Arçelik Anonim Sirketi (ARCLK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Vassilios, your Chorus Call operator. Welcome, and thank you for joining the Arcelik conference call and live webcast to present and discuss the Third Quarter 2024 financial results. At this time, I would like to turn the conference over to Mr. Baris Alparslan, Chief Financial Officer; Ms. Mine Sule Yazgan, Finance and ERM Executive Director; Ms. Delal Alver, Capital Markets Compliance Senior Lead and Mr. Sezer Ercan, Investor Relations Senior Lead. Mr. Alparslan you may now proceed.

Thank you very much. Good morning and good afternoon, ladies and gentlemen. Welcome to our third quarter 2024 financial results webcast. This presentation contains the company's financial information prepared according to IFRS by application of IAS 29 inflation accounting provisions. Let me start with the highlights of the third quarter. We generated TRY 105.4 billion revenues with a gross margin of 26.4% in the third quarter, reflecting a 13.8% sales growth year-on-year in real terms. Inorganic growth due to Europe and MENA transactions closed as of April 1, enabled that growth. In Turkey, we observed a weaker demand in both wholesale and retail markets across major product groups in third quarter. However, international demand slightly improved in Q3. Among all major markets, Europe and Africa performed relatively better. Our OpEx over sales ratio is 26.1% for the quarter. With the impact of the acquired European operations, our operating expenses have increased roughly 1.5 points year-on-year, predominantly caused by increasing personnel expenses and sales and marketing expenses. We have recorded a slightly weaker adjusted EBITDA compared to the previous quarter with a margin of 4.6% for the period. Our adjusted EBITDA calculation excludes all one-off income and expenses such as income related with the change in contingent liabilities, transaction expenses regarding Europe and MENA deals and restructuring costs. Our net working capital over sales ratio as of the third quarter is 22.7%, reflecting a substantial improvement year-on-year with the contribution of these transactions. Our leverage is 4.29% as of the third quarter, corresponding to an increase both quarterly and year-on-year due to the increase in our borrowings and weaker EBITDA. We include our adjusted EBITDA in the calculation of leverage ratio for the period. In Q3, we delivered a 13.8% of revenue growth year-on-year, recording 105.4 billion consolidated revenues in Turkish lira terms. Inorganic growth had a significant contribution to the quarter -- to the growth in the quarter, where we were faced with a slowdown in demand in local markets. However, growth in international demand slightly contributed to this growth. Our gross profit margin for Q3 is 26.4%, which is 2.9 points lower on a year-on-year basis. This is due to challenging pricing environment, unfavorable product mix in the quarter and increasing raw material costs year-on-year. We recorded an adjusted EBITDA margin of 4.6% quarterly due to lower gross profitability and mainly higher OpEx, as explained. In the third quarter in euro terms, local sales showed an increase by 10.5% on a yearly basis. Growth was mainly due to price increases in euro terms. However, real figures in Turkish lira reflects a 10.5% contraction in local market year-on-year. This is simply because the growth in CPI for the period was substantially greater than the change in the FX rate. International revenues increased substantially by 58.1% in euro terms on a yearly basis with contribution of inorganic growth. Contribution of acquired entities to the consolidated sales revenue was EUR 656 million for the quarter. Organic sales volume increased slightly, but challenging pricing environment in international markets remain unchanged. Figures in Turkish lira shows 28.9% growth in international markets. On the right-hand side, you can see our regional sales breakdown. Turkey share in total revenues declined to 30% in Q3 in comparison with 39% of share for the same quarter of last year. Western Europe share and total revenues jumped to 34% from 23%, where CIS and Eastern Europe market has 18% share in total revenues, heading up to 52% with the impact of the transaction. Revenues generated in APAC region declined by almost 3 points and constitutes 9% of total shares in the third quarter. Africa and Middle East region generate almost 8% of total revenues, corresponding to roughly 2 points decline. Due to slowdown in local demand in the third quarter, year-to-date growth figures declined in comparison with the first half MDA6 market demand. In the first 8 months of the year, sales volume grew by 6.6%. Despite our relatively lower growth, we sustained our strong leadership in the market. Volumes in the air conditioning market still reflects a substantial growth over 20% in the first 8 