Arçelik Anonim Sirketi (ARCLK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the Arçelik A.S. conference call and live webcast to present and discuss the second quarter 2020 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Hakan Bulgurlu, CEO; Mr. Polat Sen, Chief Financial Officer; Ms. Hande Saridal, Finance Director; and Mr. Orkun Inanbil, IR Manager. Mr. Bulgurlu, you may now proceed.

Thank you very much for that introduction. Ladies and gentlemen, it's a pleasure to be sharing our second quarter results with you. This is the first time I'm actually directly sharing the results together with my team. Polat usually does that. I thought it's actually a fitting time as we're going through a crisis, and we're facing some opportunities that I actually address all of you directly. I want to start by saying that I am immensely proud to be part of the leadership team at Arçelik. Our colleagues all around the world have done an incredible job in safeguarding the health and safety of not only our employees and colleagues, but also their families. It's been a very difficult time. I won't harp on this as most of you have been listening to earnings calls on many companies, I'm sure, complaining about the pandemic. But I do want to start by saying I'm immensely proud of our teams around the world who have managed the situation much better than expected and continue to do so. Our priority has always been the health and wellness of the families and employees, but also business continuity, and today, I will try and focus more on the business continuity part of that. Now as I said, I won't talk too much about COVID. It's a little bit unavoidable as we have to -- it impacts our business, but I will try to be as brief as possible, at least when I'm addressing the general impact of COVID. You all know very well that the IMF and World Bank and OECD have all projected quite dismal numbers, a very deep recession for 2020, and there's an obsession around what matter the recovery will follow. I don't really understand that obsession, but I don't think any of these scenarios are actually what we're going to be facing. We have been going through supply shock, demand shock, and I think this is going to continue in the near term, and it's too early to predict how this is going to end. Now if we look at our own industry, I think our industry, even though we face a severe downturn, is one of the less impacted industries, and I will talk about some of the tailwinds that we have later in the presentation. I think globally, March and April, we saw huge demands, huge declines in sales and a gradual recovery in May. And in June, we started seeing what people call revenge shopping, which has essentially postponed demand. This is where -- you're all familiar with the term flatten the curve, which is something we were talking about infection rates very early on. But we were actually using this term to try and flatten the curve in terms of the pent-up demand and the strain that, that was putting on our production. Now I think basically, our industry will recover quicker than most, especially other segments related to services, and I think we will get to 2019 figures in 2021. This is, of course, foreseeing a lessening impact of the pandemic going forward. Now there are no official estimates at the moment for 2020, but if we look at the base scenario in Q2, I think the global appliance market will shrink by mid-single digits, around 5% to 6%, and Europe could face a much larger contraction of up to 11%, 12% in the full year. Of course, in this new world that we live in, the consumer and the consumers' demands have dramatically changed. Obviously, groceries, medical goods, cleaning, food, beverage from-home spending have spiked, and there's a tectonic shift in the consumer basket and spending. So this conscious consumption is literally changing the way consumers not only shop, but what they're buying and what they're looking for in products. They're also really shifting their priorities to subjects around home comfort and home security. Obviously, we're a net benefit from that as refrigeration is integral part of food security. Laundry products, dishwashing is an integral part of hygiene. Also, the way they shop has dramatically changed. We've seen e-commerce double in Western Europe, triple in LATAM and in emerging Asia and CIS. This means that companies that had already went through a digital transformation and were more prepared in their omnichannel strategies actually have a net benefit from this, and we are one of those companies, which I will go into more detail later on. Now of course, there are many opportunities around this. If you look at the consumer behavior -- and we've done some in-depth studies, which I will share. The consumers are now looking for value for money. Their job security, fashionable, disposable income is there. A lot of money is shifted from other areas, travel is one, for example, into improving the home and improving basically their appliances. And as people interact with their appliances much more for the past 3, 4 months, people have been at home literally using their appliances much more than they normally would. So they have a much better idea of what they want. But they also don't want to spend as much money as they may have in the past. So our brands stand to benefit significantly from this slide to value. Also, I think everyone is reminded about the fragility of the world that we live in and the impact that COVID has had has actually made everybody much more focused on the impact we're having on the world in terms of warming climate. And resource efficiency is actually another subject in people's minds. So any appliance that consumes less energy, less water is a preferred product. Now at Arçelik, we managed because -- through our global operations and actually seeing what was happening in China early, we were able to take precautions globally very early in the pandemic, which meant that we had limited closures. There were many markets where we had to close due to regulations. However, our larger-scale plants actually remained operational, which meant that we -- our supply chains were not interrupted, and we were able to learn as we changed our way of operating to a much safer manner in terms of being able to operate under new guidelines with the pandemic. At this time, I'm happy to say that our production is almost fully normalized. Many of our plants are working 