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 AS conference call and live webcast to present and discuss the full year 2020 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Polat Sen, Chief Financial Officer; Mr. Özkan Çimen, Finance and Enterprise Risk Director; and Mr. Orkun Inanbil, IR manager. Mr. Sen, you may now proceed.

Thank you very much. Welcome, everybody, for Arçelik 2020 Q4 Earnings Call. So I'd like to start with the quarter 4 highlights of our company. As you may have seen, we had a very strong top line growth at 59% in Turkish lira terms for the quarter 4. The strong demand has continued in many markets that we operate in. High margins are sustained at quarter 4, was the best quarter for 2020. The positive performance in free cash flow continues, and we have been able to generate free cash flow of TRY 629 million just in quarter 4. Further improvement leads to historical lows in working capital and leverage. Our working capital has declined to 20.5% and net working capital to sales ratio. And also, our leverage has gone down under 1, and now it's 0.95x of the EBITDA. As you -- all of you know, we have announced a strategic partnership acquisition of Hitachi Global Life Solutions International operation, 60%, at the end of 2020. And also, a very important development for 2020 for us is also that we are the industry leader in Dow Jones Sustainable Index for the second year in a row. So I'll start with this news actually. That is an important achievement for Arçelik. We have been recognized by one of the most important sustainable indices as the industry leader, once again. Arçelik is the only Turkish industrial company to be listed in this index in the emerging markets category for 4 consecutive years. As you can see that we have increased our score almost 10 points this year. And the closest competitor that we have in our industry are lower than our scores, and we have been able to increase the gap between the first and the second. You -- I've already informed you about the deal with Hitachi at the end 2020. I'll just touch upon the highlights of this. We are increasing our foothold in APAC. And Hitachi and Arçelik is going to be -- Hitachi is going to be establishing an SPV which is going to be owning sales and production subsidiaries of Hitachi outside Japan. Arçelik has agreed to pay $300 million for 60% of this SPV. And we are going to have a long-term license agreement with Hitachi for the Hitachi brand outside Japan for our products. You already know the rationale actually, the appetite for the APAC region to find the brand and operate for a long time for our -- in our strategic road map, and we have been able to fulfill this with this acquisition. And also, we are going to be financing the deal with the cash in hand, thanks to strong cash generation performance in the last 2 years. Of course, there are conditions. We still did not close the deal. Our expectation is April 2021. Of course, it's going to be subject to approval from regulatory authorities. The operational review is -- there are manufacturing facilities in China and Thailand. Mainly the sales companies are located in Southeast Asian countries like Thailand, China, Hong Kong, Taiwan, Singapore, Malaysia, Indonesia, Vietnam. And Hitachi has an important market share in those countries. And it is going to be an addition of around 3,800 people to our workforce when the deal is completed. I'll continue with the Q4 key factors on sales and margins. As I told you, in Q4, we have been able to grow by 59% on revenue. And this is mainly due to strong demand in all our key markets. And of course, there is the Turkish lira depreciation in Q4, which led to an increase of 59% in Turkish lira terms. In terms of gross margin, we have been able to post 35.9% gross margin, which is also an important achievement. It's one of the highest in the last maybe 5 to 10 years for a quarter. And we -- I mean, the main reason for this is the highest capacity utilization achieved for 2020 in quarter 4. All our factories were full. And also weaker U.S. dollar against euro and GBP also helped the gross margin positively. And even though there were some increases in Q4 in the raw material prices, we have been able to keep the stable low level of the raw material prices mainly due to the longer contracts that we had. In terms of EBITDA margin, we have been able to hit to 14.5%. Maybe only negative thing that I can speak about is the -- on quarter-on-quarter, our OpEx to sales ratio is higher. I'll just give a brief information about the highlights. The working capital to sales ratio is historically is at the lowest level. It's 20.5%. As you may remember, at the end of 2014, I guess, we were even over 50% -- 40%, sorry. And we have been able to decrease this working capital sales ratio almost by half in 5 years' time. That was the main concentration and one of the main focuses of the company management. And we have focused on the SKUs to optimization and the inventory management was also very effective. But the main part, the main contribution came from the receivable collection performance, especially in the domestic market. And even though the financial situation for small, medium enterprises in Turkey were tough, their access to cash was tough in this COVID time, we have been able to collect much more quicker than the normal times from our dealers. This working capital management has led to a strong cash generation. And for all those 4 quarters, we have been able to post positive free cash flow. Quarter 2 and quarter 3 was very high. In quarter 4, we have been able to post around TRY 629 million. That is mainly due to the CapEx is seasonally higher. It's very traditional for our industry at the last quarter. So even though there was a high CapEx, the free cash flow generation was still strong. And capacity investments, we have tried to, as I told you, our capacities are almost full right now, and we are trying to increase capacity in some of the factories that we have by some efficiency work. And those investments also led to some increase in the CapEx side. But we are going to keep -- that is one of our most important concentrations for the coming years, is keeping on the cash generation in the coming year as well. The balance sheet is very strong as well. Our net leverage has decreased last year -- I mean, let's start with 2018. In June 2018, we were over 3x of EBITDA, our net debt to EBITDA. At the end of the year, it was 2.4. Last year at the end of the year, it was 2.4 again. This year, we have been able to go under 1x. So that is a remarkable achievement for Arçelik. And you have seen the signs of that in the last quarter when I was -- during this earnings call. But this 1x is really an important achievement for Arçelik. So but there is an important issue for 2021. Around 60% of our total financial debt is due in 2021 and mainly rising from the bonds that we have. There are 2 Turkish lira bonds, which are around TRY 500 million each. And we also have, in September, EUR 350 million bond rollover. So -- but this net leverage situation is giving us the opportunity to be flexible when we are refinancing ourselves. So we are looking at all the opportunities. We do not feel any rush. So we can use our cash whenever the financial markets are beneficial for us to be tapping the market, we are going to use it. But in terms of eurobond rollover, we are getting the question, how are we going to do that. We are working on a lot of options, which includes investment loans and normal issuance or green bond issuance, or a combination of several options. But the good thing is that we are comfortable in terms of timing and access to liquidity. In terms of raw material trends, this year was positive. Actually, in quarter 4, the prices started to rise. As you can see, this is the market prices that we give you in every earnings call. In Q4, the prices has risen in both metals and plastics. But thanks to previously secured contracts, margin procurement costs did not really change dramatically in quarter 4. But of course, these increases is going to be affecting us, especially on quarter 1 of 2021. And we are trying to take the necessary precautions as quickly as possible in order not to get affected from our profitability. So I'm going to leave the floor to Orkun to update you about the regional market dynamics.