months of the year, following a robust growth in the first half to retail low base impact and early summer this year. In Q3, we have compensated the underperformance we had in the air conditioning segment in the first half due to strong air conditioning sales this quarter. Retail TV sales volume decreased by 12.8% year-to-date, which is slightly below the market. With 10% decline in local revenues year-on-year, we generated TRY 32.1 billion revenue in Turkiye with declining volumes in the MDA segment, strong unit growth in air conditioning and flattish TV sales. The share of domestic market in total business decreased by 7 points and ended up at 30% of total revenues as of the third quarter. Moving to the European market. Having 52% share in total consolidated revenue in the third quarter, revenues generated in Europe increased almost by 90% in euro terms with the contribution of acquired entities compared to the same quarter of last year. Consumer demand in Western Europe has started to show significant recovery signs in the quarter in key markets such as U.K., Italy, Germany, Spain, Belgium and Austria, solid growth has been observed in sales volume. However, slowdown continues in France, albeit with a softer pace. Having 34% of share in total sales revenue recovery continues in the Western Europe market. As before, we preserve the market leadership with a slightly improved pricing ability in the market compared to the last year. Meanwhile, in Eastern Europe, robust demand growth continued in the third quarter. Major markets in the region point out a great recovery year-to-date. In Eastern Europe, having 18% share in total sales, Beko managed to maintain its market leadership despite the slight underperformance in the region. The revenues generated in Africa and Middle East region constitutes 8% of consolidated sales in -- in euro terms, sales within the region grew more than 28%, thanks to strong demand growth in Africa, despite lower demand in Middle East throughout the quarter. contribution of the acquired entities has limited the decline in sales units in the MENA region. Consumer demand in South Africa for MDA6 products grew by 3% in unit terms year-on-year. Device exports within Africa continued to grow substantially by a rate of 28% in the same period. In euro terms, figures are 9% and 32%, respectively. On a quarterly basis, device domestic sales in South Africa and exports within the region grew over 10% in sales unit which corresponds to roughly 20% growth in euro terms as Defy maintains its strong leadership in the South African market. As another key market in the region, demand in Egypt was weaker, both year-on-year and quarterly due to market instability and currency fluctuations. Despite the challenges in market conditions, Beko Egypt's revenues remained flattish year-on-year in euro terms, unlike 55% growth in local currency. Quarterly figures show a strong recovery with a growth rate of over 40% both in euro terms and in local currency. On the other hand, having 9% share in consolidated revenues APAC Home Appliances landscape continues to face challenges due to rising cost of living, political instabilities and housing crisis. Flash floods and typhoons in the region caused even a more negative outlook. Despite the challenges, sales in APAC region increased by almost 5% year-on-year in euro terms, thanks to substantial demand growth in Pakistan and Thailand in Q3. In Pakistan, sales revenue showed robust growth year-on-year, both in euro terms and sales volume, corresponding to 20% and 17% increase, respectively. In contrast, figures reflect a slowdown due to seasonality and increasing competition. In Bangladesh, we achieved a revenue growth of over 7% in local currency. However, figures in Europe showed a slight contraction due to the depreciation of the local currency. Sales revenue is significantly lower on a quarterly basis due to seasonality. When we move to the raw material costs due to the decline in global demand, increased policy rates, decreased energy and input costs, both metal and plastic raw material prices have started to decline in the last quarter. Metal raw prices remained flattish year-on-year, although we have observed some fluctuations in the last quarter. Minor increase is expected in the last quarter. However, a slight increase in metal raw material costs is expected for the upcoming quarters. In accordance with our expectations, we have forward contracts for most of our exposure, hence, we are not expecting a major raw material cost increase in the short term. After increasing costs for consecutive quarters, average plastic prices are substantially higher year-on-year despite declining costs in the last quarter. Having said that, we anticipate a slowdown in the decline within the next quarter with no hikes on the chemical side. With that, I pass on to Mine for the financial performance section.