3 shifts, and we're trying to catch up with this pent-up-demand spike that we have in front of us. Another improvement has been in our inventory levels. Compared to last year, in this period, we were able to decrease our inventory by around 18%. Now I think most of you are aware of Arçelik and its social responsibility projects. We basically not only actually focused on business continuity and our own employees and their families, we actually spent a lot of energy trying to understand how we could serve society at large through this difficult period. Early days when COVID-19 was spreading, it became clear that mechanical ventilators were in great shortage around the world, and producing these was going to be critical. And I think we basically went through 2 or 3 days of brainstorming and decided very quickly to start producing ventilators. And we went from 0 knowledge about mechanical ventilators, which are very complicated products, obviously, life-saving products, we managed to produce 5,000 in a very, very short time, 2, 2.5 months, and actually delivered these to different parts of the world. Many of these ventilators that we produced were donated by the Turkish government to other governments in need in Africa, in the Middle East. Also, Arçelik donated many to places like Kazakhstan, and I'm actually really proud of that fact. For us to be able to go from scratch to producing very complicated ventilators and in such quantities in such a short time, actually showcases Arçelik's innovation capability and R&D capability. Of course, this energy that we put into the ventilators is now being put into a new product range, which is reflective of the change in consumer demand in terms of the hygiene features they are looking for in products. So this was a net-net huge benefit for Arçelik and society as a whole, and I think it benefited our brands and our corporate identity very much as well. We didn't only produce ventilators, but we also, to be able to address the fatigue that medical workers around the world were going through as they were in the front lines, we started outfitting hospitals around the world with products that would help health professionals stay in the hospitals longer, keep their food fresh, bring it from home or at least refresh their clothes, and we actually donated many appliances and set them up in 550 hospitals around the world. I think, again, the impact of these projects that benefited society in many markets around the world will be a huge benefit to our brands in the long term. Now of course, going through this period, we focused all our energy on what the new normal would be. This is an "all hands on board" emergency kind of shift in our strategy and the way we do business. First, we have to identify the changing consumer habits and behaviors. We've redesigned the brand approach to fulfill their needs. What does this mean? Well, we had a unique opportunity, whereby all the consumers, our core customers were actually stuck at home. We started a massive program where we interacted with consumers in their homes to understand what their changing needs were, not only during the pandemic, but also how they were interacting with the products and what kind of changes or features they were looking for. This has resulted in a very large amount of data, which has been reflected in a new product range we are due to launch soon. This product range is coming on top of new designs and new platforms with Arçelik, which means that actually, we are going to go into a second half of the year with a much larger than usual amount of new SKUs, which are actually fully reflective of the changing consumer behavior and demands. Now this portfolio change also, of course, is bringing with it a significant reduction in complexity. We're going to be producing less SKUs, much more focused, and I think this will also drive efficiency. So these first 2 priorities of our adaptation to the new normal are well on their way, and I'm happy to report that I think this will significantly differentiate us from the competition. Also, we have seen the growth in e-commerce in most markets, and our omnichannel transformation, our digital transformation had been well underway. We've been investing a lot of sweat and tears for the past 5 years, and we had been seeing the fruit of this already. But I think we will see this accelerate, and Arçelik will be, again, a net benefiter from the consumers' change in consumption habits, meaning basically shopping online. Our share of online market share has always been larger than off-line, and I think we see this trend actually -- helping actually grow its market share everywhere. Now unfortunately, in this transition to new normal, we know that this pandemic is not going anywhere, and we will have to learn to live with this virus. I think -- I don't want to speculate on when effective medication will be on the market and readily available or a vaccine, so we are assuming that we will live with this virus for the next 12 to 36 months. And this means being prepared. This means staying focused, razor-sharp, and making sure that we have a strong balance sheet going forward and that we actually use this as an opportunity in some areas. I want to share with you just some highlights of the Q2, and then I will ask Polat to take over. You will see that we had a limited top line contraction with 7% with TRY 7.8 billion in revenue. We had a slight decline in gross margin and a large improvement, a 2.5 point improvement in our OpEx-to-sales ratio. We had a one-off contribution of TRY 67 million in our EBITDA, and our EBITDA margin is 11.1%. And something that I am, again, very proud of is our strong free cash flow that we have created in the second quarter. Our improvements in working capital and leverage in this challenging environment are very notable at 26% and 1.9x leverage. I think that these numbers are some of the best numbers that I have seen as CEO of Arçelik, and we will strive to actually keep them at these levels. Another actually proud moment for us is actually we're now among the supporters of the TCFD, which is the Task Force on Climate-related Financial Disclosures. As you know, we went to leading the sustainability -- the Dow Jones Sustainability Index for our industry, and we continue to make significant progress in becoming a much more sustainable company, and our focus remains on that. Polat, I'll give it to you now for some key numbers.

