Arçelik Anonim Sirketi (ARCLK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Gaily, your Chorus Call operator. Welcome, and thank you for joining the Arçelik AS conference call and live webcast to present and discuss the first quarter 2021 financial results. [Operator Instructions] At this time, I would like to turn the conference over to Polat Sen, Chief Financial Officer; Mr. Özkan Çimen, Finance and Enterprise Risk Director; and Ms. Pinar Sahinci, Treasury manager. Mr. Sen, you may now proceed.

All right. Thank you very much. Welcome to our quarter 1 earnings call. So I'll start with the quarter highlights. As you may have seen, we have a robust top line growth of 67%, with almost TRY 13 billion revenue. There is -- we can say that there is a very strong demand in almost all of the markets that we are operating in. The gross margin is still very high. On year-on-year terms, it has increased a lot. On quarter-on-quarter, it's slightly lower, mainly due to the higher raw material prices, but we have been able to offset the effect of that with cost management and pricing. There is some improvement in OpEx to net sales ratio, both quarterly and yearly basis. And that also leads to a very good EBITDA margin of 14.6%. And the working capital has increased mainly due to the higher sales impacting the receivables and inventory levels and also the free cash flow. So our leverage also increased to 1.42x our EBITDA. The main factors that have affected our sales and margins is -- I'll start with the revenue growth. There's solid unit growth, both in Turkey and international markets, which I'm going to explain a little bit further in the coming slides. And I have to say that there's strong euro against Turkish lira, which also helped in Turkish lira increase in our revenue. On the gross margin side, gross margin is 34.5%, which is almost 300 basis points higher than last year. Compared to quarter 4, it's 1.4% less. And the capacity utilization is very high. One of the main reasons of this strong gross margin is the capacity utilization. And again, strong euro against U.S. dollars also helped our profitability, especially in the exports. There's -- the negative effect is the upward trend in the raw material prices quarter-on-quarter. On the EBITDA margin side, we are at 14.6%. The OpEx-to-sales ratio has gone down to 12 -- sorry, 22.7%. And the savings are still continuing on the OpEx side. And the strong revenue growth also helped a lot to maintain this high margin. When we look at the quarter 1 performance of Turkey, firstly, the market, as you can see on the MDA-6 side, market has grown by 40%, and the air conditioners market has grown by 43%. The TV market is strengthened by 17%. Arçelik has outperformed the market with its sellouts and have been able to record 48% higher than last year on MDA-6, 57% with the air conditioners, and minus 2% with television, which all of them are, as I told, higher than the market average. When we look at the international markets on quarter 1, you can see on the left side that we have, I mean, almost all of the markets that we are operating in is growing, except Germany and Spain. But other -- all the other markets has really reported very high growth. In some of the markets, there is also a base effect of COVID because of the lockdowns last year. But we can say that it's a very, very strong growth in all of the markets. On the West Europe side, the volume growth is mainly led by -- on our side, I mean, for actually, France and Italy, while Germany has being adversely affected by lockdowns. On the Bangladesh and Pakistan, the year has started very, very effectively. In Pakistan, the currency appreciation also supported some. And on South Africa, there is very strong recovery versus the last year's double-digit growth in volumes. And -- but I have to say that there's a lower base due to lockdown in March last year in South Africa. When we look at our performance, our international performance in quarter 1, Europe has grown. I mean West Europe has grown by 19% and East Europe has grown by almost 17%. Strong double-digit top line growth in all of the markets and -- in euro terms. In U.K. in GBP terms, we have reported the highest quarter 1 revenue ever. Our market share has increased slightly in both West and East European markets in the first 2 months period. The price index has also improved in the U.K. and Spain, thanks to price increases. On the Africa side, we have been able to grow almost by a 42% in euro terms and 37% unit growth. We have slightly gained market share in South Africa, despite the price increases. And device export units to sub-Saharan Africa countries has grown by almost 55% in quarter 1 on a yearly basis. On Asia Pacific, the growth is 46%. The contribution is getting higher and higher in Asia Pacific. And we have more than doubled the revenue in Pakistan rupee terms, supported by the new launches and recovering consumer demand, despite the third wave of COVID-19, together, of course, with a low base effect. Positive contribution from all the products, except TV, and also low base effect, led so strong top line growth of 23% in Bangladesh taka terms, again, with the low base effect of COVID. When we look at the raw material trend, which was quite negative in the quarter 1, you can see below there that the metal prices index -- this is the market price, not our [indiscernible] prices. The market's price index from Q4 to Q1 on the metal side has almost from -- it goes up from 90 to 108. On the plastic prices, it went up from 109 to 138, which are very high increases, and we have seen some of this effect in quarter 1. But we have been able to offset this with our price increases in many of the markets and also the cost effectiveness that we have been able to produce with high capacity utilization ratios. But of course, it looks like there's more to come in quarter 2 and further. So we are also making our plans accordingly for the coming quarters. So I'm going to pass the word to Özkan to continue from here.

