Germany, Spain, Belgium and Austria, solid growth has been observed in sales volume. However, slowdown continues in France, albeit with a softer pace. Having 34% of share in total sales revenue, recovery continues in the Western Europe market. As Beko, we preserved the market leadership with a slightly improved pricing ability in the market compared to the last year.

7:12 Meanwhile, in Eastern Europe, robust demand growth continued in the third quarter. Major markets in the region point out a great recovery year to date. In Eastern Europe, having 18% share in total sales, Beko managed to maintain its market leadership despite the slight underperformance in the region. The revenues generated in Africa and Middle East region constitutes 8% of consolidated sales in Q3. In Euro terms, sales within the region grew more than 28% thanks to strong demand growth in Africa, despite the low demand in Middle East throughout the quarter. Contribution of the acquired entities has limited the decline in sales units in the MENA region. Consumer demand in South Africa for MDA6 products grew by 3% in unit terms year on year. Defined exports within Africa continued to grow substantially by a rate of 28% in the same period.

8:07 In Euro terms, figures are 9% and 32% respectively. On quarterly basis, DeFi's domestic sales in South Africa and exports within the region grew over 10% in sales unit, which corresponds to roughly 20% growth in Euro terms as DeFi maintains its strong leadership in the South African market. As another key market in the region, demand in Egypt was weaker both year-on-year and quarterly due to market instability and currency fluctuations. Despite the challenges in market conditions, Beko Egypt's revenues remained flourished year-on-year in Euro terms, unlike 55% growth in local currency. Quarterly figures show a strong recovery, with a growth rate over 40% both in Euro terms and in local currency.

8:58 On the other hand, having 9% share in consolidated revenues, APAC home appliances landscape continues to face challenges due to rising cost of living, political instabilities, and housing crisis. Flash floods and typhoons in the region cause even more negative outlook. Despite the challenges, sales in APAC region increased by almost 5% year-on-year in Euro terms, thanks to substantial demand growth in Pakistan and Thailand in Q3. In Pakistan, sales revenues showed robust growth year-on-year both in Euro terms and sales volume. Corresponding to 20% and 17% increase respectively. In contrast, figures reflect a slowdown due to seasonality and increasing competition. In Bangladesh, we achieved a revenue growth of over 7% in local currency.

9:48 However, figures in Euro shows a slight contraction due to the depreciation of the local currency. Sales revenue is significantly lower on a quarterly basis due to seasonality. When we move to the raw material costs, due to the decline in global demand, increased policy rates, decreased energy and input costs, both metal and plastic raw material prices have started to decline in the last quarter. Metal raw prices remained flattish year on year, although we have observed some fluctuations in the last quarter. Minor increase is expected in the last quarter. However, a slight increase in metal raw material costs is expected for the upcoming quarters. In accordance with our expectation, we have forward contracts for most of our exposure, hence we are not expecting a major raw material cost increase in the short term.

10:39 After increasing costs for consecutive quarters, average plastic prices are substantially higher year on year, despite declining costs in the last quarter. Having said that, we anticipate a slowdown in the decline within the next quarter with no hikes on the chemical side. With that, I pass on to Mine for the financial performance section.

10:59 Thank you, Baris Bey. Good morning and good afternoon. Here is the summary of our third quarter financials with the application of inflation accounting both year-on-year and quarter-on-quarter comparison besides nine-month cumulative results. Consolidated revenues were 105.4 billion Turkish Lira in the third quarter, reflecting 14% growth year-over-year and 5% decline quarterly. Year-to-date results point at 14% growth, including in organic sales. Growth profitability is weaker both in comparison with the same period of last year and quarterly basis. Margins are lower by 2.9 and 1.3 points respectively.