Thank you, Hakan. For -- as Hakan said, our revenue growth was around 7% negative. There's a contraction for our sales compared to last year. We have made a difference this time. Normally, as you know, we do not disclose monthly information, but as we would like to present you the effects of the COVID-19 better, we could give you a better understanding about the expectations of the future as well. So we have seen almost 25% decrease in April, 17% decrease in May. But fortunately, June, after the lockdowns was lifted, we have been able to have 20% increase in our sales. This 2-month contraction is mainly due to the full lockdown in most of the companies in -- largely lockdowns in Europe, but especially countries like South Africa, Pakistan, Bangladesh had almost 2 months full lockdown periods, which we had almost no record of sales. But starting with June, everything is much normal now, and we have been able to post really high-demand sales. On the gross margin side, we have been able to post 30.9%. But again, especially in April and May, the gross margin was low, 28.7%, mainly due to the lower capacity utilization ratio in Turkey and Romanian factories and the closures -- factory closures in the other countries. We had a better -- slightly better raw material prices, and as you know, at the end of quarter 2, the stronger euro-dollar parity has also helped our gross margin in June, and we have been able to post 33.8%, which is close to 34% gross margin. And the EBITDA margin, 11.1%, if you exclude the onetime 10.2%. And as you can see, especially in the April and May, the results were, in average, 7.4% EBITDA. But I have to say that we have -- we had a huge strict OpEx management, which I'll share in the later slide, and that has an effect on June results as well. And we have been posting around 15.8% EBITDA in June, mainly due to strict OpEx management and the capacity utilization ratios, which affected the gross margin. In your text, I think it's 16%. It's now 15.8%. We made a small change here. I'll continue with the OpEx-to-sales ratio. As you know, in the first quarter, our OpEx-to-sales ratio was around 27%, and we have been able to go down to 24.5%, which is a 2.5% decrease. Of course, there is the support of government incentives, which helped the personnel expenses to be lower. We had a significant cost in the administrative expenses, and the marketing, we had to lower the marketing investments, mainly cancellation of some of the trade fairs, which is very important for our industry, like EuroCucina in Italy and IFA in Germany. And of course, there's better inventory management, which Hakan has shared with you the numbers. And we are taking measures, and the rebound in the revenue in June led to a lowest monthly OpEx-to-sales ratio since 2013, which is very good. Our expectation that we are expecting to keep that, let's say, win of the company on the OpEx to sales ratio, at least some part of it in the coming quarters as well. When you look at the working capital to sales ratio, again, this is historically the lowest working capital to sales ratio for Arçelik, which is 25.7%, especially -- I mean, the company has been focusing on from day 1 of this crisis on collecting money and managing the inventory as effective as possible, and that really helped us to eliminate aged inventory, eliminate the toxic SKUs in the system. We have optimized our SKUs, and that really helped our inventory management. And we have been able to achieve some better terms for large international suppliers, and we have used our supplier financing programs as much as possible, and 25.7% is something that we are really proud of. Again, in the half 1, when you look at the half 1 as a whole, we have been able to post TRY 2.3 billion cash -- free cash flow. What -- as Hakan said, quarter 2 was around TRY 1.86 billion, but this is also -- normally, maybe some of you can remember, our second quarter is generally a negative cash flow term for us. But because of this tight working capital management in the system, we have been able to generate this amount of cash. And we also lowered the CapEx. And we have been going through all the CapEx items one by one even today to really make sure that we really need to use CapEx or not. So that also had an effect on the cash flow. And as a result of all of these, actually, the balance sheet has been stronger. Our cash in our balance sheet is around TRY 9.2 million -- TRY 9.2 billion right now, and almost 80% is in hard currency, and we didn't distribute dividends of TRY 500 million. And also, we have sold our subsidiary token for TRY 310 million, which has supported the liquidity. But I have to say that our finance team has been quite active on the market to reduce our interest rates, especially Turkish lira interest rates, from 25% -- this time last year, it was 25%, the average of our Turkish lira loans. Right now, it's 11.3%. Actually, there is one long-term fixed rates here, which is taking us over 10%. Actually, almost all of our loans are under 10% rank now. And also that affected our leverage positively, and we have been able to post 1.9x, which is less than 2x, which is also a very good sign for the health of the company. So I will hand over to Hakan again for the regional market dynamics. Hakan?