Good evening. So I would like to mention about the sales breakdown. When we look at the turkey sales from TRY 2.8 billion to TRY 4.7 billion, with an increase of 69%. And international sales have increased by 66% from TRY 5 billion to TRY 8.3 billion. And compared with last year's first quarter, we don't see a change in Turkish sales. It's almost the same with 36% of total sales. The Western and Eastern Europe shares has declined due to the fact that Africa, Pakistan, Bangladesh and -- or Middle East shares have gone up compared to last year. Pakistan and Bangladesh continued to grow and recover as in the last quarter and also Africa lost [ a chunk ] and also supported with the sub-Saharan exports in Africa region. We move to the next slide. You can see the breakdown of the growth, 67% in total growth coming from almost similar rates from domestic and international growth. And the currency impact in the international growth is 36.0%, which leaves of 30% organic growth in international markets. I'll move with the income statement. As in the last quarter, we have TRY 13 billion sales, which is slightly less than last quarter, actually, due to the seasonality impact. We had high gross profit of 34.5%, which is 1.5% lower than last quarter, mainly impacted by the material increases that are in the cost. And compared to last year, we have a strong gross profit margin, which is around 300 basis points higher. Mainly due to price increases throughout 2020 as well as the strong euro-dollar currency, which helped to improve our margin. And when we come to the EBIT line, we don't see similar impact because the OpEx was lower compared to last quarter. Therefore, we had similar EBIT margin as in the last quarter of 12%. And again, in the EBITDA level, we reached to 14.6%, almost the same as in the last quarter, which is 5 points higher than last year, including the one-off income. So in the bottom line, we have achieved TRY 1.1 billion, which is 8.5% of sales as net income, which is the same level in last quarter, but around TRY 800 million higher than last year's first quarter. I will continue with the cash and financial debt position. We have TRY 18.2 billion equivalent debt portfolio. And we have TRY 10.2 billion cash, which is mainly in U.S. dollar and euro currencies. And then I look at the breakdown of long and short debt portfolio, TRY 11 billion is short and TRY 8 billion is long debt. And if you look at the debt measures with the profile, most of the portfolio is due in 2021. This is mainly to the bond that is due in September of EUR 350 million. And the offer TR based loans for working capital needs of domestic markets. We are evaluating the options of either long-term loan our euro bonds, depending on the market rates. We are getting prepared whenever we feel the best rates in the market and best conditions. So we are considering issuing bonds or getting a long term loan. If you look at our cash flow breakdown, as you see, we have a beginning balance of TRY 12 billion and the balance is TRY 10 billion. So TRY 2 billion cash out. And when you look at the cash out items, the CapEx level is almost the same level as last year, if we exclude the currency impact. And we have paid out TRY 1.5 billion dividend. And in the other line, around TRY 400 million, mostly coming from the interest payments of the borrowings. Those were partially financed with the additional bank borrowing TRY 1.3 billion. And in the net operational cash flow, you see minus TRY 1.7 billion, which I will mention in the coming slides. If you look at the detail of the free cash flow, we had a strong EBIT of TRY 1.9 billion. But the receivables and inventory levels have increased compared to last quarter. As you will recall, we had the lowest working capital to sales ratio in the last quarter, with a rate of 20.5%. And we have mentioned that our inventory levels are at minimum. So those were not sustainable levels, and we were expecting an increase in the inventory level to support our growth. And in addition to the increase in the inventories due to the increase of sales in domestic markets, the receivables have also gone up. At the right corner, you will see the impact of FX in our receivables and inventory. So around 3% of the increase of working capital to sales is coming from the FX impact from receivable and FX impact of inventory. And we -- as I said, this has impacted our working capital negatively. And in the end, we have a free cash flow of TRY 2 billion. But I would like to mention that we do not expect further increases within the monetary levels because we have decided to get prepared to the market and produce the inventory to -- for selected product groups. Therefore, we do not expect further deterioration in our working capital in the coming quarters. So I will give the floor to Polat for 2021 guidance.