11:45 Year-to-date growth margin is 1.9 points weaker on a yearly basis. Our operating profits and adjusted EBITDA margins were substantially weaker in the second quarter due to lower gross profitability and growing effects. Net financial expenses grew substantially by 57% year-over-year and 65% quarterly. This is mostly due to increased net interest expenses in line with growing debt and increasing hedging costs. As a result of inflationary counting, We booked around 2.4 billion rochestra monetary gain in the third quarter, which was 1.9 billion rochestra last quarter and 6.4 last year.

12:32 Year-over-year decrease is due to smaller indexing impact compared to the last year. Consequently, we saw net loss of 5.6 billion rochestra in the third quarter, which corresponds to minus 5.3% net margin. Decline is 6.9 points year-over-year and 4.5 points quarterly. Our net debt increased by roughly 13 billion Turkish Lira compared to previous quarter and ended up at 97.1 billion Turkish Lira. After the borrowing in the third quarter, now our long-term borrowing comprised more than 55% of our total borrowing. It was almost vice versa last quarter. As of third quarter, cash and cash equivalents decreased around 32 billion Turkish Euros compared to 2023 year-end and booked at 34.3 billion Turkish Euros in our balance sheet with well diversification between currencies.

13:37 29% of our total cash is Euro and 11% in USD. Turkish Share Australia was 22% as of end of September. Turkish Share's share in total debt was 25% as of third quarter, whereas Euro and USD shares were 41% and 21% respectively. You may find the details regarding our debt currency breakdown and effective interest rates of our loan and bond portfolio on the figure at the right hand side. As a result of growing debt, Along with weaker adjusted EBITDA year-on-year, our leverage was up to 4.29 times as of third quarter. We are not concerned with the current level of our leverage, hence we do not plan any major borrowings in the short run.

14:31 On top of that, our brand new Egyptian Bangladesh facilities which were not generating EBITDA but had a significant contribution in borrowing will start to contribute to EBITDA as of last quarter, which will support leverage decrease accordingly. And finally, as we start to see recovery in our EBITDA in line with our restructuring plan to bring out synergies and cost savings, we expect to see a gradual decrease in leverage. On the upper left corner, you can see our adjusted EBITDA margin bridge. Narrowing gross margin due to product mix and higher cost, besides increasing COPEX, led to a significantly lower margin of 4.6%. The change in DNA and one-off adjustments have a positive impact on calculation.

15:20 Adjusted EBITDA excludes income related with a change in contingent liabilities, one-off transaction expenses regarding work transactions and restructuring costs. On the upper right corner, networking capital to sales ratio has been shown. The ratio is 22.7% as of third quarter, decreased by more than 2.0 year-on-year as a bar of quick wins from transactions complete as of 1st of April. On the lower left corner, you can see our capacity to sales ratio, which is 4.6% in the third quarter. This was mainly due to Egypt and Bangladesh investments. There are also partial impacts of integration and optimization costs we have started to book as a part of restructuring our European business.

16:11 Finally, on the lower right corner, due to net loss in the period, increased capital expenditures and cash outflow for trade tables, we generated negative cash flow of approximately 25.1 billion Turkish liras. So, I leave the floor once more to Burj Faiz to walk us through our guidance. Thank you.

16:33 Thank you very much, Mine. Based on our most recent forecasts, including Europe and MENA transactions completed as of April the 1st, we have revised our 2024 guidance. We maintain our flourished expectations over local sales in real terms in 2024, considering the stagnant demand environment for the rest of the year. Also, we keep our guidance on international revenues corresponding to 50% increase year-on-year in Euro terms, including the impact of inorganic growth. We've revised our guidance regarding our adjusted EBITDA margins. We expect an adjusted EBITDA margin roughly in between 5.8% to 6% for 2024 full year. We are expecting an improvement in our net working capital over sales ratio, so we have updated our guidance at the level of approximately 20%.