Thank you, Baris. Good morning and good afternoon. Here is the summary of our third quarter financial aspect inflation accounting both year-on-year and quarter-on-quarter comparison besides 9 months cumulative results. Consolidated revenues were TRY 105.4 million during the third quarter reflecting 14% growth year-over-year and 5% decline quarterly. Year-to-date results pointed 14% growth, including inorganic sales. Gross profitability is weaker, both in comparison with the same period of last year and a quarterly basis. Margins are lower by 2.9 and 1.3 points, respectively. Year-to-date gross margin is 1.9 points weaker on a yearly basis. Our operating profit and adjusted EBITDA margins were substantially weaker in the second quarter due to lower gross profitability and growth in CapEx. Net financial expenses grew substantially by 57% year-over-year and 65% quarterly. This is mostly due to increased net interest expenses in line with growing debt and increasing hedging costs. As a result of inflationary costing we booked around 2.4 million of share monetary gain in the third quarter, which was TRY 1.9 billion last quarter and TRY 6.4 billion last year. year-over-year decrease is due to small indexing impact compared to the last year. Consequently, net loss of TRY 5.6 billion in the third quarter, which corresponds to minus 5.3% net margin, declined in 6.9 year-over-year and 4.5 point quarterly. Our net debt increased by roughly TRY 13 billion compared to previous quarter and ended up at TRY 97.1 billion. After the borrowings in the third quarter, now our long-term borrowings comprise more than 55% of our total borrowings. It was almost severe in the fourth quarter. As of third quarter, cash and cash equivalents decreased around TRY 32 billion compared to 2023 year-end and booked at TRY 34.3 billion in our balance sheet with well diversification between currencies. 29% of our total cash is euro and 11% in USD, Turkish lira share was 22% as of end of September. Turkish share in total debt was 25% as of third quarter whereas euro and USD shares were 41% and 21%, respectively. You may find the details regarding our debt currency breakdown and effective interest rates of foreign loans and bond portfolio on the figure at the right hand side. As a result of growth in fact, along with weaker adjusted EBITDA year-on-year, our leverage was up to 4.29x as of third quarter, but not confirmed with the current level of our leverage. Hence, we do not find any major borrowing in the short term. On top of that, our brand new Egypt and Bangladesh facilities were not generating EBITDA but had a significant contribution in borrowings will start to contribute to EBITDA as of last quarter, which will support leverage decrease accordingly. And finally, as we start to see a recovery in our EBITDA in line with our restructuring plan to bring out synergies and cost savings, we expect to see a gradual decrease in leverage. On the upper left corner, you can see our adjusted EBITDA margin bridge, narrowing gross margin due to product mix and higher costs. [indiscernible] increasing OpEx led to a significantly lower margin of 4.6%. The change in G&A and one adjustments had a positive impact on calculation. Adjusted EBITDA excludes income related with a change in contingent liabilities, one of transaction expenses regarding book transactions and restructuring goals. On the upper right corner, net working capital to sales ratio has been shown. The ratio is 22.7% as of third quarter decreased by more than 2 points year-on-year as a part of [ 3Q ] from transactions completed as of first of April. On the lower left corner, you can see our CapEx to sales ratio, which is 4.6% in the third quarter. This was mainly due to Egypt and Bangladesh investments. There are also partial impact of integration and optimization costs we have started to book as a part of restructuring our European business. Finally, on the lower right corner, due to net loss in the period increased capital expenditures and cash outflow for trade payables it generates a negative cash flow of approximately TRY 25.1 billion. So I leave the floor more to Baris to walk us through our guidance. Thank you.

