Migros Ticaret A.S. (MGROS) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Migros 4Q 2020 Financial Results Conference Call hosted by Özgür Tort, CEO of Migros. My name is Katie, and I'm your operator today. [Operator Instructions] I would like to advise all parties that the conference is being recorded. And now with that, let me hand the call over to Affan Nomak. Please go ahead.

Thank you, Katie. Good afternoon, and thanks to everyone for joining us today. I hope you are all well, and welcome to Migros Full Year 2020 Earnings Call. We are here with the management team, and today's speakers are our CEO, Özgür Tort; and CFO, Cem Dogan. First, Özgür Tort will briefly talk about our operations, and then Cem Dogan will share with you a review of the company's efforts for the de-risking of the balance sheet. And I would like to remind you that there will be a Q&A session at the end of the call, as usual. Now I'll turn the call over to Özgür Tort, Migros CEO and Board member. Özgür?

Thank you, Affan. Welcome, everyone, and we thank you for participating in our results conference for the year of 2020. Straightforward, I think 2020 was a very bumpy ride for everyone. And we all -- we definitely hope you, yourselves and your families are keeping safe in these difficult times. We are definitely looking forward to going back to our normal life. That's very clear. The spread of vaccination program and the efficacy, of course, will give us some green lights, hopefully, at some point in 2021. And we only want to get closer as quick as possible to our regular life. But it seems like it could still take a while, at least for another couple of quarters. The main issues are still pending for all individuals across the world. In this new environment, I think we have adapted ourselves significantly rapidly. And we have been implementing all our hygienic rules and the protection for our employees, for our customers. And one of the major breakthrough was to -- a clear increase on online service demand of the shoppers. And I believe we have done an important structural move to cover the entire country by rapidly expanding our capacities across the whole physical operations to respond to the shopper necessities, not just with the physical stores, but also at the same time, with our online operations. And in this new environment, of course, together with the rapid digitalization of the grocery retail, I want to also express that our focus has been also under review. And we have decided for [ equal ] opportunities of business, which I will try to cover today. And at the same time, we went through a strategic review regarding our international operations, and we decided to divest our branches at Kazakhstan and Macedonia. The Kazakhstan operation there, especially on the retail part, operation has been exited as of last year and at this end of 2020. And as of now, we don't run any longer retail operation, and we have been, in part, as the major shopping mall business in the country, and we operate as a kind of real estate operator regarding our shopping mall business targets. And similarly, we have also done an important review regarding our North Macedonian unit. And very recently, we have disclosed that we are in negotiations to divest this operation as well. And step-by-step, we are moving towards the SBA and the relevant requirements to close the deal. In this impressive, new environment, of course, it is worth to express, before our presentation, the regular Turkish food retail environment. In a basic nominal terms, the market grown another 18% to 19% range on the total food retail consumption. It is clearly perceived that all grocery channels have done an important growth, and mainly, of course, the pandemic environment resulted towards the shift on home consumption. And that was one of the important driver of this channel movement. And at the same time, except open bazaars, majority of the channels, both in physical stores and online operations, have been shifted towards an important, rough turn. And we believe that we have positively differentiated from this market, which is also a growth market, together with our physical stores and, at the same time, with our online operations. Regarding the recent movements on our business, I would express that we have done an important, strong top line growth, which we will cover today, in Q4 of last year. And at the beginning of this year, especially January and February, the trading was pretty much parallel to that result of top line growth. And I think we can express that this momentum is still continuing. And starting from March, with the base impact of last year's where the first implementation of lockdown and relevant high demand of shoppers towards some consumption has started, we will start to have a base effect coming step by step from March. And as of yesterday, our government expressed the new slightly relaxed, I would call, region-by-region limitation of lockdowns. And especially restaurants and cafeterias will start operating around 50% capacity, starting from today, in majority part of the country, which will be another important move towards the shopper behaviors, and we have to be just experiencing, of course, not as the very previous years of high demand to restaurants and cafeterias, but a slight move towards that new channel as well. This will be a kind of a brief before starting our presentation. So now you have our presentation pack from our website, and we will be just covering the pages based on our presentation. We will start now with our sales evolution on Page 3. To start with our recent quarter's turnovers. We reached almost TRY 8 billion sales turnover in the last quarter of last year, which delivered us a 34% top line growth, which includes our international operations, which is relatively lower than growth area. And excluding our domestic -- excluding large international operations, this last quarter growth is even ahead of 35%. 35.3% levels has been realized in the last quarter of last year. All in all, the full year results has been around TRY 29 billion of sales turnover, representing around 26% top line growth, again, including several different regions, but strong momentum definitely coming from the home consumption patterns. And especially, starting from November and December, the lockdowns of restaurants has also accelerated home consumption, respectively. And at the same time, our operational significant outcome is also represented by our online channel growth coming from the same shopping behavior. To support that, on the Page 4, we have given you a kind of breakdown of the different online channels that we are operating. We have already expressed this similar graphic line representation regarding the growth on online. And with the last quarter, the numbers are even ahead of 9 months' results. The full year of representation figures, our online orders, by number of orders, has been significantly different, and we reached 2.7x larger online orders. And with the instant delivery offers, the numbers are much more ahead of our initial expectations. And as of now, in the overall Turkish market, we are covering all the cities of the country with more than 500 different servicing stores, which is still growing at a similar pace, to cover the last-mile efficiency, which is the key driver of our satisfaction ] comparing to our operations to different platform operators for any new business models regarding the online inflections. And we trust that the fixed cost base advantage on the logistic coverage of the operations will help us deliver similar results like of our physical retailing activities in terms of contribution to the bottom line. And at the same time, the service quality and any important customer service, NPS scores, et cetera. Relevant drivers will also help us to reach our customers with the best service offer. We trust that offering more than 30,000 SKUs online and with our own last-mile capabilities with be the key differentiation of Migros in the coming years as well. Next to it, our instant delivery option, which is a 30-minute delivery facility under the brand of Migros Hemen, is now represented in 23 cities. Around 