17:23 We have also revised our previous guidance regarding our CAPEX from €350 million to €400 million for 2024, reconsidering the impact of woeful maintenance, integration and restructuring expenses. As we have disclosed in the previous quarter, we estimate savings of approximately €140 million through eliminating roughly 2,000 office positions across our global operations within three years. Here you may see the recent updates and realized figures as of Q3. So far we have completed roughly over one-fourth of role eliminations as of third quarter. So with that we conclude our presentation and we can move on to the Q&A section.

18:11 The first question comes from the line of Bistro Vaivgenia with Barclays. Please go ahead. Yes, hello. Thank you very much for the presentation and for the opportunity to ask you some questions. I have two key questions. So my first one is regarding your new guidance. If you could briefly touch on EBITDA margin guidance and what was the key driver to downgrade it, that would be very helpful. And then my second question. So during the call, during the presentation, you mentioned that you were expecting Thank you very much. So I'll start with the EBITDA margin.

19:12 This is mostly based on the cumulative results that we have as of nine months of this year actually. We do not expect a major recovery in the Turkey operations, so expect the stagnant demand to continue. But in the European business, we expect some recovery given already declining rates, interest rates due to ECB's rate cuts and the expectation around increasing demand going forward. That's why we took the base as of cumulative based on nine month results for this year, but also expecting a slight uptick throughout the remainder of the year. When it comes to the leverage, you have to consider two things. One is, as you know, we have completed special projects like Egypt and Bangladesh. and for the next year we will mainly focus on the maintenance capex plus restructuring and integration related capex on the back of the recent acquisitions.

20:18 And that's why when we look at the leverage, so when you for instance take out the leverage on the back of the capital investments of Egypt and Bangladesh, you will already see that we can go below four times in terms of net debt and EBITDA. And given the expectation of the rate cuts in 2025, both in Turkey, on the back of declining inflation rates, and the European market, we expect the demand growth, the operating leverage inherent in the business, and the cash flow generation that will come along with the demand recovery. And with tight control in capex, networking capital management, and the completion of the integration and the extraction of synergies of workflow operations we expect the leverage to reduce to our previous levels. We do not share any target in terms of leverage, any specific target, but we expect it to decline on the back of those factors that I just mentioned.

21:28 Okay, thank you very much. Maybe one last question from my side. In terms of the synergies, I think on the last call you mentioned that you're already expecting some synergies to kick in later this year or next year. Could you please update us on the progress with regards to savings that were planned to be generated? Yes.

21:56 So I must say first of all that the progress of the extraction of synergies is going faster than we anticipated. And on the back of our announcement, both on HR restructuring and the plant restructuring in UK and Poland operations, we have started to extract our synergy plants, be it in HR reduction, procurement, IT, etc. For this year, I can say that we're already targeting around 15 million euros of synergies to be accrued as part of our financials. As you know, we've announced a long-term synergy plan of 300 million euros.

22:42 We're not in a position to share with you the exact trajectory of that, but you can extrapolate that on a, let's say, backlog fashion. Thank you very much. Thank you. The next question comes from the line of Kilikiran Hanzande with JP Morgan. Please go ahead. Baris Bey, thank you very much for the previous questions. I want to make a follow-up on the leverage side. and you are looking for your leverage to decline but could you also share your plans for financing the short-term debt given that it currently met with your cash position and there is ongoing cash burn so I wonder how you are going to pay this debt and and maybe you can also and I can ask the other question let me do that wait so I'll start and

23:40 Pass on the floor to Mine on that one. So our average maturity of debt is around two years right now. And if you exclude our cash pool and the trade-related financing here, the credit card, loans, et cetera, it's almost two and a half years. So that's why 56% of our debt is comprised of long-term debt and if you exclude again the cash pool and credit card related loans it's around 66%. So considering that we wouldn't label it as a let's say short-term refinancing, imminent short-term refinancing need and that's why we do not face any major problem in rolling over the short-term debt.