Sorry. Got stuck on mute. Thank you, Polat. I'll start actually with Turkey, obviously, our largest market. The market itself shrunk by about 1% MDA-6, air conditioners grew 7% and TV, 4%. But if you look at the year-on-year changes, of course, you have to remember that Turkey had been declining in terms of MDA-6 for the past 2 years in a row. So being above last year, even though it's significant and different to other markets, especially in June the recovery has been fast, you have to remember that this comes on top of a depressed market. Now I'm very happy to share with you Arçelik's performance in this period. Our sell-in to the dealers was actually kept under tight control to actually free up working capital where possible, not just our working capital, but also our dealers. And we focused very much on what the consumer was buying and when they were buying, how they were buying. And actually, our sell-out performance is significantly better than our sell-in performance, which resulted in extremely high levels of market share. Now underlying this is actually a big strategic shift. Many of you will know from Polat on earlier earnings calls that we've been investing a lot in our IT infrastructure to enable a full omnichannel transformation of our dealer network in Turkey. Actually, all of that work paid off handsomely, and during the lockdowns, while many of the stores, for example, in shopping malls, were closed, we were able to deliver to consumers. And I think this model is unique in the world. What we did is we enabled all of our dealers to come online with their stock level and SKUs, and actually, we serviced the consumer directly through our own websites but fulfilled through our dealers. And this meant that, of course, as people were switching to buying online, we saw a tenfold daily revenue through e-commerce. And actually, as we were fulfilling through our dealers, and this is where the model is unique, our dealers, even though their stores were closed, were getting addressed for deliveries and actually still managing to drive some revenue and cover their costs. I think this also builds a lot of loyalty in our dealer network and on with the consumers, which has resulted in, I think, historically high sell-out market shares. There are examples where we actually delivered refrigerators in very difficult parts of Turkey in 2 hours, 3 hours, many of these examples, because we were able to fulfill from our dealer stocks. And of course, you can only imagine what kind of shock this creates with the consumer, because most of them are buying a refrigerator because they really needed it, either their old one is broken or they need a larger one because they're buying less food -- more food, less intervals. Now if we look in detail a little bit, our sell-in performance: televisions, 5% up, sell-out 15%; air conditioning, sell-in 29%, sell-out 3%. Of course, this is very seasonally relevant, because we were selling in to prepare for a sell-out, which is happening now as we speak. And small domestic appliances, again, 24% growth sell-in, 15% sellout, historically high market shares there again. If we look at our white goods, MDA-6 market share sell-outs, first of all, June was an all-time record in terms of revenue for Arçelik in Turkey. Our market share in white goods came to about 53%, and small domestic appliances, close to 21%, 20.7% to be exact, which actually puts us in the #1 position, something we've coveted for a long time and quite frankly, I believe we deserve. And with air conditioning, 64.5% market share, extremely significant, as you can imagine. If we look at Europe, many of the markets in Europe, obviously, were very deeply impacted. Starting with Italy. March, April were absolutely terrible. Some declines which reached 30%, 35%, 45%, which slowly started recovering in May, and then we returned to some growth in June, especially starting in Germany and Eastern Europe. Almost everywhere now in June has been green, and actually the flattening the curve concept that I was talking about earlier, actually continues through July and August orders as well. Now while this is happening, of course, the share of online has grown dramatically. There's a 56% year-to-date increase in click and mortar, and about 16% in pure online. This, of course, if you follow through weekly during the closures, you could see an undulation, where each high of the curve was getting higher and higher in terms of conversion to online as off-line remained closed. And it will be interesting to see going forward, I would be willing to wager that actually share of online will continue to grow going forward, and it won't return to off-line pre-COVID period. If you look at our performance, almost everywhere we operate, with the exception of Romania and Russia, we have gained significant market share. And what lies underneath this is basically through our digital transformation and our omnichannel experience, our share of online is larger than off-line. It always was the case in 2019. This is the case, 6.2% off-line; 7.7% online. But in 2020, first 5 months, actually, this spread grew. Our off-line market share grew as well, but our online market share grew even more. This is because our product ranges are very suitable. We have deep customer insight, which we're able to share with our online retailer customers, and also, we actually prepare, not only the product, but also the content and the materials that our partners need for actually selling Beko products, and this has resulted in very strong results. If we actually move a little bit further away from Europe, which is 42% of our business, Africa has been significantly impacted. As you know, Africa, Pakistan, Bangladesh, these 3 countries are more than 10% of our revenue. So they're very significant for us. We have dominant market shares, local brands, Singer in Bangladesh, Dawlance in Pakistan and Defy in South Africa. South Africa, unfortunately, remained closed for most of the lockdown. Our plants were not operating, and the markets were significantly down and remained significantly down. However, our exports from Defy have grown dramatically, and I think this is a sustainable trend, and our profitability is normalized in June. If we look at the Asia Pacific, unfortunately, Pakistan, down 50% or more; Singer in Bangladesh, 40% or more because of the extensive closures. As you know, these markets have health systems which are challenged, and COVID continues to spread in these markets. We will continue to do our best to keep operating. Of course, again, as always, safety is our #1 priority, but we will keep operating, and I think these emerging markets are similar to Turkey in some ways, where the pent-up demand is very significant, and the return to growth will actually erase most of these declines relatively quickly. If we look at our sales performance, of course, with Turkey as an outlier, the share of Turkey has grown to about 40% from 35% in 2019 Q2. This is significant, of course, because it impacts profitability very positively as well, and the share of Pakistan, South Africa, as I mentioned earlier, has about halved to what it was 2 months ago. And now if I look at the sales bridge here, despite TRY 525 million FX positive impact coming from the currency impact in international markets, the overall growth was negative. This is mostly coming from our international organic sales decline and the markets decline in Europe. Even though we've gained market share in this period, so we've done better vis-à-vis the competition, there has been an impact to our top line from these shrinking markets. Turkey, of course, as I mentioned earlier, star performance, TRY 320 million net-net positive addition. With that, Polat, I think I'll let you continue with the P&L.