2,000 SKUs are offered, and our online service is now covering more than 100 stores to deliver with such new business model, which is also another competitive market represented by another 3 important players of new business models in the country. Similarly, Macrocenter also is now offering, in all store services in 7 cities, the same online capabilities, together with our niche operations regarding [ major ] groups of Tazedirekt. And at the same time, our partnership with platforms are still continuing to an extent. Regarding our expansion on Page 5. In 2020, the company delivered a net increase of more than 120 stores and to reach 2,319 stores in 81 cities as I expressed. And that physical expansion, which is more than 180 stores opened in a year, represented at around 3%, roughly, the sale of area increase on our physical space. And at the same time, our online service opening stores were increased by another 336 stores to reach, as I expressed, 529 stores right now and equally represented in all the cities of the country. And as the new start of the year, for the first 2 months, our new store openings has reached already 26 stores on the physical side, and another 132 new online service stores are introduced in the first 2 months of the year with very significant focus both on physical expansion and, at the same time, online store service expansion. Obviously, our business model will continue to be store-based delivery, and at the same time, we are trying to introduce our new [ consumer center ] approach based on mini-darkstore structure, which has been a new experience across the world right now for physical retailers to act with an omni-channel offer to replicate the same shopping experience from store and, at the same time, with online service for the relevant districts, which are servicing the same customer base. We continue with our capital expenditure on Page 6. As of 2020, company has done TRY 539 million of capital expenditure, which is higher than our guided figure amount to TRY 470 million. And obviously, the main reason was our accelerated store expansion and, at the same time, our clear concentration regarding store automation and especially the small-sized footprint and center automation initiatives, which are nowadays taking significant place to make sure that we are running our online operation from a store-based delivery model but with a dedicated technology and with a dedicated picking environment, which we are calling mini fulfillment centers or mini-darkstores model, depending on the size of the operation that we face in different districts. And this model will be with the major replication to be represented both on online service expansion and, at the same time, store automation expansion program, which are 2 major dedicated developments and expansion model for the company at this moment. With all this in hand, for next year, we have a similar target around TRY 600 million equivalent of capital expenditures are guided for next year, which is compared to 2019, as we have seen through 2020 other -- an accelerated capital expenditures, which will be supported the same for 2021 as well. As a result of this growth, on Page 7, you can see our market share evolution, that Migros has managed to increase the market share to 8.7% on the FMCG markets reported by Nielsen Company. That is 70 basis points increase on the total market share gain. And regarding the representation on the total Turkey, as I expressed in the introduction, there is different statistics but more or less 18% to 19% range was reported by different market research companies regarding the total Turkey retail growth, whereas organized trade is relatively higher growth in this environment, around 26% levels of organized trade growth. And at the same time, the gross domestic top line growth, as I expressed, reached around 27% levels last year, which has helped us even an increase within the organized trade, where a lot of players are actively opening lots [ of new stores ] and, at the same time, representing new business models to service the shopper base. So all in all, 70 basis points on the total market share gain and 10 basis points within the organized trade market share gain was the outcome of 2020. So with this in hand, now I will directly move to our financial results slide on Page 9, starting with our gross profit consolidated figures. In Q4, we had an important increase, around 30%, parallel to our top line growth, and which has clearly helped our company's cash generation in the last quarter. And basically, our margins are pretty much, I will call it, flat. However, despite the important growth on the top line and, at the same time, gross profits, the due date charges, which are directly relevant with interest rates in the market, has an impact of dilutive site, which has resulted the company to reach 25.7% rate of gross profitability for the year 2020. And all in all, if we are to disregard the due date charge impact, the company has done a similar gross margin generation when we compare our results back to 2019 as the previous period comparison. So all in all, of course, the company is doing a lot of efforts to support the top line growth with different channels, both on our convenience formats and, at the same time, our online channel, and together with an important competitive pricing policy in a market where discount stores are -- by number of stores are ahead of the market averages compared to different countries. So in that reflection, Migros continuing investing on pricing and maintaining the margin now that's pretty much similar to the previous year. Continuing with our EBITDA generation for -- on Page 10 of the presentation. We managed to generate TRY 2.3 billion EBITDA in 2020 based on IFRS 16 figures, which is representing around 5% levels of growth versus previous year. Obviously, there are important elements on our figures represented on Q4 as well. Q4 has represented around 21% growth in the same IFRS 16 figures and which has reached the company an important levels of EBITDA generation. On the other hand, to compare our margin levels on EBITDA margin, unfortunately, we have to do 2 important adjustments. One of them is just the normalization of the interest rate, which has been the impact on gross profitability. And at the same time, IFRS 16 is doing a different segmentation profile based on our rental contracts mix. So for that reason, to ease the perception, we have identified a normalized EBITDA, which is normalizing our interest rate on due date charges and, at the same time, excluding IFRS 16, to compare ourselves apple-to-apple. And in that regard, the company's EBITDA margin generation has reached 26% increase versus previous year. We trust that it's a more clear and objective comparability in terms of financial results. Hence, you can see the outcome of this, of course, at the cash generation levels. And all in all, if we are to compare this normalized calculation on EBITDA performance, the margins are around similar levels of previous year, 2019, at the levels of 5.3%. And regarding IFRS 16 outcomes, the margins are reaching more than 8% levels based on IFRS 16 adjustment on rental expenditures. I think it is worth to express that our similar margin generation to -- compared to 2019 is an outcome of an increased profitability on the operating front for the retail operations by addressing an important asset sales of [ years ] and, at the same time, an important rental income contraction at our shopping malls, which is totally driven by the COVID-19 pandemic outcomes. I think by comparing around the similar margin levels compared to 2019 in this environment is clearly showing us an important operating profitability gain at our retail business, which is a representative level for us for the future, where less assets and higher concentration on rental stores, together with the business model, which is based on online servicing from store fronts, which will begin in our company for a clear outcome of profitability for the future years. Now at this moment, I want to give the floor to Cem to express our sales and the balance sheet figures regarding the de-risking efforts of the company.

