Arçelik Anonim Sirketi (ARCLK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the Arcelik Conference Call and live webcast to present and discuss the full year 2021 financial results. [Operator Instructions] 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. Ozkan Cimen, Finance and Enterprise Risk Director; and Mr. Oktem Soylemez, Senior Investor Relations Specialist. Mr. Sen, you may now proceed.

Thank you very much. Good morning and good afternoon, ladies and gentlemen. Welcome to our fourth quarter 2021 results webcast. I am here with Ozkan and Oktem. First of all, I'd like to take the opportunity to thank all of our employees for their hard work and dedication through this -- in 2021. I'll start with the highlights of the fourth quarter. Our consolidated net sales was TRY 22.5 billion in this very, very challenging quarter, registering 69% year-on-year and 24% quarter-on-quarter growth, while the growth was 42% year-on-year organically. In Turkey, MDA6 market has experienced pull-forward demand, particularly in November and December with higher inflation expectations. As expected, the demand was contracted in European markets in fourth quarter on a yearly basis. Our EBITDA margin was 9.4% in the last quarter of 2021, bringing the annual margin to 10.6%, which is in line with our guidance of around 11%. In fourth quarter '21, there were two one-off items, which will be discussed later. Excluding the impact of those one-off items, the EBITDA margin was 8.1% in fourth quarter and 10.1% in 2021. Our OpEx to sales ratio in fourth quarter went up by 271 basis points to 23.8%, compared to the last quarter, while slightly improved on the yearly basis. On an annual basis, the ratio was improved by 169 basis points to 22.7% in 2021. Net working capital to sales ratio was 26.3% in the last quarter, flattish compared to a quarter ago, and in line with our guidance with no major deviation. The leverage was realized at 2.4x in 2021. If the value of the shares bought back as of year-end was added back, it would have 0.26x positive impact on the leverage and bring it to 2.14x. Also adding 0.29x positive impact of annualized EBITDA and cash contribution of our recent acquisitions, the leverage would go further down to 1.86x, which is much more comparable to last year's number. In November, Arcelik's approach of placing sustainability at the center of its business has been awarded with 2 important initiatives. Arcelik has registered the highest score in Dow Jones Sustainability Index in its industry and awarded His Royal Highness The Prince of Wales' Terra Carta Seal. Next slide, please. Before going into operational and financial details, I'd like to open up the sustainability awards a little bit more. We are more than happy to increase our score by 7 points compared to 2020, and to achieve being the highest scoring household durables company in Dow Jones Sustainability Index. Having the highest score in 3 years in a row as of 2021 was a powerful indicator of Arcelik's commitment to a sustainable future. In November, Arcelik was one of the 45 companies across the world, who has been awarded His Royal Highness The Prince of Wales' Terra Carta Seal. Terra Carta Seal recognizes global companies, which are driving innovation and demonstrating their commitment to and momentum towards the creation of genuinely sustainable markets. We are very proud to be the first and only company of our industry across the world and to be the first and only company in Turkey, which received the Seal. Our net sales on a consolidated basis increased by 69% year-on-year to TRY 22.5 billion in fourth quarter '21, while the growth was 24% on quarter-on-quarter basis. The main drivers of the growth were Turkish lira depreciation on both quarters and annual wise. Price increases on both quarter-on-quarter and year-on-year, and inorganic growth volume also contributed to the growth. Organically, the growth was standing at 42% year-on-year. Consolidated gross profit margin was 28.8% in fourth quarter, slightly better than on a quarterly basis, while significant rise in the raw material prices, coupled with the Turkish lira depreciation was the main reason of 726 basis points contraction year-on-year. Additionally, normalized capacity utilization rate and strong U.S. dollar against Euro were also having negative impact on gross margin. On the right-hand side, you can see consolidated EBITDA margin. In the last quarter of 2021, EBITDA margin was 9.4%, down by 47 basis points quarter-on-quarter, including 129 basis points positive impact of one-off items in the fourth quarter. On a yearly basis, despite having better OpEx to sales ratio, significantly increased raw material costs resulted in 513 basis points contraction in the EBITDA margin. Negative goodwill of Whirlpool Manisa plant acquisition and the sale of subsidiary were the main one-off items that created the positive impact of 129 basis points. Excluding this, EBITDA margin was 8.1% in the fourth quarter. On the other hand, 271 basis points of deterioration in OpEx to sales was mainly due to higher guarantee, installation and transportation, and advertising expenses. Let me move to the next slide, please. I'll continue with the domestic market. In fourth quarter, despite having quite a high