Those strong results of quarter 1, there was a need for a change in the guidance, upward change. On the revenue side, we decided to increase our guidance for Turkey to 25% on -- around 25% growth for Turkey. On the international side in FX terms, we are expecting more than 10% growth. It could be higher than that. We try to make sure that the numbers are going to be not too ambitious, but we can easily say that we are going to be outperformed over 10% growth for international markets on the FX side. On consolidated Turkish lira terms, we are expecting more than 30% growth in the overall year. On the profitability side, mainly, I mean, we have recorded 14.6% of EBITDA margin in the first quarter. But we can see that the increases in the raw material prices looks that it's going to continue, especially in quarter 2 and quarter 3. So our margins are going to be affected from this one. So our expectation for the whole year for the EBITDA margin is going to be 12%. This is an increase we guided in the beginning of the year as 11%. Now we have increased almost by 1% on the EBITDA margin side. On the working capital to sales ratio, there is no change. We are keeping our 25%, as Çimen just explained. We moved up to 27% in the first quarter. But our expectation is that our receivables are going to come down a little bit in the coming quarters. We do not expect a big change in the inventory levels. So the working capital to sales ratio is expected to be around 25%, which is a healthy level for Arçelik. On the CapEx side, there is no change as well. We are going to keep our guidance of the -- in the beginning of the year, which was EUR 220 million. So this is all from our side the presentation. We are ready for the Q&A session right now. So we can move on to that part.

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

And congratulations for very good results. My first question is about Arçelik in second quarter. There was impressive performance in both domestic and international sites. To what extent you expect this trend to continue in the second quarter, lower inventory levels and the sell-in and sell-out rates? How much prepared are you to current trends, Especially in the international side, what are your expectations? And the other question is about the microchip issue, does it have an effect on your products and the white goods side and the consumer electronics so far? How will you manage this situation? And how long do you think it will take to normal levels? And how do you compare yourself with your peers, international/local peers in terms of procurement capabilities?

Cemal, thank you very much for the question. I'll start with the first question that you asked. Yes, the performance on both domestic and international was really very, very strong in the first quarter. And we are almost finished in April now, and you can see that our order books are closed right now. And we are going to be able to use our factories with high capacity utilization until the end of quarter 2 as well. And right now, we do not have any information which would make us think otherwise for quarter 3. So it seems like the demand will stay strong. And as you said, at the end of the year, our inventory levels were not at healthy levels. Now we have increased our inventory level a little bit, but the sales are increasing at the same time. But when we look at the sell-out performance versus inventory level, we are better than the quarter 4. So we are ready for quarter 2 very, very strongly. And the sellout looks like will go. We are very closely following the situation in the country because in some of the countries, the vaccination is complete like Israel. In some of the countries, the normal life is -- normalization is coming up like U.K. So we are trying to watch the trend in those countries, so that we can understand how our sell-out is going to be affected from the changing environment of COVID so that we can get ourselves ready for that. So right now, we haven't seen any negative -- we don't have any negative expectations for sellout as well for at least quarter 2, that is something that I can say very surely for quarter 3. Of course, things change very quickly. But right now, we do not have any data that we can say otherwise. On the chip issue side, yes, as all the industries, we have been affected as well. It's not clear as the automotive industry and -- but I have to say that we have to -- we are changing designs. We are trying to come up with solutions, which -- how we can really get rid of the problem of a chip shortage. Till now, we haven't been affected as actually in any of our factories. Our factories did not stop because of chip shortage. But the situation is really tough. And I can't say from today that it's not going to happen in the second or third quarter. It may happen because the shortage is still there. And we may be affected. But even there will be some effects, some stoppage due to chip shortage. I don't think that this is going to be very severe for Arçelik. It will be very local and very small, which could be considered as negligible right now. So we do not really see a huge problem for Arçelik, but it may be a problem, locally, in some of our products.