Thank you, Özgür. Thank you. I trust that everyone is healthy and coping very well with this COVID situation. We're all very tired, and we're hoping that, hopefully, with the vaccination efforts, we will go back to our normal life at some point in 2021. Euro debt and the risk associated with it has been a part of our problem since 2009, a big problem, a risk factor for the company. 2019 has been a turning point for us for our deleveraging efforts. And we managed, with the help of the property sales, quickly deleveraged the company at the level of -- from EUR 611 million at the end of 2018 to EUR 95 million by the end of 2020. And hopefully, in the first half of 2021, we won't be talking about a euro debt going forward. By the end of February, this figure also went down to EUR 50 million. Having a euro debt in the balance sheet had a multitude of impacts on our balance sheet. First of all, foreign currency exchange losses made quite a sizable erosion in our equity. And also, the foreign exchange losses as well as the interest payments that we have made on this number was not really tax efficient because it was a part of the leverage buyout. And the foreign exchange losses and the interest associated with this loan, we could not include in the tax-based calculations. So it wasn't very ideal from that point as well. But hopefully, going forward, we will -- we won't have this problem in 2021. We won't have any foreign exchange gains or losses. It could be some minimum foreign exchange gains or losses for transactional purposes, but that's about it, basically. With the coming down of euro debt, and also the net debt situation of the company improved substantially. In -- by the end of 2018, we are talking about 2.4x EBITDA on the net debt. And by the end of 2019, this was down to 1.4. And at the end of 2020, we are talking about 0.4, and we are sustaining it. We are looking at our figures in January, February. And I hope at some point in the second half towards the end of this year, we might be in a situation of net cash as we are closing to the year-end. In the second page, we try to summarize our cash balances. As I said, on the net debt side, we are -- we closed the year at 0.4x EBITDA. And our exposure on euro was limited to EUR 15 million only. And -- but in January, we actually brought this exposure to 0. So we hope we are not really carrying any exposure. That's why I'm pretty confident that in 2021, we won't see any foreign exchange losses that we used to see over the past 10 years or so. And on the IFRS 16 -- sorry, including the IFRS 16 side, this is also a sizable -- it's no longer a sizable amount, net debt multiple. It's also went down to 1.5x EBITDA. And I would like to hand over now to Özgür to make a few comments on this one as well as the [ performance ].