Thank you very much, Mine. Based on our most recent forecast, including Europe and MENA transactions completed as of April 1, we have revised our 2024 guidance. We maintain our flattish expectation over local sales in real terms in 2024, considering the stagnant demand environment for the rest of the year. Also, we keep our guidance on international revenues corresponding to 50% increase year-on-year in euro terms, including the impact of inorganic growth. We have revised our guidance regarding our adjusted EBITDA margin. We expect an EBITDA -- adjusted EBITDA margin roughly between 5.8% to 6% for 2024 full year. We are expecting an improvement in our net working capital over sales ratio, so we have updated our guidance at a level of approximately 20%. We have also revised our previous guidance regarding our CapEx from EUR 350 million to EUR 400 million for 2024, reconsidering the impact of work maintenance, integration and restructuring expenses. As we have disclosed in the previous quarter, we estimate savings of approximately EUR 140 million to eliminating roughly 2,000 office positions across our global operations within 3 years. Here, you may see the recent update and realized figures as of Q3. So far, we have completed roughly over 1/4 of role eliminations as of third quarter. So with that, we conclude our presentation, and we can move on to the Q&A section.

The first question comes from the line of Bystrova Evgeniya with Barclays.

I have 2 key questions. So my first is regarding your new guidance. If you could briefly touch on EBITDA margin guidance? And what was the key driver to downgrade it? That would be very helpful. And then my second question. So during the call, during the presentation, you mentioned that you in leverage to be decreasing at some point. Could you please provide more details with regards to the timing of when you're expecting leverage to decrease? And what are the actions that you are undertaking to do that? And maybe you have some leverage targets for the end of this year and maybe next year?

Thank you very much. So I'll start with the EBITDA margin. This is mostly based on the cumulative results that we have as of 9 months of this year actually. We do not expect a major recovery in the Turkey operations. So we expect to stay in the demand to continue. But in the European business, we expect some recovery given already declining rate interest rates due to ECB's rate cut and the expectation around increasing demand going forward. That's why we took the base as of cumulative based on 9-month results for this year but also expecting a slight uptick throughout the remainder of the year. When it comes to the leverage, you have to consider two things. One is, as you know, we have ongoing -- and we have completed special projects like Egypt and Bangladesh. And for the next year, we will mainly focus on the maintenance CapEx plus restructuring and integration-related CapEx on the back of the recent acquisitions. And that's why when we look at the leverage, so when you, for instance, take out the leverage on the back of the capital investments of Egypt and Bangladesh, we will already see that we can go below 4x in terms of net debt and EBITDA. And given the expectation of the rate cuts in 2025, both in Turkiye on the back of declining inflation rates and the European market we expect the demand growth, the operating leverage in hand in the business and the cash flow generation that will come along with the demand recovery. And with tight control in CapEx, net working capital management and the completion of the integration and the extraction of synergies of local operations, we expect to leverage to reduce to our previous levels. We do not share any targets in terms of leverage any specific target, but we expect it to decline on the back of those factors that I just mentioned.

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

So I must say, first of all, that the progress of the extraction of synergies is going faster than we anticipated. And on the back of our announcement, both on HR restructuring and the plant restructuring in U.K. and Poland operations, we have started to extract our synergy plans, be it in HR reduction, procurement, IT, et cetera. For this year, I can say that we've already -- we are targeting around EUR 15 million of synergies to be accrued as part of our financials. As you know, we've announced a long-term synergy plan of EUR 300 million. We're not in a position to share with you the exact trajectory of that, but you can extrapolate that on a, let's say, backloaded fashion over the 5-year period in your models.

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

For the previous questions. I want to make a follow-up on the leverage side. And you are looking for your leverage to decline, but could you also share your plans for financing the short-term debt given that its currently matches with your cash position and there is ongoing cash flow. So I wonder how are going to pay this debt. And -- maybe you can answer that I can ask another question.

Let me do that. I'll start and pass on the floor to Mine on that one. So our average maturity of debt is around 2 years right now. And if you exclude our cash flow and trade-related financing here, the credit card, loans, et cetera, it's almost 2.5 years. So that's why and 56% of our debt is comprised of long-term debt. And if you exclude, again, the cash pool and credit card rate of loans, it's around 66%. So considering that, we wouldn't label it as a, let's say, a short-term refinancing, even on short-term refinancing need. And that's why we do not face any major problem enrolling over the short-term debt. And as, let's say, recent news, we've managed to tap into Turkish lira lending market as of Q3. As you know, since August 2022, we weren't able to tap into that market given the restrictions in FX-related assets, there was a ratio of 5% cap. And that's why, right now, being able to tap into Turkish lira lending market, plus the ample room for credit limits, especially in the local market, we do not expect any major problems enrolling over our short-term debt.