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

The profitability is very high. So we are going to get affected from this change. And according to our calculations for the year-end, we expect our tax rate to be affected around 300 basis points. So of course, this is just a kind of a calculation with a lot of assumptions, but this should be more or less what we can expect from this new regulation in Turkey.

[Operator Instructions] The next question is from the line of Kilickiran, Hanzade with JPMorgan.

I have 3 questions. The first one is about your pricing. You mentioned about continued strength and demand in all markets. And I mean, would it mean that you may be able to pass some of these expected raw material cost increase to your prices in all markets or you don't see any upside in the pricing at the moment after all these price increases so far happened? And the second question is, you achieved a very low OpEx over sales ratio after the savings. I mean, is this a new normal that we should be reflecting in our model, I mean, something around 22%, 23% of sales going forward? And the third question is about India. We didn't talk about this for a very long time. Is it -- I mean, is it something becoming sizable after the launch of the business? Any update on this one, please?

Hanzade, for the pricing, yes, we have increased some prices, some of the prices in some of the countries, but we continue our efforts and it seems like -- not seems like our plan is to increase prices where we can, in order to offset the effect of this raw material price increases. So that is a kind of a must for all the competitors because it is the situation for everybody. And you have seen the raw material trend, which I've shown in the presentation. So this looks like it must, and we will continue doing that until the trend will change to the other direction. So that is our expectation. On the OpEx to sales side, yes, there is a decrease. But quarter 1 has been a -- it's not time that we are spending too much, I have to say. But our expectation is to keep the OpEx to sales ratio lower than the years before. I can't tell you an exact number for your model. But what I can say is it should be less than the previous years. That is our expectation as well because, to be honest, the COVID situation is really helping the savings on the OpEx side. On India, India is -- has started the operations. And they have -- they are really selling whatever they can produce right now. It's a very, very strong market for us. And we are now working on how we can really increase our sales in India more. To be honest, we are very happy about the results. And we have been fulfilling all the capacity that we have. So it seems like the capacity is not going to be enough for us in the coming years. So we are working on plans with our partner there. How we can increase the capacity and how we can also invest in other products. So India is going well. That's what I can say right now.

The next question is from the line of Lanka, Sashank with Bank of America Merrill Lynch.

But I just have 1 question on your working capital to sales guidance. When I look at Q1, I think it was around 27% and you have mentioned an increase in inventories and receivables. Just wanted to understand -- your full year guidance is around 25%, so I just wanted to understand the direction from here because it does seem like you are guiding for working capital at the sales ratio could be lower than 25% for the rest 3 quarters. I'm assuming that sales do keep increasing in total, I just want to see how you're going to get to that number.

I will take this. So as we said, we had an increase of working capital from 20% to 27%. However, that 20% level, with level of inventory was very low. And we expect the normal level of inventory to be higher, that will take up around 25%. And when we look at the period end exchange rates compared to last year, the main impact is coming from the currency impact, which is a temporary impact, that's what we estimate. So we don't expect further increases in the inventory level. So that will take us around 25%. And in addition to that, we expect the receivables days to normalize because in Q1, we have longer term sales, which impacted our receivable value. So we -- in Q2, we expect them to turn into normal, which will take off again to 25%. So we think that 25% is the sustainable level as in our guidance.