Thank you, Cem. As we have seen the clear outcome of the deleveraging efforts, I want to thank to all of our team, especially the storefront. I think it was very important in a very difficult year of generation of history probably that we will recall it. But at the same time, that has given us a very clear advantage of cash generation at this difficult environment. And then next to it, and I want to thank to our finance team to make sure that the targets, which has been expressed about 2, 3 years ago, that we're going to derisk our balance sheet significantly, has been delivered as of the end of 2020. And I'm glad -- I'm really glad that after almost a decade, the company will not going to have any pending issue regarding the foreign exchange risk on the balance sheet. And most likely, we're going to just remove this Page 11 from our presentation, which is going to be a new, new time. And that is going to be our new future thrust as well to the company's financial risk territory. So with this environment, of course, with the strong confidence regarding the application of extra efforts and operating performance, the company will start to express a net cash position rather than a net debt in the coming quarters. With this, I think, performance summary on the last page of 2020 will give us, on Page 13, the summarized version with the target on expansion, almost 23 more stores than the target, and the top line has been realized around an important target realization at the levels, that is thanks to our operating teams, very important performance, as I expressed. And on the EBITDA margin, the applications are pretty much similar to our guidance that was slightly ahead. And with the CapEx, based on the reasons that I expressed, we are slightly ahead of our CapEx targets for 2020. So continuing with our strategy update for the next year on Page 15. As I summarized at the introduction, based on our strategic review to focus on the Turkish market, especially with the pandemia environment, there are strong, positive signs that gross retail -- gross retail business across opportunities, combined with new digital initiatives that we have in hand, we want to focus all of our efforts on the domestic market for the moment. And with that structure, we decided to exit Kazakhstan and Macedonia. Retail operations in Kazakhstan has been already sold out. And then the next term is now experienced in the North Macedonia and the full transaction of exiting the company as a whole. And we will be just updating the markets accordingly, and we are at the very close stages of closing this important transaction as well. And with our future intentions are going to be very clear that we are still targeting the surrounding geographies. But in the new perspective, we're going to be targeting in this new geography, not just for physical store purposes, but both physical and online and digital efforts, which should be the target for Migros for the future periods with a focus definitely coming from the Turkish operations. Following that, of course, the new environment, let's call it, the new world definition is putting new product categories focused to all grocer retailers across the globe. And we are putting significant time and effort to come up with new product lines, especially ready-meal categories, which are relatively very popular in the western markets but not much as long as in the western market in Turkey based on cooking habits of this country. However, with the pandemic environment, we are experiencing, very clearly, especially on the working class, which are staying at home, home office consumption, not just for cooking, but also, at the same time, straight ready-meal consumption also is very significantly increased. And now we are offering this new product category segment with our own banner, Migros branded private label, regarding our offline offer to reach 95 stores. And on the online offers, especially with the sanalmarket, 62 stores. And even at the instant delivery offers, 56 stores are offering this ready-meal category at this moment. Same initiative that we are piloting is a pizza delivery option, which are based on our existing facilities on the bakery sections with a partnership of an important operators and producers. It is now on our offline stores. We are opening -- more than 700 stores are offering ready-to-cook or already cooked pizza operation. And next is the delivery options are also available with our main online channel as frozen. And for the instant delivery channel for 55 stores are now offering a pizza delivery service as well. Another initiative is based on Macrocenters, which is our clear -- one of the product category leaders at the moment in the country, especially on premium segment. And to support that operation, we have invested on an important small factory called Food Atelier, which is 100% own production of ready meals, which are cooked and serviced to the stores and, at the same time, serviced online to the shoppers. So that's fully integrated, 100% integrated vertically from production to the last-mile delivery with our own operations. And we trust that this segment is going to grow in the coming quarters, not just because of pandemia, but also with the new shopping habits, both the outcome of working class, new structures, this new lifestyle and, at the same time, regarding the representation of new consumption patterns coming from different regions of the country. And similarly, we're also enriching our frozen product portfolio for the same obvious reasons, both for service ready meals or ready-to-cook type of new product categories to be offered at our stores and online operations. Similarly, on Page 17, we are addressing, next to the product offers, a new ecosystem that we are trying to build for the company. Majority of them are based on either digital or now new service operations to act Migros as not just the product service operator but also service operators, with several different fronts and different market definitions at the same time. The very first initiative that we have taken place is the last-mile delivery company, Paket Taxi, that we invested. We now own 25% of the subsidiary, and it is growing very rapidly. It has reached more than 2,000 motorcycles and combined with courier service, which is mainly helping the Migros business but also, at the same time, several different operators at the restaurant fronts to have a common denominators and to size -- to reach a size, which is going to be the scale required for a beneficial operation. And as of now, I'm glad to express that this subsidiary is already cash positive and helping our initiatives to grow faster in several different districts of the country. Similarly, MoneyPay, which is a fintech subsidiary for us, where we are now focusing with our e-wallet offer, which is now launched as of the beginning of this year, and the application is up and running. And it has already reached, during the piloting phase, more than 5,000 active users, which has been at pretty early stages without any launching specifically. We are still at the piloting phase for the initiatives of money transfer repayments, product financing and e-wallets and POS operation, of course regarding to our credit card purchases, both at the store level, physical and, at the same time, on the online offers to act on the financial business markets. Similarly, we are working on a new offer, which is also another piloting effort, on a new service called 7/24, which is a full self-service concept representation regarding the locations. We have high-traffic locations, and web shoppers are in need of 24-hour services to replicate a new offer of a small store format to represent a multi-use operation with that new understanding. And the last initiative, but not least, the Migros-Up, which is a clear start-up platform that we are working together with our new investors and profiles of start-up initiatives, obviously, for collaboration purposes and engaging young talents to our profile and providing an agile solution to our existing supply chain issues. And mainly, I'm very glad to express that the very strong launch has been realized at the beginning of February. And we have already received several different applications. And we are motivating the new investors, small and medium-sized entrepreneurs, regarding the usage of Migros platforms on any front based on data, based on supply chain, based on our production facilities, storefronts, distribution centers. All our platforms are now open for selected start-ups to make sure that we can run similar projects, not just with our own engines, but also to have entrepreneurs own agile solutions regarding the applications. It is not just a standard offer, but also, at the same time, we are glad to address our business issues, which has been facing by our operating models. And these issues are shared publicly with the investors and entrepreneurs to make sure that they are also guided for their agile solutions to be helped by the company. So we trust that we can build a lot of new solutions and, at the same time, even in the long run, new investment potential for the company to grow in different fields of servicing. So that will be the presentation for today, and I want to close with our regular guidance slide for 2021. We want to guide our top line growth at the levels of 15% to 18% range. Just to bear in mind, on this guidance level of top line growth, we are assuming that starting from third quarter, there will be a clear normalization regarding the COVID-19 environment. And we are not assuming a lockdown starting from the second quarter and pretty much a normalization starting from the third quarter, with a low inflation coming from the second half of the year with both the impact of the bank impact and also, at the same time, relatively more business life coming from production facilities and several different initiatives in the country to take place. Of course, depending on the outcome of both lockdowns and the normalization, the top line growth targets might be subject to be reviewed, and we're going to clearly share with the market the new terms in case there is a change on the COVID-19 environment in the country. EBITDA margin guidance, based on IFRS 16, will be again similar levels of 8% to 8.5%. And our expansion target for physical stores will be around 170 new stores to be added. And I have expressed the capital expenditures guidance will be around TRY 600 million, mainly focusing on new stores and new online initiatives that we want to grow up our procurement center with more automation. So this will be the presentation for today. And as usual, we want to thank you for participating to our presentation, and I will be glad to have your questions if there are any. Thank you.