base, Turkish MDA6 market was down by -- only by 1% in unit terms. Particularly starting from November, the market experienced pull-forward demand with consumers anticipation of further increase in prices. In November and December, the market was up by 7% and 8%, respectively, which has limited the further contraction. As previous quarters, Arcelik again outperformed the market and strengthened its market share. Turkish MDA6 market was up by 9% year-on-year in 2021, while Arcelik grew by 15%. Pull forward demand also was experienced in the AC market. Market grew by 34% year-on-year in the fourth quarter, while our AC sales have increased by 27%. TV market continued to shrink in the fourth quarter. Next slide, please. Let me move on to the European market. In fourth quarter, the demand of the majority of the European countries were contracted on a yearly basis, mainly attributable to the strong base in 2020. In Western Europe, consumer demand was growing in France, Belgium and Italy, while there was contraction in U.K., Germany and Spain, in 2021 on a yearly basis. In Eastern Europe, sellouts were quite strong despite the high base and up by mid- to high-single digits 2021, year-on-year. Major markets such as Russia, Poland, Ukraine and Romania were contributing to that strong demand in Eastern Europe, each of them contributing at different degrees. With our Beko brand, we have captured the market leadership position in France in 2021, and strengthened our market leadership position in U.K. In Eastern Europe, except for Poland, the demand in other major countries such as Russia, Romania and Ukraine have contracted. On an annual basis, 2021 has been a year of growth for all these countries. Beko continued its leadership position in Poland, while Romanian local Euro Arctic and Beko brand keep their first and second position in Romania. Next slide, please. The share of European markets in our total sales was 45% in the fourth quarter, of which 31% was coming from Western Europe and 14% from Eastern Europe. As demand was weaker in Western European countries on both quarterly and yearly basis in fourth quarter, Arcelik benefited from acquiring Whirlpool Manisa Factory. The additional units provided by that acquisition and the price increases were the main drivers of the revenue growth of around 1% quarter-on-quarter and 10% year-on-year Euro terms. With our Beko brand, we have captured the market leadership position in France in 2021 and strengthened our market leadership position in the U.K. In the Eastern Europe, our revenue grow by -- has grown by almost 5% on a quarterly basis and 3% on an yearly basis in the fourth quarter, mainly thanks to the price increases. Beko continued its leadership position in Poland, while our Romanian local Euro Arctic brand is first and second position. When I move to Africa, Middle East and APAC, having a total of 8% share in our consolidated sales, Africa and Middle East region posted 14% quarterly and 2% yearly growth in the fourth quarter in Euro terms. Defy's net sales in South Africa and units sold increased by double digits in fourth quarter '21, thanks to the positive impact of Christmas and Black Friday. In '21, despite the challenging operating environment, Defy was able to pose double-digit revenue growth compared to 2020. As of '21, Defy strengthened its leadership position in South Africa with significant market share gain. In Egypt, net sales declined in fourth quarter on a quarterly basis, almost 15% in Euro terms due to off-season impact. On the other hand, on a yearly basis, sales were up by 60%, thanks to price increases together with higher Beko share in a growing market. Beko Egypt succeeded to increase its market share, particularly in cooling and dishwasher categories and Beko became market leader in dishwasher category as of fourth quarter. APAC sales continued to have larger shares in our consolidated net sales with Arcelik-Hitachi contribution. In the fourth quarter, Arcelik-Hitachi net sales have increased by a high single digit in Euro terms, generating 13% of our total sales. Despite the challenging fourth quarter due to inflationary pressure, together with the off-season impact, our sales in Pakistan with Dawlance brand posted 21% growth in Euro terms in fourth quarter year-on-year, bringing yearly growth to 65% in 2021, thanks to both, again, the price increases and the growth in units that we have sold. Singer, in Bangladesh, net sales was contracted in mid-single digits in Bangladesh Taka terms, mainly due to the ongoing pandemic impact. With the help of strong first and second quarter, Singer closed '21 -- 2021, with mid-single-digit higher revenue on a yearly basis. I'll continue with the raw material prices. In this quarter, average metal price index was softened moderately compared to the previous quarter, mainly due to the increase in capacity usage in China. On the contrary, as we mentioned in the previous quarters, the energy crisis that world has been facing with -- for a while, coupled with the power cuts in China, within the scope of its Blue Sky motto had a negative impact on especially the plastic prices in the fourth quarter. Now I'm going to hand over to Ozkan to take you through the numbers, then I'll take over again on the guidance side.