24:29 And as a, let's say, recent news, we've managed to tap into Turkish Lira lending market as of Q3. As you know, since August 2022, we weren't able to tap into that market given the restrictions in ethics related assets. There was a ratio, as you know, 5% cap. And that's why right now, being able to tap into Turkish Lira lending market Plus the ample room for credit limits, especially in the local market, we do not expect any major problems in rolling over our short-term debt. Okay, thank you very much. Can I make a follow-up for two questions, please? Sure, please.

25:14 Yeah, all right. And maybe Mina Hanım can answer this. I mean, there is a substantial increase in the financial expenses compared to the previous This is basically offsetting all of your EBITDA. You said that there are some one-off items. Is it possible to explain again about these one-off items and are there any one-off items that won't appear in the fourth quarter? And if so, the total amount would be quite useful for us to estimate the upcoming financial expense outlook actually.

25:51 Sure. As you can decipher from the difference between adjusted and unadjusted numbers in our presentation, we have around 947 million Turkish lira of one of items related to mainly plant restructuring and HR admin restructuring costs for the third quarter. When you look at the cumulative results for the first nine months, We have additional one of items around 440 million TL which is mostly related to the consulting expenses related to the Whirlpool transactions. And as you know we have changed the assumptions in the contingent liabilities in our balance sheet. And the income impact, gain impact of that was around 1.1 billion Turkish lira. And that's why you see a lower amount on a cumulative basis for the nine-month result in terms of delta between the adjusted and unadjusted numbers.

26:56 Most of the figures that have been recorded in the third quarter are non-cash in the sense that As you know, given the announcements and given the IFRS regulations, we have to allocate some provisions based on the upcoming restructuring costs, et cetera. And we will continue to allocate provisions as we approach the year end. But these will be, again, mostly related to non-cash expenses. So on a free cash flow basis, you should not expect any major We will continue to allocate provisions. That's what I can say on a directional basis to you.

27:41 Thank you, Baris. This is very helpful. But actually, I think these are all under the other income. So I'm looking into the financial expenses. So something happened in the financial expenses in the third quarter. It has been inflated a lot versus the second quarter. So what happened? Is there a hedging load? I mean, that elevated level will remain the same in the fourth quarter.

28:07 Yeah, on the financial expenses side, as you know, on the back of increasing net debt and just to take a step back, we do not experience any major change in the interest rate percentages on a quarter basis. So the main impact has been on the net debt side. The increase in net debt is the main culprit behind the change in financial expenses. And secondly, under financing expenses, you also see some portions that are related to imputed interest of receivables and payables. So there are also some operational related items that are also accounted for as part of the financial expenses.

29:00 But the main reason is the increasing net debt, I must say. And in fourth quarter, with the recovery of the operations, especially on the Europe side, and the strict networking capital control on the inventory side, we do not expect a major change on the net debt side. And on the back of the declining interest rates, relatively speaking, We do not expect a major growth on the net debt level. Okay, thank you very much. And the final question is about the margin pressure. Could you share how much of this margin pressure is related to Whirlpool acquisition?

29:38 At the gross profit side, the impact of Whirlpool is around 1%. And on the operating profit side, the impact of Whirlpool is around 1.5 points. Thank you very much. Welcome. The next question comes from the line of Demirtas Cemal with Atainvest. Please go ahead. Thank you for the presentation. One of my questions is related to transition costs. We see around 909 million Turkish Lira of transition costs in third quarter. In your footnotes and when we look at the details you're mentioning that some other costs might be arising in the fourth quarter and you didn't put any numbers but I guess you know it's difficult to calculate right now but at least you can could you give some direction on that side and in your EBITDA unadjusted EBITDA calculation Do you include this transition cost in the unadjusted?

30:50 Because I cannot fully just make similar calculations with your numbers and my numbers that don't coincide. And the other question is, again, in addition to Hanzade's question, in the quarter, something is happening, especially in credit finance, These are the expenses arising from the trading activities. When we look at from outside, there was not big changes, you know, the fluctuations and occurrences, but really, you know, it's difficult to understand how this much losses occur in third quarter. Maybe, you know, maybe do you have any additional comment on that?