I would like to add something to that answer, actually. And we have already seen that in the beginning of the year when we were guiding for the whole year, that we were at 20% level at Q4, but we guided the year at 25%. So we continue doing that. Actually, we did not change anything. So the cash flow is not kind of a surprise to us. So that was something that expected. So in the coming quarter, you can simply say that, this is a seasonality effect for -- and some, let's say, special issues for this year, which is the low base effect of the Q4, especially on the inventory side. So that is, in a nutshell, the situation on the net breaking capital side.

I'm sorry, the line has dropped from the questioner, but we will proceed with the other questions, if available. [Operator Instructions] The next question is from the line of Kurbay, Berna with BGC Partners.

I have a few questions. The first one is about the revenue growth guidance for Turkey. You have raised it to around 25%. And in the first quarter, revenue growth in Turkey is around 69%. And you already mentioned that on the white goods side, your shipments to the dealers was around 48%. What kind of market and pricing do you expect in the remainder of the year, because the guidance at least on the white goods side, implies revenue growth in the teens for the remainder of the year? So I was wondering what the -- whether what we saw in the first quarter was basically shipping inventory to the dealers and the retail demand, whether it was strong or perhaps not as strong? That's my first question. My second question is on the net debt-to-EBITDA figure, it's 1.4 as of the first quarter. Should we expect it to be around these levels in the remainder of the year or maybe slightly lower, perhaps as working capital normalizes? And my final question is about CapEx. You've mentioned -- you've been mentioning that the capacity utilization rate is very high, and that's actually helping reduce production costs to some extent. Do you see the need for major CapEx at any of the plants in the maybe next 2, 3 years?

All right. I'll answer the first and third question and Özkan will answer the net debt part. On the revenue growth guidance of Turkey, yes, we guided for 25%. But as you correctly pointed out, our sellout -- our sell-in was stronger than sell-out in quarter 1. So as I told, at the end of Q4, our inventory levels were not healthy, and it was the same in the channel as well for our dealers as well. So they didn't have any inventory. So some of these sales, some of this increase of this 69%, whatever, has been due to filling the inventory levels to a healthier positions that we take. So our expectation for the coming months, and I have to say that Q1 of last year was not as strong quarter 1 in Turkey. And quarter 3 and quarter 4, especially, were very, very strong. So we also have thought about this. And when we were guiding 25%, we're thinking about the high base effect of Q3 and Q4. And also, the Q1 month EBIT -- the growth was mainly due to inventory levels -- let's say, getting the inventory level to a healthy situation for both dealers and ourselves. So 25% looks like a tangible guidance to us, which I think that, personally -- as actually, we try to guide the numbers that we really feel that we are comfortable with. So I see upside potential more than downside potential on this growth guidance that we have given today. On the CapEx side, yes, capacity utilizations are high, but we really have to see how much of this demand is going to be sticking before we really make huge decisions on capacity increases. So in almost all the factories and all the products, we are looking at the situation very closely. But right now, the capacities that we have looks like they are enough for 2021. So the capacity -- the CapEx requirements that we have guided, looks like it's going to be enough for that. But for the next years, we really have to see the demand level after COVID before we can say that we are going to be investing in any capacity increases in any of our factories.

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

And just because you mentioned that, can you also give us a quick update on the Hitachi situation?

Yes. Actually, we are still working on the closing requirements. We are trying to fulfill them. So we are in line with our partner to be together. So according to our plan, our expectation is to get this done until the end of this quarter 2 and all the closing adjustments and all the closing requirements will be fulfilled by that. We don't really see an important, let's say, bump throughout the road. So it seems like things will -- things are continuing according to plan. That's what I can say.

And your guidance does not include Hitachi again, correct?

Yes. Definitely.