Thank you, Polat. I will continue with the sales bridge and growth slide. In Q4, Turkey sales grew by 48.4% year-on-year, with the impact of price increases and the pull forward demand. International sales grew by 78%. Out of this growth, 13.6% was coming from the acquisition. Again, a similar ratio to 37.9% of FX impact, as a result of significant Turkish lira depreciation in the last quarter and 1.1% was organic. On the right-hand side, you can see our regional sales breakdown. With the recent acquisitions, we have more diversified operating geographies. The share of Turkey in total sales has gone down by 4% to 31% in 2021 versus 2022. So if we move to the next slide, summary of financials. Here you can see the summary of our Q4 and full year 2021 financials. Figures include the impact of our acquisitions. As mentioned in the beginning of our call today, recent acquisitions, price increases and Turkish lira depreciation in Q4 resulted strong revenue growth of 69% on an yearly basis and 24% on a quarterly basis. Excluding the contribution of acquisitions, organic growth of 42% year-on-year. Following 28% year-on-year growth in 2022, Arcelik was able to register quite solid growth of 67% in 2021 and reached TRY 68 billion net sales. Our consolidated gross margin was 28.8% in Q4, bringing 2021 gross margin to 30%, reflecting 375 basis points contraction on a yearly basis. This contraction was mainly as a result of the increase in the raw material prices. In Q4, EBITDA margin was contracted by 47 basis points quarter-on-quarter to 9.4%, which is mainly due to higher OpEx compared to Q3. Excluding 129 basis points positive impact of one-off items, the EBITDA margin was 8.1%. And we had 2 one-off items as Polat has mentioned, and the impact of those was 25 basis points of our [ subsidiary ] sales and 104 basis points was coming from negative goodwill of Whirlpool Manisa factory acquisition. Despite having improved OpEx sales ratio in 2021 full year, the hit in the gross margin driven by higher raw material costs, reflected into an annual EBITDA margin as well. In 2021, EBITDA margin was decreased by 309 basis points to 10.6%. Excluding one-off impact, EBITDA margin was 10.1% in 2021. If we go to the net income line, which is TRY 893 million in Q4, including TRY 292 million of one-off impact. Net profit margin was flattish compared to Q3, while down by 481 basis points year-on-year. As of 2021, we have recorded TRY 3.3 billion net profit, which is 4.8% of our revenue and 13% higher than last year. Net profit contribution coming from our acquisitions were TRY 302 million in Q4 and TRY 357 million in full year. Next slide, leverage slide and our gross debt slide. Our leverage was 2.4x as of end of 2021. Despite cash out of acquisitions and recognizing only 6 months of EBITDA and cash contribution from the acquired companies and buyback program, our leverage was still within healthy levels. We have continued buyback in the last quarter of 2021. And our buyback at year-end have reached around 5.4% of the total sales. When the total value of the share record as of last year is deducted from net debt, the leverage will be down by 0.26x, which takes us to 2.14x. In addition to that, annualized EBITDA and cash contribution of the acquisitions would have 0.29x positive impact on leverage. Thus, if we take into account of those calculations, the leverage will be 1.86x. On the right-hand side, you can see our loan and bond portfolio. As of end of '21, we have TRY 31 billion equivalent debt, and 27% of debt is in Turkish lira. We are financing our Turkish business working capital needs through Turkish lira loans. The new loans in Q4 were limited, therefore, we have been able to maintain a flattish Turkish effective interest rate around 18%. As of end of 2021, we have TRY 16 billion cash in our balance sheet, well diversified between geographies and 17% of our total cash is in hard currency. Turkish lira share is 8% only. Next slide is EBITDA margin and working capital sales ratio. As mentioned previously, consolidated EBITDA margin was contracted on a quarterly basis, mainly due to higher OpEx sales ratio. CapEx to sales ratio was flattish in 2021. Having a low base in 2020, last year -- the year before, the increase in net working capital resulted in negative free cash flow of TRY 3 billion in 2021. So I will leave the word to Polat for the guidance.