31:35 Thank you.

31:39 So to start with the first one, as you rightly pointed out, we do not have reliable estimates at this point in time to calculate the remaining provisions that would be related to announced restructurings. That's one thing. But towards the year end, we will have more information and we plan to allocate more related to the already announced restructurings. Secondly, as far as I could understand, you're trying to reconcile the difference between 909 and 947. Some of those impacts are recorded under other expense and some of them are recorded under OPEX. So the difference is mainly related to the OPEX and they are related to most the HR slash admin restructuring costs, HR related costs. And can you repeat the last question please, because you referred to the credit finance and then you said trading activities.

32:48 When you get into details, we are not only looking at the financial expenses side, but we are looking at your FX losses and gains arising from trading activities. That's one side. And the other item, you have credit finance charges arising from trading activities, which are recorded under Other operating expenses and especially in this quarter each quarter we are just you know putting them together credit finance income and credit finance charges so when we sum up you know negative and positive numbers in this quarter we see an additional increase it's not about the fixed losses or financial expenses so that's a you know that's a big change I saw so could we expect that to come down?

33:38 I didn't understand the question now. So it's mainly related to the imputed interest that we charge on trade receivables and payables, the so-called rediscount expenses. So that's related to the extended maturity of trade receivables mainly. And secondly, we also provide early payment discounts as a financing item to our dealers. So that's one of the main reasons. So just to ameliorate the Thank you. And one last question about the acquisition impact. I see around 600 million euro. But as far as I remember, in the first quarter, it was a higher number.

34:40 How is the selling going in that region? And overall, when do you think things will settle in terms of HR, in terms of transition? I know it's a long process possibly, but at least when we are likely to see the bottom in terms of the transactions, do you see any unexpected negatives or positives on the way? Thank you.

35:07 So, as it relates to the first question, especially in August, we have realized or we have experienced a few things in the European market. Especially the distributors were trying to recalibrate their inventories and we were, there was a, let's say, relative slowdown, higher slowdown as compared to the other months. But when we look at September and October, we have seen substantial recovery, especially in the European operations. And I can say that, especially on the whirlpool side, the things have substantially improved when we come to the September results in terms of operating profit. So we're quite optimistic on September and November.

35:56 So just to cut a long story short, we do not expect to experience the same The two months are much more promising than the summer periods. When it comes to your next question, this is a long journey. We have started pretty fast. And I can say that we've been pretty successful in executing a lot of things in parallel. And we are actually ahead of our plans in terms of the restructuring efforts.

36:55 And in terms of things being settled, As we have announced, it will take a couple of years, but we are going in line with our announced plans, I must say. Thank you. You're welcome. The next question comes from the line of Campos Gustavo with Jefferies. Please go ahead. Hi. Thank you very much for taking my questions. Firstly, I was wondering, your 4.3 net leverage, is that the same net leverage that's calculated for your covenants? Yes.

37:42 Okay, thank you. And what are your existing covenants at the moment?

37:53 mainly 3.8 times okay so are you are you by chance like pursuing like a waiver with no no no this is yeah this is I understood where you're trying to reach it so the covenant testing is not done at a point in time so we have almost six months of remedy period In our documentation, I mean, I don't want to get into details of our loan documentations, but they're not being tested at just one point in time when it comes to component testing. So they are being tested on a consecutive quarterly basis just to summarize the procedure. And to be very honest with you, when you look at the calculation formula, We can also look at the normalized net working capital levels and the impact on EBITDA thereof, etc. So it's a different result that will come out when we do that vis-a-vis our lenders.

39:04 And this is not the subject of our call here totally, but we're pretty comfortable when we consider the remedy period plus the trajectory that we see going forward as we progress through 2025. Okay thank you so it's 4.3 and at some point in like six months there will be another test and you have like a way to calculate it and you are expecting it to maintain right acceptable levels is that correct?