Thank you, Hakan. It's just one slide. Normally, we have more slides, which we put in the Appendix for your information for you to ask questions, but today, I'm going to present only the income statement for our financials. I mean you have already seen the numbers on revenue, gross profit and EBITDA. I'll just focus on here. The profit before tax has been, in the quarter 2, TRY 526 million, which is 6.7% margin. And in 6 months, we have been able to get 5.3% margin on PBT. And our net income has been, in 6 months, in total, TRY 668 million, which is 4.3% margin. Of course, there are some one-offs here, but even though when we exclude the one-offs, we see that we haven't been really affected on profitability, especially given the circumstances that we have been in for the last first quarter, second quarter. I think that the impact on the profitability was limited, I have to say. And hopefully, this is going to -- this positive trend will continue in quarter 3. In this way, I'm going to give the word back to Hakan on -- and to tell us the 2020 expectations. Hakan?

Sorry, mute again. Yes. Well, trying to guess what 2020 will look like is not something a smart man should do, I think. We still have a Q4, which is going to be very, very difficult to get through. By the looks of it, and what we're seeing in Brazil and the U.S., in Australia, unfortunately, it looks like COVID-19 will be felt significantly, especially in Q4 and may result in a return to some closures. Although I think we know a lot more about the virus, governments have a lot more experience in how to manage them and the health systems have become a lot more robust to this first wave that we've lived through. And by the way, I think it's fair to say that what we will see in the fall will be the peaking of the first wave rather than the second wave. And we'll have to learn to live with this for an extended period of time. Now our second quarter was good. And it actually -- we got the results we did because we've been focused on liquidity, we've been focused on cost suppression, CapEx discipline and most of all, really readjusting our product portfolio to the changing consumer demand. And we did this in very, very short amount of time. Literally, like we created the ventilators, in -- from scratch in a very -- 2 months, 5,000 units; 3 months, 5,000 units. We were able to actually ship our whole product range to actually meet the changing demand. Now Q3 will actually continue. I think this demand -- pent-up demand will continue. We will see some tailwinds on raw materials. Euro-U.S. dollar parity is expected. And if Q4 doesn't turn out to be as bad as the first quarter we had, then I think, as I said, we will recover to 2019 levels in 2021. We will focus all our energy on keeping our factories open and keeping all our employees and their families safe. And this discipline that we have at the moment, especially with working capital, will continue. And we hope to revisit our decision not to give dividends at the end of the year depending on the results. Polat?

With this information that we have from Hakan, I'll continue with the guidance. Last time we have -- we haven't published our guidance, as you know, because of the uncertainty. But we see much better right now, especially in quarter 3, our order books are very, very strong, and we really see that the sales are coming. And especially the results that I've shown you on the EBITDA level on June is very promising. I don't know if you'll be able to get this in 2 quarters, 3 -- or the quarter 3, but I think that it's going to be over the Arçelik average. Quarter 3 is going to be over the Arçelik average EBITDA. So we have tried to -- on the revenue side, we have tried to calculate this risk that Hakan has mentioned on Q4. So in Q4, we expect some decrease in the -- some lockdowns in the market, but it is not going to be as severe as April and May. That's how we have calculated this guidance. So according to this, we expect to grow in Turkey, in Turkish lira terms around 15% to 20%. And the revenue in the international markets, in euro terms, we expect around 5% decline. And this is going to be resulting around 10% to 15% growth in Turkish liras in total revenue. On the profitability side, as I told you, we expect a very strong quarter 3. And mainly in quarter 4, due to this expectation that I've just shared with you, a little bit lower. But in average, we are expecting to reach to 10.5% to 11% at the end of this year. And our long-term EBITDA margin is going to be 11.5%, and we are much more hopeful on this long-term EBITDA margin actually than the last 2 years, I have to say. On CapEx, we are going to be around EUR 150 million to EUR 160 million. Generally, we are around EUR 180 million to EUR 200 million. But due to this environment, we have been focusing on what to spend too much. So that is going to be helping the cash flow as well. And working capital to sales ratio, you have seen 25.7%, but I think that, that wouldn't be wise to expect to be at that level for some time. But we are sure that we are going to be -- we are expecting it to be below 30%, and that's the healthy level. And the good thing about 2020 is -- the remainder of 2020, actually, the trade in Turkey and also in the other markets is very out of stock right now. So that's why our expectations are really very lively for the end of 2020. In this way, we have completed our presentation. So we can switch to question-and-answer section. We will try to answer all of your questions. Again, 2 different locations with Hakan. I'll try to direct your questions to Hakan when you ask them.

[Operator Instructions] The first question is from the line of Demirtas, Cemal with Ata Invest.

Congratulations for very good results. Actually, we were missing these numbers for a long time, and I really wanted to congratulate you for this result, because it shows us that -- the light now compared to a couple of years ago, in my view. And my question is about your strategic perspective, Hakan bey. In Europe, the competition against the Chinese and your competition in the Asian market, how do you see your competitive advantage against both the locals and the Chinese overall? And does the currency, the euro-dollar parity is helping you to compete against Chinese or others? And could you give us some picture about the competitive dynamics in international markets.

Yes, I'll do that. I mean first of all, an answer like that in itself can take a couple of hours, but I'll highlight just a few points. One, Arçelik is uniquely positioned to benefit from labor arbitrage. All our production facilities are in high-growth and low-labor markets, and we have always been a volume-efficient producer, and we utilize our capacity very, very well. I think this is our #1 advantage, cost competitiveness, and we continue to have cost competitiveness. Second, I think we will be a huge benefiter from this drive towards value. The consumer will shift from brands that they have been used to buying to actually brands like ours, where they have increased durability, reliability, less resource consumption, so environmentally friendly. They feel good when they buy our product. And on top of that, actually, they get more for their money. So this drive towards value is very, very critical. I believe in the medium term, and when I say medium term, I talk about 12 to 36 months, we will see ultra-premium brands also benefit. As people use their appliances more, they will be willing to pay more for them, but that is a small portion of society. The majority will shift to value, and I think we will benefit significantly from this. Now when we look at ASEAN, we have actually dominant positions in markets such as Bangladesh, Pakistan. But don't forget, we also have a very significant operation, which is now in full production and ramping up capacity in India. And if you put these 3 markets together, you will see very quickly that most of the growth in our industry is going to come from these markets, where you don't see these numbers reflected in our -- nor our margins nor our top line yet, but they will become even more significant contributors as the business grows in those markets. And again, you're aware of our greenfield factory in Thailand and our position in Vietnam, our new subsidiaries in Indonesia. I think all of these will increasingly contribute over time. Now when it comes to competition, I think we have shown clearly that we're able to compete with anyone anywhere. So I don't really think we have much to fear. Of course, a few Chinese companies are getting stronger, but again, it's not anything to fear. And I think our strategy has been well executed so far. Our discipline in controlling CapEx and OpEx will continue. And I think cost competitiveness will continue to be our leading edge.