Thank you, Ozkan. For 2022, we are expecting our Turkey revenues to be increased around 35% year-on-year Turkish lira terms, mainly driven by price increases and mix improvements. We do not really expect market growth. So we have assumed a stagnant market, let me say. We expect our international revenues to be increased by 20% year-on-year in FX terms, including the revenues from Arcelik Hitachi and Arcelik Manisa factory, thanks to price increases and mix improvements and better market conditions. On a consolidated basis, we expect our revenues to be increased by more than 60% year-on-year in Turkish lira terms. In 2022, since near future holds a lot of uncertainties, we aim to sustain our EBITDA margin at 10.5%, around 10.5%, including the effects of the new acquisitions. In terms of net working capital to sales, we aim to keep around 25%, which we are believing as we have seen sustainable levels for Arcelik. Our CapEx guidance remains the same as last year at EUR 220 million. So I'd like to hand over for Q&A. Thank you very much for listening to us.

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

Thank you for the presentation. My first question is regarding your guidance. Roughly, what was your currency expectation or like assumption for these estimates for consolidated revenue growth more than 60%? And the other question is about the margin pressure. Do you see further margin pressure in first quarter? And any color on the demand side in the first quarter, at least in January.

Okay. I'll leave the currency assumption to Ozkan. I'll answer the second question that you have asked. The margin pressure, of course, it will continue. It seems like it will continue. But I have to say that with the price increases, especially at the end of December, I think that we have been able to overcome some of the margin issues that we have. And starting from January, out of Turkey, we have been increasing prices in almost all the markets. So that is going to ease some of the margin pressure. So -- because almost all countries are experiencing inflationary problems and that kind of price increases in an inflationary environment is easier to pass on, I have to say. So that's why quarter 1, we do not expect further contraction in the margin side. So it's not going to be that, because in quarter 4, it was a little bit unexpected actually, this currency depreciation. It came so quickly that in order for us to take action, it took time. That's why actually our fourth quarter margins, even though it was a very turbulent quarter especially in Turkey, I think that we have been able to keep the margins at a healthy level. On the demand side in quarter 1, yes, we do not really see a big increase in demand. Actually, we -- our expectation, especially in the domestic market, maybe in the first quarter, a little bit contraction, but it is still too early to say something. The January results are not so -- let's say, we don't see contraction in January results, but in coming February and March, we really have to see what will happen. But we do not really expect a huge contraction in the market in quarter 1, that's what I can say in Turkey. Out of Turkey, the -- our expectation for the markets is some single mid- to low-digit increases -- low mid-digit increases in most of the markets that we are operating in. Ozkan?