39:42 Yes we expect to maintain or let's say pass our covenant testing to put it that way all right all right and that's expected on on the back of like the leveraging and leveraging networking capital improvement cash flow generation the synergy extraction okay perfect so that's that's a good segue way to my second question here could you please unpack your negative 25 billion Turkish Lira free cash flow I understand that There was a huge working capital outflow here at the moment. And if you could also provide, you know, in terms of your, if possible, like an EPIDA performance here, like maybe like non-IAS29 adjusted.

40:48 So let me summarize it that way. When you look at our cumulative results, our EBITDA is able to compensate for our capex investments. And the remaining is mostly the negative free cash flow is mostly related to net working capital, increasing net working capital. And when you decompose that, it's mainly related to inventories, plus increasing receivables to some extent. Whirlpool Transaction has been quite instrumental in extending our trade payables and as you know we've migrated a supply chain finance program along with the transaction reaching up to 600 million euros and in a given month it's expanded and then we utilized, draw down that credit limit And that's why the main culprit behind it is the increase in net working capital.

41:46 And as you know, this is a cyclical industry. In 2023, it was the other way around. And in 2024, on the back of the Whirlpool transaction, we've migrated a large balance sheet here. And when you compare the change in net working capital as compared to the year end of 2023, Of course, there has been an increase in our net working capital levels on the back of Whirlpool migration. This we expect to decline on the back of the recovery, mostly in European demand going forward. Okay, perfect. Thank you.

42:32 And as far as the trajectory of your free cash flows, are you expecting negative free cash flows to be We expect the free cash flow generation to improve substantially as I said due to strict capex control and as I mentioned before our expansion capex

43:04 related to the two special projects, Egypt and Bangladesh, is already completed. And for the next year, it will be mainly maintenance CapEx and CapEx related to the integration efforts. So this will be controlled. And for network, as far as networking capital is concerned, as you know, this year has been a bit problematic in terms of Fikri Ozdemir, Mehmet Ragip Balcioglu, Baris Alparslan, Umut Nazif Celik, Zafer Ustuner Fikri Ozdemir, Mehmet Ragip Balcioglu, Baris Alparslan, Umut Nazif Celik, Zafer Ustuner We expect the cash flow generation to be followed by the earnings generation.

44:07 Okay, thank you. And just lastly, is there maybe like a timeline where you would expect to see free cash flow turning positive or is that something too soon to tell?

44:21 That's our target for the next year, yes. Okay, sounds good. Appreciate your time and detailed answers. Thank you.

44:34 You're welcome. The next question is a follow-up question from the line of Bistro Vaivjenia with Barclays. Please go ahead. Yes, thank you very much for allowing me to follow up and for all the color you provided before. Just one quick question on CAPEX. So you mentioned that you're planning mainly Maintenance CAPEX as well as some integration CAPEX for next year. So what is your typical maintenance CAPEX volume and can you maybe provide some color in terms of the total CAPEX volume for next year?

45:11 Yeah, our maintenance CAPEX over is around 2% of our sales. We are yet to calibrate the CAPEX related to Whirlpool, but in line with the industry standards, this is both part of the level. Okay, so for next year 2% would be a good assumption? Yes. Total capex?

45:38 No, we haven't provided any guidance related to the capex for the next year. That will come on the back of 2024 year results. You asked me the run rate maintenance capex for the company and that refers to that answer. Okay, thank you very much. You're welcome. The next question is a follow-up question from the line of Demirtas Cemal with Atta Invest. Please go ahead. Thank you. Maybe I missed, maybe you mentioned at the beginning, but I would like to understand the guidance for the EBT. You see 5.826, so we need at least 5.8%, 5.9% in fourth quarter.

46:24 What would be the driver? To see higher margins in the fourth quarter, especially the fourth quarter has been the difficult one. Could you just further elaborate that? Thank you.