[Operator Instructions] And I'm sorry for the interruption, but we already have our first question. Can I announce it?

Yes, please.

So the question is coming from [ Harry Walston ].

Congratulations on the results. I had a few questions, if you don't mind. I'll just go one by one, if that's okay. More technical, but I just wanted to understand the restatement of the 2019 December numbers for the leases under IFRS 16. And can you just give us a bit more information on what happened there?

Should we wait for the other questions or one by one?

I think one by one, if you don't mind.

Please go ahead, Cem.

The IFRS 16 is mostly related to the useful life duration of the properties that we ran, as you know. The adjustment was mostly related to the treatment of the properties, the lease terms that expired, but we are still staying in these properties. So the assumption on these ones has changed. And also, there was a significant part coming from the property leases based on foreign exchange. Our assumption was after 2 years, because there was a regulation change, the foreign exchange contracts were abolished, as you recall. And -- but after 2 years, we were allowed to go back to normal, but that's never happened. And so we treated these contracts as TL contract, and there was a major change coming from the assumption change, basically. And there was also a change coming from the interest assumption as well. We are starting -- we started using the compound interest rather than the simple interest. And also, some of the contracts have changed from fixed rental contracts to -- from sales percentage of sales tax. As you know, IFRS 16 excludes these type of contracts from IFRS 16 standard. So there's a combination of factors that we have to redo the calculations. And some of these calculations were significant enough so that we had to restate the 2019 as well. Unfortunately, 2019 was the first year of this standard, as you know. And so we are learning as well how the -- with the new regulations and also the changes coming through.

Got it. And that's really clear. And do you expect that to be a recurring feature having to update these assumptions? Because as long as interest rates fluctuate around high levels, presumably, you're going to have to adapt the model to these changes.

No. It shouldn't, really. Going forward, I don't really expect much changes. But I should add, at this point, the IFRS 16 standard has been very helpful for our equity structure. And because of the high interest rate environment impact as opposed to Europe, for example, we have to book quite a lot of losses in the first couple of years of the duration of that lease agreement, and it gets corrected. But for the first 2 years, the net income loss coming from the IFRS 16 has reached almost TRY 230 million. And the all-in 2020 debt loss was TRY 88 million. So if we didn't have the IFRS 16, we would have been reporting a net income of TRY 230 million today. [ Instead of around TRY 30 million ]. So it's the side that we are learning to make sense of it. So I will keep it short, but there is some assumption changes. Yes.

Okay. Okay. Got it. And I know it's not the most exacting topic. Perhaps on online, I kind of understand how you've been looking at both the in-store pickup, the darkstores and the mini-darkstores. But I just wanted to get a sense of what you think is the most sensible model given the locational advantage and the economics of each type. It seems like the picking from the store would probably make sense at this point. But as we all know, it's not very economical. So I just want to see like, well, hear from you what the next stage is in the genesis of Migros in the online model, how we should expect it to look going forward. Is there more automation, development of autonomous micro fulfillment centers? How can we imagine it going forward?