And my second question is maybe to Polat bey, related to the effective tax rate. I see higher effective tax rate in the second quarter, around 22%. Could you give us some indications for the future? Because in the past, you had lower effective interest rate -- sorry, effective tax rate. There was still -- are there any specific reason behind this increase in the second quarter or just the exception?

Effective tax rate is, yes, you're right, for quarter 2, it's higher. But this is due to -- there is an effect on the distribution of the profit among the countries. So our expectation for the remainder of the year is at mid-teens, around 15%, for the effective tax rate. But for quarter 2, there is a spike, which we expect that it's not going to be continuing in the other quarters.

The next question is from the line of Dasiran, Akif with BNP Paribas and TEB Investment.

Congratulations on the strong results despite this challenging environment. I have 2 questions, if I may. One of them is related with the market dynamics, and the second one is related with the profitability side. We are in a loan boom at the moment, especially on the mortgage side. I'm just trying to understand what is the impact of these new house sales into your business. Is there any change in the mix of replacement demand or the procurements for the new houses? And my second question is, we are in a very favorable period for the cost side for the raw material prices. Is there any item that you secure long-term contract for this period?

Hakan, I'll take this because this is a question that we get generally. Yes, in Turkey, there is this new house sales impact, but people are not moving. It seems like it's more of an investment rather than new housing needs, I have to say. But I'm sure that, that is going to have an impact in the midterm in terms of positive demand. But right now, to be honest with you, the demand is not really coming from the new house sales. It's more from this pandemic effect that people living at home and changing their appliances with better quality in order to enjoy home much better. On the profitability side, on the raw materials, yes, the raw materials are historically low for -- some of them are really crazy, I have to say, some of the numbers. We are trying to secure our purchasing with these low rates as much as possible. But there's a limit in different types of raw materials. I mean you can secure the prices for cold-rolled steel for only 4.5 months or 5 months maximum. And in some other cases, it's even less. So -- but in some of them, we can secure for 12 months, like copper. So we are trying to manage this very dynamically. But at this point of time, yes, we have a lot of long-term contracts, and our purchasing team is working on those, because we do not really know how long this low raw materials will continue. So we will like to secure as much as possible.

The next question is from the line of Kilickiran, Hanzade with JPMorgan.

I have a question on online business, I think this is very important going forward. Would you please share -- I mean, what is the share of online business in revenues, particularly in Turkey and also Europe? And I also wonder if you have different collection agreements with your online dealers, which could also change your working capital strategy going forward? Because I think this is going to be the new normal for you.

Hanzade, we do not have the numbers in front of us right now on online business shares in Turkey and Europe, but we will try to share those with you if you can contact our IR department tomorrow. Your second question was, can you remind me once again? Sorry about that.

Yes, I am trying to understand how big is the online business in your revenues? And do you have a different collection agreement with your dealers -- I mean, with your online dealers, which could also change your working capital to sales ratio in the medium term?

Online sales is -- the payment terms are a bit better than the traditional channel, but it changes from country to country, to be honest. It's really hard to say a general statement about this issue. But of course, when the trade is getting more stronger, when the online gets more stronger, most probably they are going to be increasing the pressure on the manufacturers as well. So I don't really expect a big change in terms of net working capital in the long run on this issue.

Yes. Let me add something to that just really briefly. I think the share of online today is still relatively small. But what's important is that we have now put in an infrastructure, which is industry leading and doesn't exist, to my knowledge, anywhere else in the world. These are, as you know, mono-brand stores, which are franchisees, but actually, they're connected to us, and they can be part of the fulfillment system, which means that they can actually drive margin going forward even if the shift to online accelerates. And that also shows that our dealer system is extremely resilient and will be able to survive this conversion to online. So for us, net-net, it's a huge advantage to be able to do this. And I do expect it to grow, but I don't expect it to be double digit or 20%, 30% of our sales in the near term.

Okay. All right. And I have also one more question on the EBITDA margin. In June, you have a very strong EBITDA margin, which is around 16%, and I'm trying to understand the sustainability of this margin. I mean is it possible to just explain what drove the margin in June? I mean is it FX? Or is it the inventory cost? Or is it the country breakdown? I mean, what further drivers behind the 16% EBITDA margin?