And can I make a follow-up? Further questions, and maybe Mine can answer this. I mean, there is a substantial increase in the financial expenses compared to the previous quarter? And I mean, this is basically offsetting all of your EBITDA. You said that there are some one-off items. Is it possible to explain again about these one-off items? And are there any one-off items that won't occur in the fourth quarter. And if so, I mean, the total amount will be becoming quite useful for us to estimate the upcoming financial expense outlook actually.

Sure. As you can decipher from the difference between adjusted and unadjusted numbers in our presentation, we have around TRY 947 million of one-off items related to mainly plant restructuring and HR admin restructuring costs for the third quarter. When you look at the cumulative results for the first 9 months, we have additional one-off items around TRY 440 million which is related -- mostly related to the consulting expenses related to the Whirlpool transactions. And as you know, we have changed the assumptions in the contingent liabilities in our balance sheet and the income impact -- gain impact of that was around TRY 1.1 billion. And that's why you see a lower amount on a cumulative basis for the 9-month results in terms of delta between the unadjusted numbers. Most of the figures that have been recorded in the third quarter are noncash in the sense that, as you know, given the announcement and given the IFRS regulations, we have to allocate some provisions based on the upcoming restructuring costs, et cetera. And we will continue to allocate provisions as we approach the year-end, but this will be, again, mostly related to noncash expenses. So on a cash -- free cash flow basis, you should not expect any major change, but we will continue to allocate provisions. That's what I can say on a directional basis to you.

And this is very helpful. But actually, I think these are all under the other income. So I'm looking into the financial expenses. So something happened in the financial expenses. In the third quarter, it has been inflated a lot versus the second quarter. So what happened? Is there hedging growth? Or I mean, that elevated level will remain the same in the fourth quarter?

Yes. On the financial expense side, as you know, on the back of increasing net debt and just to take a step back, we do not experience any major change in the interest rate percentages on a quarter basis. So the main impact has been on the net debt side. increase in net debt and you see the free cash flow -- negative free cash flow in the quarter as well. So the increase in net debt is the main culprit behind the change in financial expenses. And secondly, under financing expenses, you also see some portion that are related to imputed interest of receivables and payables. So there are also some operational related items that are also accounted for as part of the financial expenses. But the main reason is the increase in net debt, I must say. And in fourth quarter, with the recovery of the operations, especially on the Europe side, and the strict net working capital control on the inventory side, we do not expect a major change on the net debt side. And on the back of the declining interest rates, relatively speaking, we do not expect a major growth on the net debt level.

And the final question is about the margin pressure. Could you share how much of this margin pressure is related to Whirlpool acquisition?

At the gross profit side, the impact of Whirlpool is around 1%. And on the operating profit side, the impact of Whirlpool is around 1.5 points.

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

Thank you for the presentation. One of my questions is related to transition costs this year around PLN 99 million of transition cost in third quarter in your footnotes. And when we look at the details, you are mentioning that some other costs might be arising in the fourth quarter and you didn't put any numbers, but I guess, it's difficult to calculate right now. But at least, could you give some direction on that side. And in your EBITDA unadjusted EBITDA calculation, do you include this transition cost in the -- and I guess that's because I cannot fully just make similar calculations with your numbers and my numbers, don't coincide. And the other question is, again, in addition to Hanzade's question. In the quarter, Something is happening in the -- especially in credit finance expenses arising from the trading activities when we look at from outside, there was no big changes, the fluctuations in all currencies, but really, it's difficult to understand how this much losses occur in third quarter? Maybe do you have any additional comment on that?

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

It's annually get into details. We are not only looking at the financial expenses side, but we are looking at our FX loss of some gains arising for trading activities. That's one side. And the other item, you have credit finance charges arising from trading activities, which are recorded other operating expenses. And especially in this quarter, each quarter, we are just putting them together credit finance income and credit finance charges. So when we sum up negative and positive number. In this quarter, we see an additional increase. It's not about the FX losses or financial expenses. So that's a big change I saw. So could we expect that...