46:40 Yes, sure. I tried to explain that, but as far as Turkey operations are concerned, we expect the standing environment to continue. So we do not expect any major change in the margins, barring December in that period. But for the European market, and as we can observe right now, as of September and October, there has been an operational profitability improvement in Europe. So the sales are going pretty well on a run rate basis. So the trading update is pretty well. And that's why we kept the bottom end in line with our cumulative results. and we expect a slight uptick in the margins as we progress throughout the last quarter.

47:30 That's why we provided a range here. Thank you. The next question comes from the line of Luis Gomez Antonio with 91 UK LTD. Please go ahead. Hi there, thank you for your time. Just a quick follow up on one of the answers you gave. You mentioned that there's been Far East competition. I presume that comes from China. I just wanted to understand what are the markets where you're seeing that competition and to what degree is that impacting your performance?

48:03 Yes, thank you very much. The impact of Chinese competition has been profound, especially on the European market. As you can Observe this in other consumer discretionary industries as well. But the recent announcements related to the domestic stimulus efforts in China, the impacts have already started to be felt. And to be honest, we do not expect the Chinese competition to sustain forever as they progress in their domestic market. As the European players are able to position themselves vis-à-vis that competition as we progress through the next year, we think that issue will be normalized as we progress through 2025.

49:02 Okay, so effectively the Chinese are still competing even though they have to pay a tariff to come into the European market.

49:09 Yes, that's correct. That has been there, let's say, modus operandi starting from the beginning, especially of this year. Having said that, there are many ways to shake off that competition as you can position yourself within a wide brand portfolio. And for Beko in particular, following the Whirlpool acquisition, we feel pretty confident that we can really withstand that competition with all the brands that we have, ranging from premium segments to the entry-level segments. So we have enough capacity, enough SKUs, and enough brands to withstand this competition as we progress through our integration efforts.

49:56 And are they price competitive on the brand level, entry level, mid level, high level?

50:07 Yes, especially on the entry levels, they are pretty competitive. Having said that, you always calibrate your brand portfolio within a wide range. And there are other measures that you can take. with standard competition like outsourcing or cross-sourcing in different manufacturing areas. That's why if you follow the announcements of all the peers here, there has been a margin erosion across the board and one of the main culprits behind it has been the intensified competition from China. Having said that, we expect it to be normalized on the back of, as I said, domestic stimulus that is coming from their homeland.

50:58 Okay, great. Thank you for your time. You're welcome. Ladies and gentlemen, there are no further audio questions at this time. We will now move on to written questions from webcast participants. Our first question from our webcast participant is from Mustafake Maleski with A1 Capital Portfolio Management and I quote, thanks for the presentation. When will the Whirlpool effect end? EBITDA margin revisions continue to deviate and you are currently 40 basis points below the median target. Is there strong demand in the fourth quarter? If there is, we cannot see it in this data. Can you explain this to us? We reached 5.22 in net debt EBITDA. What is the limit of this? Will Archalik be able to handle this?

51:52 When do you think Archalik will return to its old days? Are you hopeful for 2025 and the following years? Thank you.

52:02 Thank you very much. I understand that all of these numbers are based on your calculations. and we haven't reached the fourth quarter yet and that's why you're not able to see it in the data and just I think I can give a combined answer to that yes we're very much hopeful for 2025 and the main reason is that as we have we have completed our acquisition of Whirlpool as of April the 1st and we've We prepared our business plan and our integration plans internally and did our announcements going forward to restructure the operations and merge both operations going forward.

52:49 This has been experienced on the back of a tough macro period, especially for Turkey. This was coupled with the macro tightening measures as it relates to Turkey's inflation and interest rate and fixed rate environment. Having said that, we have already started to reap the benefits of the World War merger, especially starting from this quarter. And as we progress and as we execute our plan going forward, you will see the improvement Both in the margins and the cash flow generation. And right now, as I mentioned before, we have enough brands and enough capacity to withstand the competition across the continent. And therefore, we are very much hopeful for 2025 and going forward.