There are 3 main ingredients: one of them is low raw material prices. The second one is capacity utilization of almost up to -- very close to 100%, I have to say. It's one of our highest months that really decreased the fixed costs on each unit of product that we have been producing. And also, the currency helped positively, the parity of -- euro-dollar parity has helped positively. And also, as I told you, the pressure that we had on the OpEx items has been very helpful to increase this level. Your question about the sustainability of this, we really see -- quarter 3, at least, we see that it is going to be sustainable. Maybe the OpEx ratio can be a little bit higher, but not much. We are intending to keep our gain here. But we think that quarter 3 will have a very positive impact as well. And quarter 4, as I told you in our guidance, we have factored in the effect of COVID, some kind of, let's say, lockdown in some of the countries, partial lockdown, not as much as April and May, that's why we have kept it low. But if Q4 is not going to be that -- let's say, there is no pandemic effect in Q4, let's say, which is not the expectation to be honest right now, then, of course, the profitability will be higher. That's our expectation.

[Operator Instructions] Our next question is a webcast question from [ Bitalia Vuz ] with [ PAMCO ]. And I quote: "Congrats for the results. You mentioned April, May, June, your time line growth. Could you also share this in terms of Turkey and international separately in similar format?"

No, we can't. This is not something that we share. And that was -- why we showed this is because we wanted to inform our investors on what the effect of COVID. And most probably we are not going to be sharing this in the later calls in the future as well. But we would like you to understand better what was the effect. So -- but Turkey and -- this is not information that we disclose.

We have another audio question from Kurbay, Berna with BGC Partners.

I have 2 questions. The first one is about -- on new product portfolio or the shifting product portfolio that you mentioned earlier in the presentation. I was wondering if this new portfolio is more in reference to the inclusion of items like ventilators going forward in your product offering. Or is it more on -- more about shifting consumer preferences in terms of what they demand from their typical refrigerator or washing machine? And I was wondering if you could provide some color on that. And how you see that affecting profitability going forward? And my second question is on the fantastic free cash flow generation that you had this quarter, and actually in the last 2 quarters. I was wondering if some of the elements here, like the working capital situation, also the strict focus on costs, liquidity, elimination of businesses and also lowering the CapEx had some perhaps temporary impact on what we see as the free cash flow performance. But going forward, where would you see the free cash flow generation? In other words, what metrics would you recommend us to look at to have a better understanding of where we would see free cash flow generation going forward?

Yes. Let me answer the first question, and Polat will talk about the working capital. The new range of products we're talking about is much more related to our core business. This is a time when we need to be extremely focused on what we do good, and that is cost competitiveness, that is very efficient scale manufacturing. We're going through a unique period in Arçelik actually, where the first time in a very long time, we are changing our product designs, so full ranges. We are simplifying them. We are taking complexity out of production, reducing the amount of SKUs. And on top of it, we're actually adding to these new platforms user benefits, which are very much related to the changes that they're demanding from appliances during this COVID period. So I'm very excited. And yes, I think you will see these products making a real difference. Now this is what I was referring to. We do not see ventilators and medical equipment as a new business line at the moment. That was purely a social benefit and a duty to society that we tried to fulfill. And I think we did a very good job with that, and we'll leave it at that. Polat?

On the free cash flow generation, of course, there is a -- I have to say that there is an impact of contraction of our sales. When you contract, of course, our working capital is affected positively through that. But our positive results on cash flow is not really coming from this contraction, it's really coming from the inventory management, mainly, and also the receivables management. And on the receivables side, I'm sure that most of you are following. I mean we have been able to better our results for the last 3 years now. Almost every quarter, we are trying to keep -- and to be honest with you, we have been able to do that, and we think that we have proved ourselves to really continue with that, and we are really serious about working capital management. Inventory was a problematic issue. I think that we can have some kind of inventory increase in the coming months in the -- at the end of this year, meaning quarter 4. But in quarter 3, we will still have lower inventory. But we have to keep the healthy levels of inventory. But I'm sure -- and our expectation as a company is to keep the efficiency that we have created -- at least some of the efficiency that we have created in inventory management. So for both of those items, I think that this is going to be sustainable. On the CapEx side, of course, you're right. This is a temporary period, and we are going to have -- we are going to go back to our normal CapEx spending when things are more clear in the future for us. But this free cash flow generation, at least some of this generation is going to be kept for the future quarters that we are going to be living in.

And if I may ask one final question. Do you see the current environment -- and given that you have quite a lot of cash now and more, maybe providing you with more of an opportunity to embark on other inorganic growth opportunities?

Actually, as we repeat in our -- all of our calls, we are really looking at -- we are active in the M&A market, and we are looking for opportunities that would fit Arçelik. Yes, of course, some of the cash would be used for that. But right now, there is nothing that we can share with you. But yes, that is one of the reasons why we have high cash in our balance sheet -- one of the reasons, not the only reason.

[Operator Instructions] We have a follow-up question from the line of Demirtas, Cemal with Ata Invest.

I have a question about, again, in the revenue mix: white goods versus consumer electronics and others. As far as I see from your numbers, when we look at year-over-year, I see an increase in the consumer electronics and others. The share in those items in your consolidated revenues, it's increased from 25% to 30%. Were there any specific reasons for increases in those items, like consumer electronics and others? And do you think the growth in those areas would be sustainable in the second half of the year? And my second question is, do you expect any one-offs in the second half of the year or any further spin-offs.

