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Edited Transcript of ARCLK.IS earnings conference call or presentation 7-Feb-20 4:15pm GMT

Q4 2019 Arcelik AS Earnings Call

Istanbul Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Arcelik AS earnings conference call or presentation Friday, February 7, 2020 at 4:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hande Saridal

Arçelik Anonim Sirketi - Finance Director

* Orkun Inanbil

Arçelik Anonim Sirketi - IR Manager

* Polat Sen

Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting

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Conference Call Participants

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* Berna Kurbay

BGC Partners, Inc., Research Division - Director

* Cemal Demirtas

Ata Invest Co., Research Division - Head of Research

* Hanzade Kilickiran

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I'm Constantino, your chorus call operator. Welcome, and thank you for joining the Arçelik A.S. conference call and live webcast to present and discuss the full year 2019 financial results.

(Operator Instructions) The conference is being recorded.

(Operator Instructions) At this time, I would like to turn the conference over to Mr. Polat Sen, Chief Financial Officer; Ms. Hande Saridal, Finance Director; and Mr. Orkun Inanbil, IR Manager.

Mr. Sen, you may now proceed.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [2]

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Thank you very much. Good evening, all the participants. Tonight to -- today's meeting, we have announced our 2019 results. Arçelik has recorded TRY 31.9 billion of revenue with a 19% growth in sales. Also, we have submitted 10.5% EBITDA margin with 20% growth in EBITDA value.

We have outperformed the domestic market with huge market share gains, and we are continuing to grow our sales, especially in our focus areas, Europe and MENA, almost 6% growth in the built-in segment, 17% growth in small domestic appliances and 2% growth in Grundig major domestic appliances.

As you know, we have acquired Singer Bangladesh this year, which contributed to our growth, almost 4.7% of inorganic growth within this year. Arçelik has been able to manage its working capital this year very effectively. I -- we have seen that it is in between 7% working capital of sales ratio is the lowest in the last decade.

We are still -- we can see that from the results, our free cash flow generation is around TRY 1.8 billion, which is mainly due to increased focus on cash flow generation and working capital management.

We are -- also the pricing control on the CapEx also contributed to that -- cash flow results. We have been the industry leader in Dow Jones Sustainability Index, Household Durables category. And very recently, within the first quarter of this year, we have been also selected as The Financial Times sustainability index industry leaders on the -- on our category as well.

So moving to the quarter highlights. Our top line in the quarter has grown by 13% to TRY 8.4 billion, the gross profitability is lower quarter-on-quarter, mainly due to the geographical mix as the increase in the international sales in the last quarter is higher than the Turkish sales.

We have been able to post 10.5% EBITDA margin in the last quarter in line with the overall year results. The raw material prices are still stable. OpEx to sales ratio is around 25.2%. And we have been able to generate TRY 767 million of free cash flow in the fourth quarter 2019.

We continue to improve our net working capital to sales, as I have just touched on the yearly highlights. And our leverage is flat when you compare with the other quarters.

So I would like to turn the presentation to Orkun to move on with the sales performance and market performance.

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Orkun Inanbil, Arçelik Anonim Sirketi - IR Manager [3]

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Good evening, everyone, and welcome again to our presentation. When you look at the key factors affecting our sales and margin in this last quarter, for the top line growth, as Mr. Sen mentioned, we had around 13% top line growth, largely supported by our new company within our group, Singer Bangladesh. And also, we continue to record organic growth, both in domestic market and also international markets. You will also see some details in the coming slides.

Obviously, a flat Turkish lira had some, let's say, neutral impact, let's say, in our top line growth in the last quarter. When you look at the gross margin, we continue to enjoy stable raw material prices. At least, there were no headwinds in the last quarter. And a negative factor that we can say is Turkish share in the portfolio was lower due to the seasonality, and our international sales pick up in the last quarter. As you all know, our gross margin was slightly lower in the fourth quarter.

When you look at the EBITDA line, it was exactly 10.5%. And in this quarter, we have seen higher contribution from incentives like food quality and some other incentives we're receiving from some countries, and we will go into details in the financial slide.

In this quarter, the contribution from IFRS 16 implementation was slightly higher compared to the previous quarter. It was slightly above 100 bps for the fourth quarter. When you look at the OpEx sales ratio, compared with the previous quarter, it was in line with -- in terms of OpEx sales ratio and this helped us to sustain EBITDA margin around 10.5%.