Good evening, everyone. As usual, I will start with the domestic markets. Turkish markets, especially the MDA market, has been declining for the last 3 years in 2018 and '19. And 2020 was the year when we have seen the market came back strongly despite -- especially in such an environment. When you look at the fourth quarter, we see around 26% unit growth, which brings the annual growth to 16% in Turkish MDA6 market. When you look at the air conditioner segment, in this quarter, we see a 3% decline. But to defend, this is not the best quarter for air conditioner segment. It's the second and the third quarter usually. And when you look at the annual growth according to the manufacturers association, the total growth in air conditioner segment is also around 30% in unit terms. So also, we have seen strong growth in this segment as well. TV segment, we are tracking to retail sales from a [ final ] research company. So this figure is blown into just 2-month period, October and November. We haven't seen yet December figures yet. But looking at the 2-month figure, we again see a 1% growth for TV segment. And when we look at the yearly growth, I mean, the 11-month growth in TV segment, is also around 15% in near term again. So 2020 was briefly a very strong year for all the segments in the domestic marketplace. As you can see in the below chart, starting with June, the market has always reported double-digit growth rates. I mean, skyrocketing in July and then keeping a steady trend around 20% to 30% in the remaining part of the year. And obviously, we have been facing questions about whether this demand will go on and half the demand is being impacted by the increasing interest rates in Turkey. We have designed such a slide to show the development of the interest rates and the appliance demand over the past month. As you can see, for example, in 2017, we had the tax incentive -- special consumption tax incentive where we have seen huge growth, whereas the interest rate was relatively stable. Obviously, the summer period of 2018 was a real turbulent times. We had seen both interest rates going up and also the Turkish lira [ declining ] very easily suddenly. But looking at, for example, the last few months, as you can see, the interest rates are going up again. But as you can see from the line and also the previous chart, the market was able to sustain a growth around 20% to 30% unit growth on a monthly basis. And this is something we have been always sharing with our analyst and investors because the products are basic product, are necessity products. And especially the environment now, we are living through a stay-at-home concept. It's really helping the industry as a whole because as people spend more time at home as they cannot go outside, eat outside and they cannot spend some money like vacations, et cetera. So instead of spending as their income -- as they cannot spend some part of their income to such areas, they have been investing into their homes and obviously replacing their appliances, and which is obviously helping our industry as a whole. And this is why that we wanted to again touch this issue again. As you can see, consumer confidence or government incentives are really impacting the replacement demand rather than the interest rates. Yes, interest rates are indirectly impacting the demand through higher or lower liquidity, but we cannot say that there is a direct high correlation between interest rates and the demand in the domestic appliance market. If we touch the European market, our major export markets, we have the figures for many markets, excluding Germany. We do not have the December figure yet, but looking at our other markets, we see high-growth rates, especially in October and especially in December. The growth rate in December, it might be surprising for you. But I mean the numbers are correct. I mean, the growth was something like 35% or 40% on a year-on-year basis. It's the pre-Christmas period, we usually see sales increase. But we also see some other factors like due to some last counts, for example, in some countries, the Black Friday shifted to December, for example, instead of November, which boosted the sales in December period. Obviously, the same concept -- stay-at-home concept is helping also the industry also in the European market. And looking at the whole year, I can say that the growth in West Europe is around mid-single digits. And also the growth in East Europe is around the low double-digit figures in unit terms for the whole year. So briefly, Europe was also very strong during this year -- I mean, during 2020. And also, this is also reflected inside our performance and our financials. Looking at our own performance in Q4, in line with the high demand in European markets, we have seen double-digit revenue growth in countries like Spain, Italy, U.K. I can say the increase in Germany was also high single digits. The only negative performance we see was coming from France in the last quarter. And again, looking at our turnover in Eastern Europe, I can say that our growth was double digits. Significantly high figures in East European countries, major European countries like Russia, Poland, Romania and Ukraine. So as you can see from the below chart, the top line growth in these regions were very strong. Obviously, strong euro and pound against dollar, and on the other hand, weaker Turkish lira help us to -- helped our top line growth in the fourth quarter. When you look at Defy, the Africa, obviously, again, we see again increasing sales in our subsidiary in South Africa. When you look at Defy, the top line growth was around 12% in local currency. And this growth, especially the growth in third quarter and the fourth quarter, helped Defy to reach almost -- to reach last year's figures in terms of top line. If you remember, it was the worst quarter in Defy history. The sales was down by 45% in Q2. Despite the quarter, the performance in -- thanks to the performance in third quarter and the first quarter, yearly sales were in line with 2019. While keeping the top line in line with last year, Defy improved its margin, thanks to tight expense control, the price adjustments and also the decrease in interest rates in the country. And when you move to Asia Pacific, obviously, the markets like Pakistan and Singer Bangladesh were negatively impacted, especially in Q2. There were complete lockdowns for almost 2 months when there was no production and [ no field ]. So again, we see a strong demand in Q3, and again, very strong demand in Q4. And the growth in Q4 was around 50%, almost 50% in Pakistan. And this brought the yearly decline to below 20%. Before, we were talking a decline around 30%, 35% in local currency. But with a strong performance in the last quarter, the decline has narrowed down to below 20%. Similar listing at Bangladesh. Again, strong performance. The top line growth was around 29%. And like this slide, Singer was also able to reach last year's -- almost last year's top line in its home market. And another area in the Asia Pacific, the ASEAN region. And our revenue in the last quarter was around USD 27 million. And I can say that it was almost in line with last year. So briefly, the fourth quarter was strong in terms of demand in all regions. And in some markets -- in most markets in Europe, we have seen growth compared to last year. And when you look at the other markets, the 3 markets like South Africa, Pakistan and Singer Bangladesh, South Africa and Bangladesh were able to reach last year's performance in terms of top line, and all in part, some seems to be below last year's performance. But we should not forget that these 3 countries had a very negative second quarter in 2020. Well, now I will leave the stage to Mr. Özkan Çimen for sales and financial.