In our guidance calculations, so we have assumed the average rates to increase around 50%, 5-0 percent. So this year, Also, we need to take into account that some of the countries that we operate, the emerging markets might have comparably lower -- weak currency to euro and dollar. So therefore, we assume at least 50% -- close to 50% depreciation compared to average rate of 2020 for Turkish lira.

Okay. So the FX against Turkish lira will [ appreciate ] by 50%. Do you mean that?

Average to average yes, that is the assumption we have.

Okay. That's very good. And as a follow-up, regarding your depreciation, I see increase in the depreciation expense in fourth quarter, if I'm not mistaken. What was the reason for that?

Actually, in terms of sales, there is no big increase. But what I can say is in the last quarter of -- in the last quarter, we had some capitalizations, which impacted -- which were in the balance sheet with a higher currency rate. So that increased the depreciation a little bit. But as a percentage of sales, we don't have a big change.

Because I'm looking at the quarterly numbers, in the first 3 quarters, we had around TRY 1.2 billion. And I see more than TRY 650 million. That's what I thought. Maybe it's related to FX then.

It's mostly related to the FX because of the capitalization with the higher value of Turkish lira.

And Polat mentioned about the domestic market. Do you mean the selling sell-out rates that you mentioned about the contraction.

Sellout. In selling side, it's not -- it's still very, very strong, actually.

And despite a very significant increase last year, right, as far as I remember, in the last year in first. I think it was in first 2 months, it was more than 59%, in January it was about 59% and February it 42% increase again, when I look at my numbers. So despite a very strong base, actually, it's a low season, though. You see some increase in sellout -- selling, which means there's no inventory problem then. Do you have any idea about the inventory levels in the sector?

Hi guys, it's Oktem speaking. In the first quarter of 2021, the market was up by almost 40%. And yes, you are right to say that despite having quite high base, we are now seeing the selling is quite strong in the month of January.

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

Thank you for the presentation. I have 3 questions. The first one is related to your margin guidance drivers. Maybe I can also combine this with my second question. You are looking for around only 35% year-on-year increase in Turkish, I mean, in Turkish revenues, and you don't expect any volume increase. I understand you are looking for a flat volume. And that price increase is supposed to be lower than the average inflation in Turkey. So I mean, Turkey seems to be under pressure of margin in 2022 with these price increases. Is it true, how I am interpreting your revenue guidance? And second, I mean you're already realized margin, excluding all these one-offs was around 10.1% for the full year, and you are now guiding 10.5% roughly in 2022. So what could drive these margins up, I mean, this year, given that euro may be much weaker, and Turkish lira already depreciated? So I'm trying to understand why you have I mean, like a positive outlook for 2022. And is it possible for you to, I mean, help us to understand your loan rollover and average interest cost increase in 2022 on Turkish lira?

I'll answer the first and second one. Ozkan will answer the third one. On the -- yes, you're right. First of all, we are not assuming any volume increase in 2022 compared to 2021 in the domestic market of Turkey. So when we look at 35%, of course, if the inflation is going to be higher, that number may drive up. I think that there is an upside potential in terms of growth. But right now, as we have done our price increases, especially in 2021, the price increases came especially in the last quarter, let me say. So that's why there's an unbalanced impact there. That's why we are guiding for 35% on the growth side. But as you rightly mentioned, it's mainly coming from price increases and some mix improvement as well.

Polat, please can I just confirm this? So you are planning to increase prices at least in line with the inflation in 2022, I mean, average inflation, not the year-end inflation?