I didn't understand the question. So it's mainly related to the imputed interest that we charge on trade receivables and payables, the store called rediscount expenses. So that's related to the extended maturity of trade receivables mainly. And secondly, we also provide early payment discounts as a financing item to our dealers. So that's one of the main reasons. So just to ameliorate the issues in understanding demand environment in Turkey, we are incentivizing our dealers with early payment discounts. And coupled with the discount expenses related to trade receivables, that part has increased as compared to the other quarters.

And one last question about the acquisition impact. I say around EUR 600 million. But as far as I remember, in the first quarter, it was a higher number. How does the selling going in that region? And overall, when do you think things will settle in terms of HR, in terms of transition. I know it's a long process possibly. But at least when we like to tease the bottom in terms of the transactions. Do you see any unexpected negatives or positives on the way.

So as it relates to the first question, especially in August, we have realized or we have experienced a few things in the European market, especially the distributors were trying to recalibrate their inventories and we were -- there was a, let's say, relative slowdown -- higher slowdown as compared to the other months. But when we look at September and October, we have seen substantial recovery, especially in the European operations. And I can say that, especially on the Whirlpool side, the things have substantially improved when we come to the September results in terms of operating profit. So we're quite optimistic on September and November. So just to cut a long story short, we do not expect to experience the same decline that we experienced in July and August towards the last quarter of this year. Of course, December is a tough month in terms of seasonality both due to Christmas period as well as in Turkiye local market. But having said that, the 2 months are much more promising than the summer period. And when it comes to your next question, this is a long journey. We have started pretty fast. And I can say that we've been pretty successful in executing a lot of things in parallel, and we are actually ahead of our plans in terms of the restructuring efforts. And in terms of things being settled, as we have announced, it will take a couple of years, but we are going in line with our announced plans, I must say.

The next question comes from the line of Campos Gustavo with Jefferies.

Firstly, I was wondering your 4.3% net leverage -- is that the same net leverage that's calculated for your covenants?

Yes.

Okay. And what are your existing covenants at the moment?

Mainly 3.8x.

So are you by chance like pursuing like a waiver with.

No, no, no. So this is -- I understood where you're trying to reach. So the covenant testing is not done at a point in time. So we have almost 6 months of remedy period in our documentation. I mean, I don't want to get into details of our loan documentations, but they are not being tested at just one point in time when it comes to covenant testing. So they are being tested on a consecutive quarterly basis, just to summarize the procedure. And to be very honest with you, when you look at the calculation formula, we can also look at the normalized net working capital levels and the impact on EBITDA thereof, et cetera. So it's a different results that will come out when we do that vis-a-vis our lenders. And this is not the subject of our call here totally, but we're pretty comfortable when we consider the remedy period plus the trajectory that we see going forward as we progress through 2025.

So 4.3% and at some point, in like 6 months, there will be another test and you have like ways to calculate it in and you are expecting to maintain, right, acceptable levels?

Yes. We expect to maintain our -- or let's say, pass our covenant testing to put it that way.

All right. And that's expected on the back of like deleveraging...

Deleveraging and net working capital improvement, cash flow generation, synergy extraction.

Okay. Perfect. So that's a good segue way to my second question here. Could you please unpack your negative TRY 25 billion free cash flow I understand that there was a huge working capital outflow here at the moment. And if you could also provide you in terms of your -- if possible, like an EBITDA performance here, maybe like a non IAS 29 adjusted.

So let me summarize it that way. When you look at our cumulative results, our EBITDA is able to compensate for our CapEx investments. And the remaining is mostly the negative free cash flow is mostly related to net working capital, increasing net working capital. And when you look at when you decompose that, it's mainly related to inventories plus increasing receivables to some extent. Whirlpool transaction has been quite instrumental in extending our trade payables. And as you know, we have migrated trade supply chain finance program along with the transaction. reaching up to EUR 600 million. And with given -- in a given month, it's expanded and then we utilized drawdown that credit limit. And that's why the main culprit behind it is the increase in net working capital. And as you know, this is the cyclical industry in 2023, it was the other way around. And in 2024, on the back of the Whirlpool transaction, we've migrated a large balance sheet here. And when you compare the change in net working capital, as compared to the year-end of 2023, of course, there was -- there has been an increase in our net working capital levels on the back of Whirlpool for migration. This we expect to decline on the back of the recovery mostly in European demand going forward.