Yes. Thank you, [ Harry ], for the question. Before reaching out to your comments, and just to support Cem's answer regarding IFRS 16, I think, of course, we're going to just experience slightly a different time. But at the end of it, the efforts of food retailers from a shareholder perspective as well is the same, that we want to rent as much as possible without a fixed commitment. And obviously, we want to treat our expansion team regarding to that strategy to make sure that they ramp the lot stores based on a sales turnover-driven margin of rental expenditures. So as long as we continue with this policy, I think we might be having a less addition to EBITDA but a less financial exposure regarding on the interest charges driven. So this is just to bear in mind. It's really a complicated case. But at the end of it, in every year, from our existing portfolio of more than 2,300 stores, we want to move as much as possible to turn over driven rental contracts rather than fixed commitments. So this may have a continuing impact on the classification of IFRS 16 outcomes. Regarding your question around store pickup and darkstore models. Sorry. The main differentiation of physical retailers from any other business model are the great physical coverage, and that's relevant for several grocery retailer in the globe right now. And everyone is trying a different model, but the most significant driver of the decision, the additional 2 cost parameters, one of them is picking costs, and the other one is delivery costs. And for obvious reasons, delivery cost is minimized as long as you deliver a short distance, which is store-based model. Whereas your picking cost is increasing because you're not picking from a dedicated location. So the optimization for us is just to guide both of them. And the figures are proven up significantly, that it is to the favor of a model which is closest to the households, which is a store-based delivery, either a darkstore-based or a store-based delivery. So for that sake, we are very clear that we're going to expand our model based on store picking. And while we are doing store picking, we want to do it with more automation, which is a picking within a store, but in a dedicated territory. Maybe it may result in increase on the stock level because we need to stock the highest frequently shopped items twice in the same story, whereas the tail, very large number of SKUs, we don't need to replicate the stock in the same stock. So that is, for us, the winning model at the moment. So to build our delivery based on store delivery; picking at the store level; most frequently picked items to be double stocked in the same store with a dedicated zone; whereas the tail, which is the largest assortment, to be picked from the store shelf. And this is going to be our future expansion model until there is a new totally disrupting challenge, which is an internal challenge as well. We want to disturb our own business model. For instance, in Macrocenter, we had something different. In Tazedirekt, we had something different. But all in all, both the models are showing us a clear gain on -- and especially on the delivery cost part of it.

The next question is coming from Cemal Demirtas.

My question is about the number of employees as of 2000 -- and we see around 5,000 increase, and you now have around 28,500 employees overall, which means 40% increase quarter-over-quarter. What of it is related to -- do you have any new plans? I would like to see what's going on, on that front.

Thank you for the question. This is basically a follow-up as well for our store picking model. The majority of the new employees gained with this new model is just our delivery pickers, which are our employees. In the previous model, we used to outsource the picking with a dedicated team. But now the full pickers at the store front are our employees, and that is an important step forward to make sure that we have a dedicated system and a clear service-level improvement with the picking quality. But at the same time, this is where the majority of our automation efforts are going because this is a staff-based expense, which is an important expense element. This is why we want to, at the same time, lower our picking costs by more automation. So having people manually picking versus having a mini self-automated mini robot system to help pickers to spend less time on the picking operations.

Okay. And there's a follow-up related to your financial expenses and some other expenses under interest on to a purchaser. It's recorded under net other operating expenses. I see that those numbers were significant in the fourth quarter. It's partially due to maybe higher interest rates. But considering that you turn to TL, now TL starts depreciating. We think it was a good decision at this moment to turn to fully Turkish lira strategically. And what could be the current interest rate? What could be the financial income level in 2021? Because now interest rates are higher. You have TL, okay, that's fine. If Turkish lira's FX, that's a problem. But if it's not, then you have high interest rates. So could you give us at least some indication if you would turn to positive bottom line significant 2020 to '21? Could you give a rough estimate of financial expenses, assuming that current interest rates will stay?