Actually, we have to really see it's not the consumer price index that we are looking at, as you understand. We have to check our costs, because even though there is inflation, if the material costs start to decrease at some point of time, I don't think that we will be in need of increasing the prices as well. So we have to check all the factors carefully, before we make an increase. We do not want to drive inflation. On the margin side, yes, you're right. Without the one-off impacts, we are at 10.1%. And to be honest with you, in this 10.1% Whirlpool and Arcelik Hitachi, let me say, Arcelik Manisa and Arcelik Hitachi is only 6 months and their margins -- average margins are lower than ours. But in 2022 -- and I have to say that when we are going to 10.1%, especially third and fourth quarter was the main factor. Actually, our first half margins were very high. But I think that we have taken necessary measures, especially the beginning of the year, we have been able to increase prices in almost all the countries that we have been operating in. In EMEA markets, Europe and MENA markets, we have been able to -- from last year to this year, we have been able to increase almost 8%, let me say not 8%, mid- to high-single digits in those markets. Other than that, in South Africa, we have been increasing prices, and we will keep on doing that in February in order to catch up the profitability and in order to catch up with the cost. So in Turkey, we have done necessary adjustments in the prices as well. So I think we are starting the year on the right note. It's not like the beginning of quarter 4 for us. We think that we have taken necessary measures, especially on both the cost side and the price side. That's why we are aiming for 10.5%. And I have to say that without the Arcelik Hitachi and Arcelik Manisa, I think that would be -- they are having a deteriorating effect of 0.5%. When you compare our guidance in 2021, 2020 as well, it's 11%, actually. With the contribution of the new acquisitions it is going down to 10.5%.

So your margins without Hitachi and Whirlpool was around 11% in 2021?

No, no, no. It's for 2022, I was talking about.

Okay. Sorry. So...

There's an effect of 2.5%.

All right. Okay. All right. But you still see some margin expansion, obviously, I mean, in 2022. So -- okay. So you are looking for some sort of easing on the input cost?

Not -- we didn't actually -- especially in the first and second quarter, we are not really expecting, let's say, relaxation on the input material costs. Maybe starting from third quarter that would be possible in some of the materials. But other than that, we do not expect this actually. Our main expectation is why we are having a better margin is that we have taken all the necessary measures, especially at the beginning of this year. And we think that is going to be helping us to achieve this margin.

If you look at our Turkish lira portfolio -- loan portfolio coming for this year -- for this year 2022, we have a roll of TRY 5 billion mostly starting from March. And each quarter, we have roughly a similar amount to roll. And if you look at the rate, starting from December, there was a huge increase in the market where the rates were more than 30%. However, at that rates, we didn't have a big amount of loan needs. But starting from March, we will face higher rates compared to our 2021 average of 18%. That means it will affect us 700 basis points minimum for the new loans, and the total amount is, as I said, TRY 5 billion to be impacted. This is not included in the working capital needs of further growth.

Additional ones. All right. Okay. So that means that there will be some EPS pressure in 2022, because of rising interest cost, right, on your projections probably?

Yes, correct. And we are monitoring this very closely to have long-term bonds in our portfolio or have a loan from a bank.

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

My question is about effective tax rate. Did the currency change have some effects on the effective tax? I see the number below -- around 10% in fourth quarter -- in full year. Do you expect this trend to continue? Could we assume around 10% to 15% or any indication on the tax rate?

Right, Cemal. As you said, the effective rate is around 10%. And actually, as you will recall, this rate has been declining because of the incentives coming from Turkey business mainly. It was related to CapEx and R&D expenditures, which reduced the cumulative effective tax rate. But as our business is growing with the other regions in the world for that the impact of Turkish business will be limited even though the tax rate goes down. So we can expect a similar rate in 2022 as well.

Okay. And like 10%.

Yes. No, no, 12%.

Do you mean 10%? Or something minus 10%? I didn't get [indiscernible] ?

10% is the average of 2021. So we can expect in a similar rate. But if the other business growth, the contribution of our non-Turkey business is higher than 2021 basis, so this will increase our effective tax rate from 10%.

[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 listening to us in our fourth quarter results. I hope it's going to be a better year in 2022. I wish health to everyone, who's listening. Thank you very much.

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