Good evening, everyone. I will continue with sales by region slide. Like in Q3, Turkey and international sales are very strong in Q4. Turkey, with 63% quarterly growth led to 37% year-to-date growth. All the -- almost all the international markets performed very well compared to last year and compared to Q3 as well. We have a top line growth of 58% in Q4, which leads to 24% year-to-date growth. Let me go to the detail of the regional sales. Q4 breakdown is slightly different than last year. Eastern Europe shares increased by 1 point while West Europe share decreased. In Q4, international sales have higher share in -- around 70%, compared to 65% in year-to-date figures. This is mainly almost all the international markets had double-digit growth compared to last year. We see that Pakistan and Bangladesh, which were affected by the COVID are recovering from the COVID impact in Q4. In the next slide, I will talk about the sales bridge, Turkey and international breakdown. Organic growth coming from Turkey is TRY 1.5 billion, whereas international sales growth is TRY 0.8 billion, Including the FX impact of TRY 2.6 billion, we reached to TRY 13 billion TL sales in Q4. Excluding the currency impact of international business, the organic growth is 13% in Q4. Now I will highlight some of the lines in the P&L. As you will see, 59% growth in Q4 compared to last year. We were able to keep our high gross profit margin as in Q3, even better than Q3. Compared to last year, gross profit margin is 130 basis points higher. And in year-to-date figures, 180 basis points higher. Long-term contracts, which are minimizing the impact of material increase as well as the capacity utilization and partially the FX impact by U.S. dollar was, a bit compared to euro and GBP, impacted our gross profit margin. Even the operating expenses, a little bit higher than Q3, we were able to -- still able to control our OpEx with the high gross profit margin that leads us to 12% EBIT and 14.5% EBITDA level. In the bottom line, we see, again, TRY 1.51 billion net income, which is almost 3x higher than last quarter in 2019.