Cemal, I'll answer that question. Thank you for that as well. I mean you're right. At the end of the day, the Turkish lira gained value in 2021. But as I said, I mean we are not really in the business of making money from the foreign exchange fluctuations. So we basically eliminated this position. So our -- as I said, our position on the foreign exchange exposure is 0. And looking at the January figures, I can fully see that there is no foreign exchange gain or losses in the balance sheet or the P&L. So from that point of view, I'm really comfortable. So -- but also, foreign exchange losses had the positive -- could have a positive impact on the P&L indirectly because, as I said, the euro debt foreign exchange losses, I cannot include in the tax base. But the foreign exchange losses on cash can be included in the taxes. So there's an indirect impact, which will have a favorable tax impact on this. On the financial expenses, the interest rates. In 2021, our interest spend is going to be lower than what we have booked in 2020 in nominal terms. So it's a good thing. So the share of -- its share in sales is decreasing. And to give you a color, I mean the EUR 95 million will disappear pretty quickly. As I said, we brought it down to EUR 50 million. And in the first half of the year, this is going to be zeroed out. And also, we will do a substantial payout payment as well in 2021. And the refinancing for 2021 was approximately TRY 1.2 billion. And with our own cash, I mean, we will pay down a substantial part of it. I mean we will also need to refinance probably TRY 700 million, TRY 800 million. So we will see a better net debt position towards the end of the year. This will have a more favorable impact on financial costs. So the other thing that we are doing is to practice -- even the TL, the average maturity, we are not keeping it short term. The average maturity currently is 1.8 years. So the sudden increase in the interest rates should have a minimum impact on the interest cost burden. And -- but as Özgür said, in the second half of the year, we're expecting a normalization of inflation, which will have an impact, a knock-on impact on interest rates as well.

Yes. That's what -- related to that, before tax expense or could you expect a more reasonable tax rate in 2020 if you turn to post this?

Yes. Yes. This will also have a positive impact. At the end of the day, we've been paying quite a [ targeted ] interest cost. And in 2020, I think everybody has seen our tax expenses. We've made the tax man very happy in 2020. But we want to start probably in the next year. And I mean there were a few factors for that in 2020. One of the factors was our property sales. The structural value of these properties were pretty small in the books, so we made a substantial tax payment on that one. And also, foreign exchange gains, very substantial in 2020. So this also had -- sorry, the foreign exchange gains and the property gains, all in all, I think it totals approximately TRY 120 million tax, just these 2 items. And so we won't be having these going forward in 2021.

Currently, we don't have any other questions in the queue. [Operator Instructions] And we have our next question, which is coming from Berna Kurbay.

I have a few. The first one is just about some of the comments you made earlier. Just to clarify, the net loss in 2020 is around TRY 400 million. And the impact of IFRS 16, you mentioned, is it TRY 230 million, you said? Or is it TRY 88 million? Could you please clarify that?

Berna, it's TRY 88 million in 2020. So in total, I think in 2029, it was -- in total, it's TRY 200 million, including TRY 88 million, the total impact.

And also, I think there was a mention of January and February revenue in Turkey being -- following the similar trend of the fourth quarter, which showed 35% year-on-year growth. So if January, February '21 is similar to that, and your guidance is around 15% to 18%, which I presume includes the assumption of normalization, as you explained, but I was wondering if you're taking into account any sort of impact from this draft retail law in discussion or in the media for the last couple of weeks. What are your views on that? And do you expect that to have an impact? Or is that part of your guidance statement?

Thank you, Berna. The guidance that we share does not include any draft retail law impact. And we are obviously at the heart of the discussions with the government and the regulatory state bodies. If, in any case, there will be an outcome, of course, we will update the market if it is becoming a binding structured retail application. And other than that, the normalization we have assumed as a 2-step normalization from the March -- beginning of March, we assumed that lockdowns will be over, which is interesting enough, as of yesterday, it was declared the majority part of the world, or part of the country. And as of June, July, we assume that the normalization will take place, which means that we can travel, we can just work as in the past. These are the basic assumptions regarding our top line growth. Of course, we all hope that this will happen for our social benefit and for the overall economy. But at the same time, in such environment, the impact of normalization for the top line of a food retailer will be a dilutive impact because at the end of this, we will face a different consumer behavior, and especially for the first 2, 3 months, with a steady movement and reaching of the fourth quarter with a relatively lower demand for grocery stores. But another important factor is the inflation, of course. It is difficult to express the levels. But as I mentioned during the presentation, we are assuming a lower inflation environment, especially coming from second half of the year with the normalization.

And also on the staff costs and the hirings. I think there was a press release today that Migros is intending to hire 6,500 employees this year compared to around 5,000, as mentioned in an earlier question. So you're going to be hiring a higher number of -- you'll be creating more jobs this year versus last year. And this is all coming from the picking efforts, the manual peaking efforts that you would like to expand this year. Or is this something else?

This is including the additional picking efforts. And on top of it, as I expressed, since we are assuming a normalization from second half, we need to have more employees at the storefront, especially on the shopping centers located stores during our peak period. We reduced our regular staff numbers, considering the low traffic at the storefront. And that will be an increase coming from that part. And on top of it, of course, the new store expansion. So 3 flag new store expansion; further staff at the impacted stores, especially shopping malls, destination stores; and additional pickers.

And one final question on the operating profitability. I know that this figure is complicated with the IFRS 16. But if you look at your EBIT margin or cash EBIT margin, do you see room for improvement in 2021? Or are there more cost challenges on that front?