When we move to the market, the domestic market, as you can see from the market figures, the market was positive. In the last quarter, the figures for MDA-6 and air-conditioners are coming from the local manufacturer disposition. And these are selling figures. When you look at the TV segment, these are retail figures. So it reflects directly the end consumer demand, and it's coming from a panel research of a market research company.

When you look at Arçelik performance in the MDA-6 segment, we were below the market performance. But as you all very well know, we had been outperforming the market in the first 3 quarters. So -- and when you look at the whole year, our -- we had recorded a growth when you look at the whole year. So in the last quarter, there was some slowdown.

In the air-conditioner segment, there was a huge increase in the market, and our sales was -- sales increase was even higher. But the fourth quarter is, in fact, a small part of the demand, let's say, the sales are available in the air-conditioners category. I can say it's around just 15% or 16% of the demand in the whole year.

And when you look at the TV segment, we continue to enjoy our market share around 25%, and we were the second player in this segment.

And as you can see from the chart below, the demand continues to be negative when you look at the year-on-year growth on -- for each month. And starting with the September, we see the demand picking up obviously, there was -- some of the reason was the low base of last year. But we -- as you can see, the market was a better -- had a better performance in the last quarter.

And when you look at the yearly figures, and we just wanted to compare 2017 and 2019. As you can see, within the last 2 years, the shrinkage in the market for both MDA-6 and TV category was slightly above 20%, which shows that there is depressed demand, and we believe that it will be coming back in the coming year.

When we move to international markets. On the left hand, you can see the demand -- retail demand in these markets for 9-month and 12-month period. As you can see, the U.K. market has been performing well already in the first 9 months, and we have seen that there was some slowdown in the third quarter. And we see the demand again picking up in the last quarter, again, in the U.K. market. And this resulted a positive figure for the whole year, slightly above 4%.

When you look at Germany, France and Spain, you will see that there was strong demand development in the last quarter, which has taken the yearly figure to a better level when you compare it with the first 9 months. So in the last quarter, the picture was a better -- we had a better picture in Western Europe, we can say. But when we move to East Europe, Romania and Poland, which have been performing well in the first 3 quarters, we have seen some slowdown in these markets in terms of retail demand. There was almost no change in Russia, which was negative and continued to be negative in the last quarter. It was slightly negative around 1%.

When you look at our major markets, South Africa, as you can see, the 9-month growth was almost neutral. But when you look at the yearly figures, it is -- it's a negative figure. And this shows the depressed demand, the low demand in the last quarter in South African market. And we see a similar picture also for Pakistan. The market conditions continue to have a negative impact on the market. And when you look at our new markets within our portfolio, Bangladesh, we see mixed signals from the macro, like decreasing borrowing, for example. But when you take at other factors like the decreasing inflation, et cetera, there are some positive and negative factors we see. And also for our category, it was a lower season, especially for cooling products and Singer is especially strong in the refrigeration and air-conditioners category. So it wasn't a perfect year also for Bangladesh in terms of the market demand.

Let me move to our platform in these markets. When you look at Europe, which is around 53% of our sales. In the Eurozone, we succeeded to record low single-digit increase in our top line compared with the last quarter of 2018, and we shouldn't forget that the base of 2018 -- the last quarter of 2018, the base was already high. As you remember, we were really benefiting from the deep search devaluation last year. And on top of that, this activity recorded growth in the last quarter in the Eurozone.

When you look at the U.K. market, there was strong performance in the last quarter, for our group. And our growth in GBP terms was around mid-single digit top line growth in the U.K. market. And as you can see from the first 2 items, it was a strong performance for the group. And we have seen this strong performance reflected into market share as we have been communicating to you in the previous quarters, we have been witnessing some market share loss. I can say most of the market share loss has been compensated in the last quarter. When we look at it on a quarterly basis, this was the best quarter in terms of market share in major -- all major Western European countries, and most of this market share increase is largely coming from the built-in segment. We continue to gain share in this expanding and more profitable segment.

Then we move to Africa. As you know, most of the sales -- of our African sales are coming from South Africa. Again, Defy, our subsidiary there, despite the market environment had a successful sales performance. It was low double-digit top line growth in the South African market, especially thanks to strong marketing campaigns like Black Friday.

In terms of exports, in fact, this is the weakest quarter, for Defy in terms of exports, when you look at also the past year. It was marginally down in the last quarter of this year. Despite -- in this picture, and despite the working economic climate, we have been improving profitability at all lines year-on-year for our South African subsidiary.