Just a small correction for this slide. On the right side of the table, the heading says -- mistakenly written there 9 months, but those are 12 months results, just for correction.

I move with the cash and financial debt slide. We have around TRY 12 billion in cash, which is mainly in major currencies, euro, dollar and pound. TRY 16 billion -- we have TRY 16 billion of debt, half of it is bonds and half of it is loan portfolio. And of the loan portfolio of TRY 4.7 billion in Turkish lira borrowing. When you look at the maturity of the debt, we see that 62% is due in 2021. And of this, eurobond is 20% and TRY-related loans and bonds, 26%. On the last slide, I will mention about the cash flow. Each quarter, we have positive cash flow coming from profit and as well as the net working capital improvement. And then we include the FX conversion and after the TRY 1.5 billion CapEx, we see that in the right corner, there is TRY 1.6 billion other item, which is mainly interest payments. And we reached TRY 12 billion cash and balance with a strong positive cash contribution. Now I will give floor to Polat for 2021 guidance.

Thank you, Özkan. I'll start with our performance on our 2020 guidance first before I move to 2021. So our last guidance for revenue, we have almost beaten all of the guidance that we have given to the market. Especially on the Turkey side, the growth in the Turkish lira revenue was much stronger than our expectation, and we have finished the year by 37% growth. Our guidance was 25% to 30%. And on the international side, we were expecting less than 5% decline, and it was -- it was 2% decline. So it's almost the same. And in terms of consolidated growth, we are very close to our guidance. And on the profitability side, our expectation on the EBITDA margin was over 11.5%. And we have been able to give around 13.1%. Without the one-offs, we are at 12.4%. So I think that we can say that it exceeds target as well. On the working capital to sales ratio, this was one of the positive surprises at the year-end. That is that has procured better than our expectations. And instead of less than 27%, we have been able to go almost down to 20%. So in terms of CapEx, we are a little bit out of the range. We have around EUR 215 million of CapEx, which our guidance was EUR 180 million. But especially in Q4, we started to invest in the extra capacity needs that we have. So we can say that the main reason of this difference is coming from those investments. When we look at 2021, so it's in the same format. Our guidance for Turkey is 15% to 20% growth in Turkey. We are expecting -- in terms of market growth, we are expecting around low single digit growth. And the remaining is going to be coming from the price increases that we have. And on the international side, our expectation is more than 5% growth in Arçelik. We have high ambitions in most of the markets, and we expect this to be fulfilled. And a lot of the markets were closed last year, and we expect to fulfill this gap of last year. And in consolidated terms, we are expecting around 20% growth. On profitability side, the EBITDA that we are expecting is around 11%, mainly due to the increases in the raw material prices. It can be over that or under that, but it should be around 11%. On the working capital to sales ratio, yes, we are down to 20%. But I have to say that, especially in terms of inventory, we are out of inventory on the finished goods side for the last almost 6 months. And it's going to continue like that for quarter 1 as well. But that is not a healthy level of inventory. So when the demand is going to be going down, we are going to go back to healthy levels. So that may increase the working capital to sales ratio to 25% level. So that is going to be our guidance for working capital to sales. On the CapEx side, we are expecting to spend around EUR 220 million. We didn't write euros there, so it's a small mistake that we are going to correct later on, but it's our expectation. So this is all from us right now. And if you have any questions, we are more than happy to answer. Thank you.

[Operator Instructions] The first question comes from the line of Moore, James with Redburn.

It's James Moore from Redburn in London. I have 3 questions, if I could. I was -- the first question is about your guidance for 2021. You talked about above 5% international sales growth. Could you say what you expect for Europe versus the other international growth rates? Maybe we go one at a time, if that's easier for you?

Yes, that's okay for me. 5% is for the overall international markets. We are not talking about only European market, and we don't give guidance for each and every market. So that is how we disclose the information. So you can consider the 5% for all the markets that we are operating in.