For the numbers for consumer electronics is mainly due to this effect that Hakan has explained. People are living at home, and one of the things that -- because there was a lot of both shares for people making holidays, eating out, et cetera, that has been diverted to some other products, and consumer electronics has got a better attraction than the appliances on this one. And that's why we have been able to sell more TVs and, more or less, all of this growth is coming from TV business. And I have to say that our base value in 2019 was really low, mainly due to the market conditions there. On the other side, on the other segment, you know that we have air conditioners and small domestic appliances. And because of the weather, especially in Turkey, the air conditioner demand was really huge. And we have been selling whatever we are producing actually. And also, SDA has been one of the most affected segment in this COVID environment. That's why the numbers are like that. And on the one-off question that you have, we do not really expect any one-offs in the remainder of the year.

And any incentives from the -- to the quality kind of things you were having in the past? But I don't see in…

Not a significant amount, Cemal, actually. Yes, we are working on our efforts on this one, but we do not really expect huge numbers on these incentives right now.

Okay. And maybe one last thing. About the interest rate, I see that your interest rate expense as declining to some extent, and you are managing your CapEx effectively. Do we expect further decline in the interest rate expense side in the second half of the year?

Cemal, this is Hande. Let me take this one. As Polat and Hakan, they mentioned during the call, we have done some repricing on our existing structural loan portfolio based on the central bank regulations. We have seen some impact in the first half of the year, but it was quite limited because it was mainly the early penalty, early termination penalties that we had to pay out while repricing these loans. But in the second half of the year, there will be another impact coming from all these repricing. So we have done some significant savings in that front. And there will also be some savings that are leading into year 2021 as well. So of course, these are some numbers, around 40 million for the remainder of the year and another 20 million for next year, not as sizable as we should expect, because the interest rates are already -- have already struck bottom right now, and the central bank has been on hold for 2 times in a row now. But the financial expenses will continue to improve.

We have another follow-up question from the line of Kilickiran, Hanzade with JPMorgan.

My question is on your demand outlook next year because it looks like that 2020 is much better than expected. And you mentioned about replacement demand helping to unlock the pent-up demand, particularly in Turkey. Do you believe that we have ground in Turkey for this strong replacement demand to continue next year? Or next year, growth may come more from recovery in the international markets other than Turkey? I'm trying to understand if Turkey can sustain the growth going into 2021.

Hakan, I think you can take this one.

No, no, I'm here. I think essentially, it's very, very difficult to predict demand at the moment. What I can tell you it's going to be different market to market. At the moment, the geopolitical risk is coming on top of what COVID is creating. So I think emerging markets will be more severely impacted as they have less chance of providing liquidity to their economies. And I think it will take them longer-than-expected time to recover. Having said that, they also have a lot of pent-up demand, a very young demographic and a high-growth trajectory. So I think those 2 will balance each other out. And 2021, we should see, if, of course, we don't see a massive degradation of the situation with COVID, and again, we don't go through mass closures, we should see the markets recovering in 2021 to the 2019 levels. If your question is more related to Turkey, Turkey is already seeing year-on-year declines for a few years. So I don't expect it to go down much further, even if we go through a difficult COVID winter season. I think demand is solid in Turkey, and we'll see recovery faster than the rest of Europe. I hope that answers your question.

Yes, this is very good. And the final question about your pricing. Do you plan to increase your prices in the second half of this year?

Please, Hakan, go ahead.

No, go ahead, Polat.

All right. For Turkey, if you're talking about Turkey, we are watching the currency movement, I mean, Turkish lira depreciation very closely. And if we are going to be -- we are going to -- if we are not going to be able to offset the currency effect with the raw material prices, of course, we will need to. But as of now, it seems like our prices are at a level that is going to be sustained like that. For the other markets, we have already increased prices, especially in the countries which was -- whose currency was depreciated a lot, like South Africa, Pakistan. And we are going to see positive effects of this in the second half of the year with the higher demand in both of the countries. But in Europe, of course, the competition climate is really tough. We have been winning market share, and we expect our competition to strike back. And that's why I don't think that our -- if we really do not need it, I don't think that we are going to be increasing prices in our main markets in Europe.

The next question is from a webcast participant, Mr. [ Mimiso Wilbam ] with [ Ambrosia Capital ]. And I quote, "Can you please comment on the M&A strategy and opportunities for Arçelik in the past-COVID environment?" And we also have another webcast question from Mr. [ Uro Lupingnar ] with [ TEB Porfoy ]. And I quote, "Would you mind commenting on Philips selling its home appliance unit? Would you be interested in such assets? Or if a Chinese buyer emerges, would it change competition dynamics much?"

For the M&A strategy, as I have explained most probably before, I mean we have appetite. We have been looking at the market for some players. But today, there's nothing that I can share with you. But Arçelik, because of the cash that we are sitting on right now, Arçelik has the ability to be a candidate for a lot of companies if they are on sale. But the second question is related, so we are getting this question a lot on Philips case. Right now, we do not have any connection with this case right now. So -- but we know that -- and we are closely looking at the environment on the Philips sale on the SDA side. But right now, we do not -- we didn't act at all, I have to say.

[Operator Instructions]

I think that's it. Polat?

I think so. If -- because we are -- we have a strict -- time's up for us actually. Hakan has to leave. I can answer your questions if Hakan leaves because he has strict deadline for this. Thank you very much, Hakan. I'll continue.

Thank you. Thank you very much to you and everyone else.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.