[Operator Instructions] The next question is from one of our webcast participants, Gupta, Anuj with Goldman Sachs. How much 48% increase in TR MDA market is matched by end consumer demand? Looking at WC, it seems you have loaded huge inventory-to-dealer network.

No. There is no huge inventory loads to network. Again, I'm going to explain once again the inventory issue. At the end of quarter 4 2020, the inventory levels were almost nothing, almost close to nothing in the dealer side. So what we have done is, we had to put this inventory to their warehouses again so that they can healthily sell. So I don't really see a kind of a push -- an artificial kind of increase in the inventories. This is the level that should be actually. So this is what we have seen on the dealer side. So all of this 48%, yes, some of the sell-out is less than that. But what I can say is, we are at a better situation right now because not having the inventory in the warehouse of our dealers is costing us market share at the end of the day. So that is not something that we want. And we have taken the necessary precautions in order not to face this problem. That is what I can say.

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

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

Yes. In the presentation, I have told, especially in Turkey, the market growth of the TV business in Turkey, the market has shrank by 17% compared to last year first quarter. So the main reason is that actually the market is shrinking. We have -- our sales has decreased by only 2% in terms of units in Turkey. And the situation is not just really so different in the other country that we operate a lot TV, which is Germany. The market actually wasn't growing there as well. So it's a market condition rather than anything else. So the chip issue has not been a problem for us in the TV business till now. But the market is shrinking. In the coming quarters, of course, we should be aware that the European Championship coming up, so there may be some increase in the quarter 2. So we are trying to get ready for this, especially on the sell-out and sell-in side. So quarter 2, expectation is a growth rather than a shrinkage for TV business. And consumer electronics is -- most of the number is TV for us. So this is the situation on the consumer electronics side.

And another question about the raw material costs. You see the prices increase to significant level for HRC, around [ 1,000 ] right now and it was [ 500 ] last year. And for the rest of the year, how do you make your procurement, for instance, that might be the strong price -- HRC price might continue until September or beyond? What are your expectations? You need to make some price increases, and it depends on the volumes, demand side. So that was a major concern about the Arçelik that was overshadowing the strong performance of the company. I just -- do you have any calculation on that, assuming that prices will stabilize at current levels or a little bit lower? What could be the impact on your margins? I think these are all included in your margin guidance or just any guesstimate?

Yes. I've just told you that actually -- yes, you have answered the question actually. Our guidance is 12%, EBITDA margin guidance is really capturing all of this. On the raw material side, our expectation for quarter 2, we know the prices of quarter 2, and it increases, and we know that it's going to increase. It is going to be -- we don't expect a change on upward trend in quarter 3 as well. But it is going to slow down. The pace will slow down for the increase. But starting from quarter 4, our expectation is the raw material prices to stabilize. So we have taken into account all of these changes for raw materials. At the same time, we are planning some price increases in some of the markets that we operate in and most of the markets that we operate in. And this 12% EBITDA guidance is capturing all of the assumptions that I've just explained.

[Operator Instructions] We have a follow-up question from the line of Kurbay, Berna with BGC Partners.

Just wanted to clarify something you mentioned earlier about the impact of the increase in the corporate tax rate. You've said there would be around 300 basis points impact, if I understood correctly. Is this the impact you would observe on the net profit? Or is this -- your effective tax rate was around 18% last year. Does that mean that it's going to go up to 21% this year?

It is the effective tax rate.

Okay. And that 300 basis points is versus last year or...

No, not last year. What I'm saying is if -- I mean, this year's tax rate is going to be -- may be different than last year, mainly due to the profit distribution around the countries. So I do not know right now -- from now what will be the effective tax rate of today. But this change is going to be affecting us around 300 basis points in terms of effective tax rate. If it is going to be 15% this year, it has to be 18%. If it's going to be 18%, it's going to be to 21%. That's what I tried to tell actually.

[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.

Right. Thank you very much for everybody for sparing their evening to Arçelik. So if you have any further questions, our Investor Relations team is happy to answer tomorrow or from tonight. Thank you very much for joining the call.

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