I understood that. I just wondered if you could give any flavor on whether Europe is above average or below average?

It should be around the average because Europe is our main market. So you can't really expect it's going to be much more higher or much more lower than that.

And the second question was on your profitability and your margin coming down 200 basis points from raw material, which makes a lot of sense to me, with steel and plastics. Could you say what sort of raw material headwind you expect in absolute terms for the full year? And when do you expect to sort of raise prices in relation to raw materials to pass this on?

Yes. First of all, I have to correct the 200 basis points. Because actually, when you make it apple-to-apple, in 2020, we had some one-offs. And without the one-offs, our EBITDA level is around 12.4%. So we are talking about maybe 140 basis points would be a better way to put it. And in terms of increases in the raw materials, of course, the raw material increases is much more than this 140 basis points if we do nothing. And what we are doing right now is we are trying to -- it's not only our problem. It's the problem of all our, let's say, all our competitors. So we are trying to pass this on, some of this on, to the market. And we started trying that in most of the markets, including Turkey, U.K., South Africa, the other big European markets that we have. And we also see that we are not the only ones who are affected from this. And we hear that our competitors are doing the same movement in the market. So most probably, we will be able to pass some of this. But our expectation that 11%, I don't really think that I am expecting -- I'm positively, let's say, optimistic about this 11%. I don't really expect to be under this in 2021 if things are not really going to change so dramatically. But 140 basis points is a kind of a sensible, let's say, expectation for loss of margin for 2021. That's what we see. And as you said, yes, the raw material prices has risen. But our expectation is quarter 1 and quarter 2, the raw material price is going to be at its highest levels. But starting from quarter 3, maybe more effectively in quarter 4, our expectation is going to be -- there is going to be some decreases in the raw material markets you're going to see.

Well, very interesting. Maybe if I could just understand your answer a little bit more. In the past, historically, when we've had a similar surge in steel prices, when you take the total headwind that you get in your P&L as extra raw material expense, what proportion do you typically pass on? Do you typically pass on roughly 100% or only 50% or 140%? What's the sort of net relationship been in the past, and has it changed over the years?

To be honest with you, there is no exact answer for that question because the 2 detailed analysis and the increases in the past is not really -- sometimes, the increases are permanent; sometimes, it's more temporary. The timing and the problems behind it really changes from time to time. So it's a very dynamic analysis. And -- but what I can say is Arçelik is one of the companies who has the ability to really reflect those kinds of increases to the price of mainly our -- we are operating in Turkey, and we have our own dealership network, exclusive leadership network. And we are really -- it's easier than the other countries, let me say. And that's like 30% of our overall sales. But for the other markets, we also have visibility in some of the markets. In some of the markets, it takes too much time, sometimes 6 months to pass on the prices. Sometimes it's less. But what I can tell you, in my past, I have seen that we have been able to pass on the, let's say, this kind of raw material increases or currency effect. It's not the only one. The currency also is an important factor as well. Both of them very effectively. You cannot really see in Arçelik's history that our profitability or EBITDA levels has risen or fallen very dramatically in any of those raw material increases. It may happen for 1 quarter, but the second quarter, the market really finds its balance. Thank you.

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

Actually, majority of my questions were answered, but I have one question on pricing. How are the pricing amount at the moment? Because when we check the inflation data, we observed very strong pricing in your sector, actually. So is this something positive for the first quarter, even though I mean, raw material prices are increasing?

Is this something, Hanzade, that you are asking for Turkey only or for the overall market?

I mean, for the overall market, but I can only see the pricing for Turkey at the moment for the sector.

Right. Yes, your analysis is correct for our industry in Turkey, the pricing environment. The issue is that we are effective right now in quarter 1. And we have seen that was coming, actually, as you have seen in Q4. Mainly thanks to our long-term contracts, we didn't really get any hit of those increases in the raw material prices. But we knew that it was coming up. So we tried to position ourselves in Turkey very effectively. And to be honest, there are 2 factors, which helped us in this pricing. We didn't have to pass on all the increases actually. One of them is the high capacity utilization ratio led to lower transformation costs, lower overheads in the factory. I mean we are producing almost around 90%, more than 90% in our home appliance factories in Turkey right now. And that continues in Q1 as well. So that is really helping us to ease the effects of the raw material prices. The second issue is the currency. As you know, Turkish lira has appreciated since the end of the year until now, and that also helped us for our Turkish lira pricing, especially. And we are really closely watching what the situation is going to be in the first quarter in terms of profitability, et cetera. If there's going to be a need, we are going to do the price increase. And we see that we are not being, as I told, all our competitors are having the same problems. So we are watching the market very closely. We do not want to lose any market share, not only in Turkey, for the other markets as well. So -- but we see that when this kind of price increase in the raw materials happen, it's easier for us to explain with our all competitors to the market that, that is a necessity. So as I've told in some of the markets, it takes a little bit more time; some of them, less time. But I think that we will be able to keep our profitability levels high and our capacity utilization high. It looks like it's going to be high in the quarter 1 and 2 as well. Because to be honest with you, we are producing and we are selling whatever we can produce right now. And hopefully, that will continue until the end of Q2. And the pipelines are empty, I have to say. Not only our dealers and also our customers outside Turkey are having a lot of inventory problems. So at some point of time, when the demand is becoming weaker, there will be some more months to fulfill the pipeline which is empty right now.