And as far as the trajectory of your free cash flows are you expecting negative free cash flows to be improving and heading towards maybe a new more neutral profile? How do you see this trajectory over the next few quarters?

Yes. We expect the free cash flow generation to improve substantially. As I said, due to strict CapEx control. And as I mentioned before, our expansion CapEx related to the 2 special projects, Egypt and Bangladesh is already completed. And for the next year, it will be mainly maintenance CapEx and CapEx related to the integration efforts. So this will be controlled. And for network. As far as net working capital is concerned, as you know, this year has been a bit problematic in terms of competition from Far East, the slowdown in Europe. And there's been a contraction in the European market for the last almost 2 years, which is relatively unprecedented. And that we expect to recover. And there are, like, as you know, the macro tightening measures in Turkey is not helping. And I think coupled with the normalization of the interest rate trajectory and inflation rate going forward, we expect the cash flow generation to be followed by the earnings generation.

And just lastly, is there like maybe like a time line where you would expect to see like free cash flow turning positive? Or is that something too since...

Yes. That's our target for the next year, yes.

Okay. The next question is a follow-up question from the line of Bystrova Evgeniya with Barclays.

Yes. Thank you very much for allowing me to follow up and for all the color you provided before One quick question on CapEx. So you mentioned that you're planning mainly maintenance CapEx as well as some integration CapEx for next year. So what is your main typical maintenance CapEx volume? And can you maybe provide some color in terms of the total CapEx volume for next year?

Yes. Our maintenance CapEx is over around 2% of our sales. We have -- we are yet to calibrate the CapEx related to Whirlpool in line with the industry standards, this is ballpark the level.

Okay. So for next year, 2% would be a good assumption?

Yes.

Total CapEx?

No, we haven't provided any guidance related to the CapEx for the next year. That will come on the back of 2024 year results. You ask me the run rate maintenance CapEx for the company, and that refers to that answer.

The next question is a follow-up question from the line of Demirtas Cemal with Ata Invest.

Thank you. Maybe I missed, maybe you mentioned that at the beginning, but I would like to understand the guidance for the EBITDA. You see 5.8% to 6%. So we need at least 5.8%, 5.9% in fourth quarter. What would be the driver to see higher margins in fourth quarter, especially the fourth quarter has been the difficult one. Could you just further elaborate that?

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

The next question comes from the line of Luiz Gomes Antonio with 91 U.K. LTD.

And just a quick follow-up on one of the answers you gave. You mentioned that there's been Far East competition. I presume that comes from China. I just wanted to understand what are the markets where you're seeing that competition? And to what degree is that impacting your performance?

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

And so effectively, the Chinese are still competing even though they have to pay a tariff to come European market?

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

And then are they price competitive on the brand level entry level, mid-level [indiscernible] for the tariffs.

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

Ladies and gentlemen, there are no further audio questions at this time. We will now move on to written questions from webcast participants. Our first question from our webcast participant is from Mustafa [indiscernible] with A1 Capital Portfolio Management and they quote. "Thanks for the presentation. when will the Whirlpool effect end? EBITDA margin revisions continue to deviate and you are currently 40 basis points below the medium target. Is there a strong demand in the fourth quarter? If there is, we cannot see it in this data. Can you explain this to us? We reached [ 5.22 ] in net debt EBITDA what is the limit of this? Will Arcelik be able to handle this? When do you think Arcelik will return to its old days? Are you hopeful for 2025 and the following years?"