Basically, of course, there is always an improvement area. I mean that is what we believe as grocery retail management and coming from the operations, coming from any type of distribution supply chain. So this is why company is running different initiatives like zero-based budgeting, similar type of initiatives, not just by our own, but also with some advisers, which means that there is always room for improvement for a lower cost base. But the most important item that I trust as the CEO is the technology-driven initiatives, where we will have less manpower required first to pick and to deliver. So in that replication, mainly, of course, since the largest numbers are existing at the store operations, I hope we can benefit from that. That's part one. And part two would be our rental expenditures, which is the second largest item. And considering the new [ royalty ] definition, and we all hope that shopping centers will recover with the normalization, but in case the shopping centers cannot recover, I think we're going to just have an important deal structured with our landlords regarding the rental expenditure for large store operations. And this is a pending issue. As for temporary purposes, we are doing very short-term agreements with the landlords like quarter-to-the-base outcomes but not like long-term rental contract revisions. But if we are obliged, we will be just doing that with a challenging environment because in majority of the world, shopping centers are under big trouble, and some of them may not recover in terms of traffic. So this will be the 2 major initiatives. Of course, there are some other areas like energy costs and our salary costs. But relatively speaking, staff and the rent will be the major areas of focus.

And you're not worried about the gross margin in general?

Gross margin management is, of course, totally driven with the competition, but Migros has proven a very clear track record competing one-to-one with discounters on all the commodity lines. And we have proven an important traffic gain regarding this important shift on shopping demand towards online. So all in all, unless there is a new significant impact, which may come up with COVID-19 relevant issue or something else, I trust that we can manage our gross margin levels.

Our next question is coming from [ Harry Walston ].

Sorry, just a couple of follow-ups. First of all, I just wanted to understand, earlier, you mentioned about core EBIT. EBITDA margins actually improving but the results being clouded by lower rental income and something else. I just missed -- I missed what the other thing was. So if you don't mind repeating that, that would be really helpful.

If I got the question correct, EBITDA has a 2 dimension for us. The retail operations are very clearly one part of it. And the other operation, the assets that we own, were generating as either 0 rent, and on top of it, they were creating a rental revenue for the shopping centers that we own. So EBITDA of Migros has 2 components: retail EBITDA and real estate treatment, let's call it, EBITDA. Since we exited several real estate, and at the same time, COVID impacted heavily negatively the shopping mall revenues, actually, we lost a significant revenue base on EBITDA generation due to our real estate business. However, since when we compare our EBITDA with the normalized interest rate and excluding IFRS 16 impact, as you have noticed, our EBITDA is parallel in terms of margin compared to 2019, even though we lost ground on the real estate business, which has been done by the help of retail operations' increased profitability.

Got it. That's very clear. And on the IFRS 16 profit that we were discussing earlier, I'm just curious, like, as to how you think we should account for the growth in the company's outlets. When we're looking at pure cash flow, because of the changes, the way that they are accounted for, I mean do you think we should be looking at another cash flow charge related to new leases that the company is entering into? And internally, how do you see that developing?

If I may answer that and then just give the floor to Cem. But IFRS 16 in terms of cash impact has no impact other than some financial charges, which are not cash driven. So -- and as long as your question is regarding the cash flow generation of the company, there is no impact regarding the replications. However, our tax base is impacted -- sorry, our net income level is impacted because of interest charges driven from IFRS 16 implementation. So it is a net income issue rather than a cash generation.

Exactly. I mean under normal circumstances, the IFRS 16 impact on the net income must be 0. But unfortunately, depending upon the inflationary environment, interest rate environment, that is not happening through the lifetime of the assets. So in the first few years, you're booking a loss, and you're expecting that to be corrected towards the end of the lease period. So this is a bit of an anomaly. And what we are looking at internally, the company is -- I'm looking at our financials, stripped off IFRS 16 impact, really, because this makes more sense cash -- in terms of cash to us.

Yes. No, I understand the implications on it. If you look at the business in -- at this point in time. But if you consider the fact that you're opening 170 stores, like surely, we're missing out on a cash charge because these aren't actually currently incorporated in the lease liability that you report in the balance sheet. All that's reported in the lease liability is the existing stores. So I'm just curious as to how you -- because there's alternative ways to account for this, but I feel that there may be sort of overstating the free cash flow generation at this point.

I'm not sure how to answer that, [ Harry ]. But, [ Harry ], if you like, we can have a special session with the IR team to make sure that you feel more comfortable. I totally agree with you. It's confusing.

Sorry for the interruption. This is operator speaking. I can see Özgür's line disconnected, but I'm sure that he will join back very soon. [Technical Difficulty]

Sorry for disconnecting. One of our line has been cut out. So...

Sir, no problem.

As I was offering, we will be glad to help you to model that. And unfortunately, it's not an ideal case for [ the emerging ] market [ the IFRS implementation ].

Yes. No, I agree. I agree. Okay.

We don't have any other questions in the queue.

I think we don't have any other further question, I believe. So if it is the case, I would like to thank you all for joining us today for our yearly conference, and we will be glad to see you for our next call in May. Thank you, indeed. Thank you for being together with us.

Thank you very much.

Thank you.

Thank you, everyone. This concludes your conference call for today. You may now disconnect. Thank you so much for joining, and have a very good day.