Polat, what is the total price increase you did in the last quarter? I mean, are we entering into first Q with like 20% price increase already? I mean something like this in domestic market?

The domestic market in the last quarter remained around 15%.

15%. And you mentioned about that -- I mean, your raw material contracts are now about to expire. So I presume that you are renewing your contracts now. So what is the increase that you are already agreeing on these raw material contracts? Or you won't work on a contract basis because you are looking for a decline in prices in the later part of the year, right?

Yes. The issue is that, of course, what we are showing you is the market price. We don't disclose our prices to the market. But of course, we are trying to keep our negotiation performance, our alternative suppliers and try to keep our increase less than the market increase. That is how we were. And most probably, it's going to be under the numbers that you have seen in the presentation for Q4. And was there any other question? I missed anything?

No. So you already agreed with your contracts. I mean, you already signed contracts for 2021, right? Is it still like a long-term contract? Okay.

No, no. As the prices are high right now, and we think that these prices are going to continue, we try to refrain ourselves from making long-term contracts right now because we don't feel that it's the right timing for a long-term contract. But of course, for quarterly -- and there is a problem. I have to say that there is a problem with the raw material shortages in some of the sectors as well. So we have to really keep the balance of this pricing and the shortages and being able to find the material. And I'm sure that every one of you also looking at the increased prices of logistics from China, the container prices and rising of quadruples in the last 2, 3 months. And that is also affecting. So we try to keep all of them under one balance. And as I've told, I mean, these are price increases that we are trying to do and also the raw materials, high capacity utilization, the currency movements. I think that we are going to be able to keep our guidance in Q1, especially on the profitability side.

Okay. All right. And my final question is, I presume, just want to be sure, you didn't include Hitachi in your guidance, right?

No, we didn't. We didn't want to change the apple-to-apple comparison which is better. Whenever we close the deal, we will start including it.

I mean, will the inclusion, I mean made the inclusion have a positive impact on your working capital versus your guidance?

Yes, that is our expectation, because the working capital is very low. And our expectation, with the additional Hitachi, is going to be taking down the working capital to sales ratio.

The next question comes from the line of Kurbay, Berna with BGC Partners.

Congratulations on the results. Actually, my -- many of my questions are already answered. But just going back to the last point, you mentioned that you haven't included Hitachi in here. And I was going to actually ask about the operating cash flow that you foresee for this year, given that your working capital to sales guidance reflects some increase. I was just wondering how you actually see this year's operating cash flow performance versus last year. So including Hitachi, do you see it being higher year-on-year despite a possible decline in EBITDA margin? Or I mean, should we be -- should we expect some deterioration year-on-year in terms of your operating cash flow margin?

Of course, I mean, we tried to disclose the information about Hitachi, but the business plan with our partner has not been finalized yet. So it really would not be correct for me before we shake hands on a business plan to speculate about what is going to be the numbers. But what I can tell you is, as I've told, the working capital is very low in the assets that we are getting. And in terms of revenue, you know the increase is going to be adding up almost TRY 1 billion. In terms of EBITDA, we have already given you the -- that it's around 7%, as long as I remember, the EBITDA level. So the inclusion of Hitachi is going to be diluting our EBITDA -- EBIT. But not much because in the very near future, our expectation is to create the synergies, especially on the procurement side, and the effect is going to be minimal at the end of the day. But in terms of the other issues that you may come up with, we can help you some more. But as I told you, our business plan has not been finalized yet. So it's really hard for me to give more than this information as of now.

That's very helpful. And also just to touch upon the capacity utilization comments that you've already made. So for the first quarter, you said that you expect finished goods inventory to be 0 basically. And going into second quarter, I guess you can see your order book for -- until spring or maybe until the end of June at this point. And you see capacity utilization level similar to what you've seen in the fourth quarter, is another question I had.