Then we move to Asia Pacific. As we mentioned, the demand is also depressed in the past spanning market and this condition is reflected to also our sales, that was mid-teen top line decline in local currency, which reflected weaker volumes in this market.

And when you get Singer, again, this is not their best season because, as I mentioned, cooling products in Asia are the most selling products. But despite this fact, our subsidiary recorded around 10% top line growth. And in the coming slides, we will mention Singer's financials as well.

When you look at our ASEAN top line, in this quarter, our sales was around USD 28 million. And when you look at the yearly figure, our turnover stands around USD 113 million. As you can remember, this figure was around USD 135 million last year. There is some decrease. But as we have been always explaining you there is -- some of this decrease is coming from South Korea sales. Last year, there was a one-off sale -- a dryer sale last year, which didn't materialize this year, for example. And also, we shouldn't forget the tragic fire events in the Australia and New Zealand, which also had a negative impact on the demand.

Just to give you an idea, if we just focused on the poor markets like Thailand, Malaysia, Indonesia and Vietnam, the increase in these markets, the annual increase was around 20%.

So in this geography, it is -- it seems that we -- the top line growth is growing. And we have been manufacturing the refrigerators in Thailand. And in this quarter, we also expanded our production range with Semi Knocked Down washing machines and side-by-side fridges so we have more production capability now than Thailand.

As we just mentioned, Singer, and which also announced their financials today. In the fourth quarter, there was top line growth around 10%. And when you look at the margin, we again see margin development, both for the EBIT line and also for the PBT when you compare year-on-year.

And when you look at the whole year figures, we see that the top line growth is around mid-teens level, which is in line with the past performance, the company continues to grow strongly.

And as part of the integration process, there has been already some improvement in the procurement process, production efficiency and quality. And also, we have been transferring our know-how in an area like after-sales service and customer care management. Just to give you some color, for example, in the refrigerator plant, the air conditioner category, we have added the second shift, for example, and we have been improving the production efficiency. And also a new development in the coming months, we plan to open up a call center in this market, which will be one of the first of its kind.

So as you can see, this integration has been going on and we've been transferring know-how and improving our subsidiary in the market. We've already enjoyed this strong position in this home market.

When you get to raw material trends, as you can see, every quarter, it was getting better, despite some pickup in the metal prices. But when you look at the whole quarter average, it is again lower than the third quarter for the metal side. And when -- we see a similar picture also for the plastic. Maybe we'll be -- in the Q&A session, we may talk about our expectations for the raw material for 2020. But last year, in 2019, we had a supporting picture environment in terms of raw materials. And finally, on my part, some other developments, as you might have followed from the press, our JV in India has finished the construction of refrigerator plant and started trial production in the last quarter, and the official opening ceremony was just held a few days ago. And it's now manufacturing, the mass manufacturing started. And our factory in Romania received a certificate -- LEED Platinum certificate, which show the recognition of the sustainable production. And our subsidiary, Beko Italy proceeded to reach 1 million units of major domestic appliance sales in 2019. For the first time it reached this threshold. So these were the major developments in the last quarter.

Now I would like to hand over to Hande for the sales and financials.

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [4]

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Thank you. Good evening, everyone. As usual, let me start by the geographical distribution of our sales. On the upper left, you can see the Turkish and international sales in the fourth quarter. As we have already mentioned, you may remember that the final part of 2018, that was a very high base because of the deep search devaluation and the international sales had a very good performance because of this reason. So because of this high base, in this quarter, in the fourth quarter of 2019, there is only 6% increase in the revenues. And similarly, the Turkish revenues were quite weak in the fourth quarter in 2018. And because of this low base, we have recorded 32% increase in the Turkish sales, total of which corresponds to 13% in the final quarter. When we look at the same full year terms, there's a 19% increase in the overall revenues and the distribution is more balanced. 17% increase in international sales and 23% in the Turkish sales.

In the international sales, the main contributing countries are the Western European countries, thanks to the improvements, especially in the final quarter of the year. Italy's trends have been performing quite well in terms of increasing their revenues. Romania has been a quite strong performer. Bangladesh, of course, has a first-time impact on this increase. And U.K. and Germany and the other bigger markets, they remain flat in terms of our revenue stream.