Thank you very much. I understand that all of these numbers are based on your calculations, and we haven't reached the fourth quarter yet, and that's why you're not able to see it in the data. And just -- I think I can give a combined answer to that. Yes, we're very much hopeful for 2025. And the main reason is that, as we have completed our acquisition of Whirlpool as of April 1. And we've prepared our business plan and our integration plans internally and there are announcements going forward that restructure the operations and the merge both operations going forward. This has been experienced on the back of a tough macro period, especially for Turkiye. This was coupled with the macro tightening measures as it relates to Turkiye inflation and interest rate and FX rate environment. Having said that, we have already started to reap the benefits of the Whirlpool merger especially starting from this quarter. And as we progress and as we execute our plan going forward, you will see the improvement both in the margin and the cash flow generation. And right now, as I mentioned before, we have enough brands and enough capacity to expand the competition across the continent. And therefore, we are very much hopeful for 2025 and going forward. Of course, the macro environment has to be conducive. With that, I mean, there shouldn't be any low delta and low tail-risk event. But I don't understand what you mean like the old days in terms of numerical figures. But I can comfortably state that as we execute to our plan, the financials that you see will substantially improve going forward.

Thank you. The next written question comes from Serhat Kaya with YF Securities who have submitted four questions, and I quote the first one. "can you talk about initial progress about synergies and planned cost savings that was announced in Q2. Also, do you see room for gross margin expansion in Europe due to your improved market position and increasing presence in high-margin building segment?"

So as I mentioned a few times, we are going in line with our plan and expect to finalize the announced restructuring for the U.K. operations until the year-end. And for Poland, we expect it to be finalized within the first half of the next year. All of them are going according to the plan. And along with the HR-related restructuring, we expect our market position to Europe improved substantially, given our brand positioning and positioning in our distributors as well. The margin increase will come from our perspective in 2 ways. One is obviously the pricing and given -- especially the Whirlpool brand, we will be able to tap into the premium segment, especially in the built-in -- profitable built-in market. And as we relocate our manufacturing to less costly areas, regions like Turkiye and Romania, as we fill out our capacity utilization ratios, there will be a gross margin improvement due to lower transformation costs as well.

Second written question from Serhat Kaya and I quote, "there is a TRY 16.3 billion income classified in retained earnings as part of Europe manage transactions. Will this item be reclassified in P&L at the end of year once final calculations are made? If yes, do you expect a positive net income in Q4? Thank you."

So we have a purchase price allocation study ongoing, and the numbers are not yet out, but we expect it to come out in the full year results. The numbers are not set yet. We cannot state anything about this specific numerical direction, but you will see it on the full year results.

Third question from Serhat Kaya. There was an announcement today about 30 billion bond issuance. Do you plan to use this for sure paybacks?

So just to correct, this announcement is only related to the preparation for us for, let's say, upcoming potential domestic bond issuances so that we do not lose time when the time comes to hit the market. It's not earmarked for any specific use of proceeds at this juncture.

Fourth and last question from Serhat Kaya, and I quote. "is there a change in your euro-USD parity exposure in the balance sheet? As per footnote, you have long USD and net short euro position as of Q3. Thank you."

So our euro-dollar exposure stays the same. And reason for our long QST short position is related to the cross-currency swap deal that was executed to hedge future cash flow of our issuance. However, cross-currency swap transaction is under hedge accounting application. And when tariff excluded, the euro-dollar exposures will be balanced. Thank you.

Next written question from Max Nekrasov with Citi. And I quote. "what was the impact of recent acquisition on your EBITDA margins in Q3? What are the key drivers of margin pressure in Turkey?"

As I said, the margin impact, let's say, the operating profit -- the margin impact on the operating profit of the acquisition is around 1.5 points. And the key drivers of margin pressure in Turkey, as you know, due to flat FX rate and increasing in minimum wage, et cetera, the labor cost has increased substantially in euro terms, in dollar terms, in hard currency terms in Turkiye. And that has impacted our transformation costs substantially. That's on the cost side. And on the pricing side, given the monetary tightening measures and limit in monthly installments, et cetera, there has been a decline in purchasing appetite of the households. And that's why it's relatively harder to pass on the increases in the cost inflation to the pricing. We expect that to recover as Turkiye progresses towards a consumer stimulated economy going forward when the time comes. And this time, in our expectation, will come when the growth rate will stay low. And then the cycle will probably start all over again in terms of consumption growth led going forward.

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

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