The capacity utilization is going to be high for the next 2 quarters. That is our expectation. So I don't know if the second quarter is going to be as high as quarter 1, but it is going to be higher than our traditional capacity utilization. But what I can tell you is it's going to be high. It seems like that right now.

And should that be attributed to strength in all markets across the board? Or are there particular markets that you see as a trend?

It's all across the world. I mean, from Middle East to North Africa, from Asia to China to Turkey, U.S.A., Africa, almost all the markets, we are having high demand actually.

Excellent. And final question from my end is about raw material prices. Your chart was showing 20%, 25% increase in metal prices, I think, at the end of the fourth quarter versus the end of the third quarter. But you're saying that this is the market price, and that's not the cost increase you insured in fourth quarter. Is that the correct interpretation?

Yes. Actually, the index that you have seen was -- third quarter was, for the metals, it was around 77 to 90, which is around maybe 15% increase for metals. What we have written there is quarter end to quarter end, actually. The average is around this, the 15%. And in terms of plastic, it's less than that. As I told you, our increases is going to be less than those increases. But is not -- I mean, for the -- what we are showing here is only the metal and plastics. We are not able to show you all the components one by one. So those are the raw materials that we use, and those are representing almost like 30% of all our materials. But other than that, we are buying a lot of electronic components, electromechanical components like motors and compressors and a lot of [ wells ] and heaters, that kind of stuff. The increases in those components are not that much high. So a blended version is going to be less than that, plus the negotiation performance and the alternative suppliers that we are trying to come up with. We are planning to keep it under the market, I have to say.

I think the steel prices that most people look at show much higher increases. So that's looking -- in a little bit of a surprise. When you look at steel prices, the increases appear to be a lot more significant than what your metal price index here shows that. But I guess, this is -- this reflects your cost base, right?

Yes. The steel prices are -- cold rolled steel has increased much more than the others. But for example, the stainless steel increases are not that high. It has increased as well. But when you look at our raw materials, maybe 12% is only cold rolled steel or types of carbon steel that we have. And I don't think that, that is going to be too much of a problem for us because the remainder of all the materials that we use is not going to be increasing that much. So blended version, as I told you, is going to be much more less than that.

The next question comes from the line of Demirtas Cemal with ATA Invest.

My first question is about the tax rate. I see that tax rate in fourth quarter is lower compared to the first 9 months average. I see the number at around 15%. And the second question is about the fixed position -- Arçelik fixed position stand? And do you see any impact of a stronger euro-dollar parity on your financials? And the third one is the January trends. How do you see the outlook, what are the indications for [ sellout rates ] in January so far?

Cemal, the first question, we didn't -- there was a problem in the line. Can you ask the first question again? The second and third, we noticed.

Okay. Tax rate. My first question was tax rate. I see that in fourth quarter, your tax rate looks lower, around 15% compared to previous quarters. That was the first one. The second one was a fixed position and euro dollar. And the third one was January trend so far.

Okay. So I will take this. Regarding the tax rate, actually, for the domestic side, as you know, we have incentives that are being utilized, mainly in Turkey. So when we have higher profit, the utilization ratio is increasing. But at the end, the effective tax rate in Turkey is low. And in the European countries where we have higher sales, the effective tax rate is higher compared to Turkey. So the breakdown of the mix impact of the countries are actually changing the bottom line tax impact. So we do not have a major change in the effective tax rate of individual countries. However, the shift of profit or change of profit of each country is impacting that ratio. And regarding the second question, the FX management. So we all -- as you know, we always try to keep the position as square as possible. We have a forecast of FX position each month, and we have -- we tried to close all the provisions. We follow the -- following the KPS daily. So we don't have impact of FX fluctuation. However, due to the closing of hedging instruments, we have swap rates difference, which is booked in the P&L.

Maybe the third question, I'll take it. You asked about the January selling sell-out rates. It still is very strong. I mean, selling and sell-out rates are -- we don't really see a big difference. So as I told, whatever we can sell is being sold to the market. So -- for Turkey, I'm talking about. And it's pretty much the same as what we get from the other markets as well, the same situation. So I can tell that we don't really see any signs of slowdown in this respect.

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

I have a question about your dividend policy in 2020. I mean after paying Hitachi, you will still have plenty of cash. Is there any risk on your dividend? Or you are still on track to distribute the dividends in 2021?