53:49 Of course, the macro environment has to be conducive, with that I mean Thank you. The next written question comes from Serhat Kaya with YF Securities who have submitted four questions and I quote the first one.

54:36 Can you talk about initial progress about synergies and planned cost savings that was announced in Q2? Also, do you see room for gross margin expansion in Europe due to your improved market position and increasing presence in high margin building segment? Thank you.

54:59 So, as I mentioned a few times, we are going in line with our plan and expect to finalize the announced restructuring for the UK operations until the year end. and for Poland we expect it to be finalized within the first half of the next year. All of them are going according to the plan and along with the HR related restructurings we expect our market position to Europe improve substantially given our brand positioning and positioning in our distributors as well. The margin increase will come from our perspective in two ways. One is obviously the pricing and given especially the Whirlpool brand, we will be able to tap into the premium segment especially in the profitable built-in market.

56:01 And as we relocate our manufacturing to less costly areas, regions like Turkey and Romania, and as we fill out our capacity utilization ratios, there will be a gross margin improvement due to lower transformation costs as well. Thank you. Second written question from Serhat Kaya, and I quote, There is a TEL 16.3 billion income classified in retained earnings as part of Europe MENA transaction. Will this item be reclassified in P&L at the end of year once final calculations are made? If yes, do you expect a positive net income in Q4? Thank you.

56:51 So we have a purchase price allocation study ongoing and the numbers are not yet out, but we expect it to come out in the full year results. The numbers are not set yet. We cannot state anything about this specific numerical direction, but you will see it in the full year results. Thank you. Third question from Serhat Kaya and I quote, There was an announcement today about TL 30 billion bond issuance. Do you plan to use this for share paybacks? Thank you.

57:32 So just to correct, this announcement is only related to the preparation for us for, let's say, upcoming potential domestic bond issuances so that we do not lose time when the time comes to hit the market. It's not earmarked for any specific use of proceeds at this juncture. Thank you. Fourth and last question from Serhat Kaya and I quote. Is there a change in your Euro-USD parity exposure in the balance sheet? As per footnotes, you have long USD and net short Euro position as of Q3. Thank you.

58:21 So our Euro dollar exposure stays the same and reason for our long USD short Euro position is related to the cross currency swap deal that was executed to hedge future cash flow of our Euro bond issuance. However, cross currency swap transaction is under hedge accounting application and when that is excluded, Euro dollar exposures will be balanced. Thank you. Next written question from Max Negrasov with Citi and I quote What was the impact of recent acquisition on your EBITDA margins in Q3? What are the key drivers of margin pressure in Turkey? Thank you.

59:05 Thank you for the question. As I said, the margin impact on the operating profit of the acquisition is around 1.5 points. and the key drivers of margin pressure in Turkey. As you know, due to flat FX rate and increasing in minimum wage, et cetera, the labor cost has increased substantially in euro terms, in dollar terms, in hard currency terms in Turkey. And that has impacted our transformation costs substantially. That's on the cost side. And on the pricing side, Given the monetary tightening measures and limit in monthly installments, etc., there has been a decline in purchasing appetite of the households.

1:00:00 And that's why it's relatively harder to pass on the increases in the cost inflation to the pricing. We expect that to recover as Turkey progresses towards a consumer-stimulated economy going forward when the time comes. And this time, in our expectation, will come when the growth rate will stay low and then the cycle will probably start all over again in terms of consumption growth-led going forward. Thank you. Ladies and gentlemen, there are no further questions at this time.

1:00:46 I will now turn the conference over to Mr. Alparslan for any closing comments. Thank you.

1:00:52 Thank you very much for attending the webcast and for all of the questions. We can take any remaining questions offline and hope to see you again in our next webcast to present the full results. Thank you very much.