As you know, the last 2 years, we did not distribute any dividends. But our policy still remains the same. In long term, we want to distribute 50% of our earnings. So we didn't decide on the dividend distribution yet until the general assembly. But what I can tell right now is our intention is to keep our policy in the long term time. So as you can see, our cash situation is right now very positive. And we are going to take into consideration about the dividend distribution when the time comes.

The next question comes from the line of Özdemir, Alper with Azimut Asset Management.

There has been a semiconductor shortage, chip shortage for automotive company recently that led these companies to cut production for a certain period. I wonder if it's relevant for the white goods industry and specifically for Arçelik?

Yes, we are following up the semiconductor shortages in the automotive industry. But I have to say that the semiconductors produced for the white goods industry is a kind of different technology than the automotive industry. So yes, there is a general shortage, but it's not as severe as the automotive industry. It's not something that is not manageable right now for us. So we don't really see a big problem on the semiconductor side. There are a lot of raw materials which are, I can say, short. Because they are short, the prices have increased. I mean, you can do the math here. But there is nothing that really would lead to a shutdown in a factory in our industry yet. That's what we see.

We have a follow-up question from the line of Moore, James with Redburn.

Yes. Can I return to your pricing power comment that you expect to pass on all the raw material pressure through price rises in the P&L in the end? And I'm just thinking about the fact that we have margins down 140 basis points this year in 2021. Does that mean you expect the price rises to spill over into, say, the first half of 2022? And could you end up having a net positive margin effect in the second year with the headwind entirely contained, if you like, all other things being equal at current prices in this year and a positive reversal in '22?

Yes. The issue is whatever -- I mean, to be honest with you, as I told you before, it's a very dynamic growth, and it's really moving very quickly, and there are a lot of factors that is really affecting. And it's not really working then mechanically. And it's -- I don't think that we are able to make a comment on this, that mathematically, what's going to happen in the first half and what's going to happen in the second half. Because whenever, for example, the raw material prices start to decrease, then our customers are going to be opting for decrease in the prices. So it's a kind of a thing. I mean, we got to be fair to that and they got to be fair to us when we need to increase the prices. And when we need to decrease the prices, we need to decrease the prices. So I don't really expect a big change between the quarters or, let's say, the half of the years. I am expecting very close profitability as of today. But as I told you, things can change very quickly because whenever, for example, in Turkey, the currency changes on north or south, I mean it's not easy to reflect everything right away until we see it permanent. Otherwise, we really play with the market too much, and that's not correct. We should be fair to our customers. So it's really hard to foresee from now, to answer your question with a concrete answer. But from now, what I see, it's not going to be too different than 2 distant halves for the year 2021.

[Operator Instructions] We will now move on to our webcast participants. The next question is from Dhaloomal, Ali with Bank of America. Congratulations for the strong results. My question is about dividend plans for 2021. I understand this will be decided by the Board, but how much is the technicality distributable dividend given the small distribution in 2020? Also, second -- other question, any guidance on net leverage by year-end? And then a third question, should you opt to issue a new eurobond, can you indicate what would be your preference in terms of size and currency?

Okay. I'll leave the third question to Özkan. I'll try to answer the other 2. The dividend, I think that I have explained it extensively already on the question from the TV partners -- sorry, [ JV ] so we don't really see a big difference actually than that. Our intention is to pay 50% in long term. And according to our plans, we are going to decide on when we are getting closer to general assembly. As of now, I do not have any concrete answer if we are going to be distributing, or if we distribute, how much we are going to distribute. I don't have the answers for that. The second question was -- just a moment. The second question was leverage -- sorry, the leverage. The expectation for the leverage for the end of the year actually, as you know, the Hitachi situation is -- I mean, when we close the deal, actually, the company doesn't have any leverage at all. So that is going to be coming in, but we are going to be paying some amount to -- for Hitachi. And actually, we are going to see a different number. But apples-to-apples, our expectation is, of course, the dividend is also a very big and important factor, which we don't know right now. So it's really whatever number that I tell you, it's going to be a speculation until I know about this dividend issue for sure. So that's what I can answer. I will give the floor to Özkan for the third question on bonds.

We have several options on the table. Either we will go with a long-term investment loan or eurobond. So if we were to have some investment loan, the amount of the euro loans will be lower. But assuming there is no investment loan, we will try to have a similar amount of renewable for the eurobond.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Sen for any closing comments. Thank you.

I would like to thank everybody who spared their time to listen to us at that time. Our 2020 results was very strong. And hopefully, we would like to continue those strong results on both balance sheet and P&L in 2021 as well. The company management is really geared for that. If you have any further questions on our 2020 results, our Investor Relations team are at your service. You can get in touch with them. Once again, thank you very much, and good evening to everybody.

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