On the Turkish revenue increase, all of the segments actually have contributed to this increase, apart from the heating ventilation and air-conditioner segment, which has a single-digit contraction. In the consumer electronics and small domestic appliances, they have all performed quite strongly in full year terms. In terms of the geographical distribution, in the fourth quarter of 2019, it certainly has a bigger share because of the high base of the international sales being more restricted, as I mentioned. So Turkey accounted for over 29% of the revenues in Q4. In full year terms, it is 32.3% share. The second biggest market, Western Europe, it accounts for 36.6% in Q4 and almost 32% in full year terms. And of course, following, as usual, our Eastern European, African and Middle Eastern sales, and Bangladesh naturally has taken in full year terms, around 4.7% stake from our consolidated revenues in full year.

On the next page is the sales bridge for Q4, you can see that the organic growth in Turkey has contributed by almost TRY 600 million. The international growth this year has remained subdued, as we mentioned. So it is around TRY 114 million. The cost structure was very stable in the fourth quarter, we see a minimum contribution from the FX translation impact, less than TRY 100 million. And the Singer impact contributed TRY 147 million.

If you look at the full year sales bridge comparing 2018 and '19 in full year terms. The organic growth in Turkey accounts for almost TRY 2 billion, which is a very significant increase. The international growth, again, has remained limited, around TRY 300 million. Of course, the average FX rate increases around 15%, let's say, FX against Turkish lira. So we have around, again, TRY 2 billion of FX translation impact fitting into the revenue increase and full impact of Singer acquisition accounts for TRY 873 million, which makes -- which brings us to TRY 32 billion sales by the end of 2019.

The next part is the financials. First to the income statement. We have mentioned that we have seen a 19% increase in full year terms in terms of the revenue. When we examined the profitability lines in Q4 because Turkey accounted for a lesser portion, the gross margin has also been slightly down. We printed around 31.7% gross margin in the fourth quarter, and this has brought the full year terms to slightly above 32%. Because of the decrease in the gross profitability, of course, it is also reflected on to the operating profit line, and we have slightly above 7% operating margin in Q4 and 7.2% in full year terms for 2019.

And the profit before tax is around 3.4% in Q4 and similarly, 3.5% in full year terms, which brings us to -- around 3% net income margin slightly below in Q4 and exactly 3% for full year terms. And the EBITDA margin, as we had mentioned at the beginning of the presentation, is 10.5%, and last year was 10.4% but of course, there's also the cash flow coming from IFRS 16 impact.

As also -- as mentioned, in this quarter, we have recorded some incentive income, TRY 13 million TURQUALITY income, another similar number from our subsidiary in Russia because of an incentive -- a local incentive in freight expenses. And we also had an incentive coming from the R&D activities in Turkey. So these actually have one-off impacts on our profitability numbers in the fourth quarter impacting the full year positively as well.

When we look at the profitability by segment, again, because of the lesser portion of the Turkish sales, the gross margin on the white goods have also come down to -- from 35.2% in the previous to 33.4% in Q4. And the revenue generation has remained almost flat.

In consumer electronics, we actually see a 21% jump in terms of the revenue and the gross profitability has remained almost flat, only slightly better. In the other income category, which actually is a bundle of many other categories. We see that there is a pickup of around 200 basis points to 29.5% in terms of gross profitability. And there's a small contraction in terms of the revenue. Within this other segment, we can say that we have seen more air-conditioner sales, although it's a very weak period for air-conditioners compared to Q4 of 2014 -- 2018, sorry. We have seen a significant jump in this quarter, in 2019. And there is also an increased contribution coming from the small domestic appliances sales compared to both last year and also third quarter. So these were the factors impacting the other category in terms of the gross profitability.

On the next slide, you can see the working capital performance of the company comparing the 9-month numbers with the full year numbers. Again, as mentioned, we have displayed a very effective performance in terms of net working capital management in this year, and the year-end ratio is 27%. You know that the -- actually, TL had a small depreciation against FX at the end of the period. So if we also take this out from the calculation, this number would actually be 26%, which would be even better.

So the factors contributing to this, actually, are in almost all of the areas. In terms of the receivable days, as we have also mentioned in our previous earnings calls. We have had a very effective management in terms of the [trade] receivables despite the difficult market conditions. The receivable days overall have come down by 5 days on average.

In terms of the inventory days, we see, again, an improvement of almost 2 days. And there's also an expansion on the payables part, which overall, contribute to the net working capital days by almost 7 days. Of course, because of the stronger international feature of the final quarter, we see some increase in the FX-denominated receivables in this quarter. And the Turkish lira receivables have been coming down.

On the next slide, we give out the details for our cash and financial borrowings. Q4 2019 numbers, the very right-hand bar on the chart actually now includes the full impact of the IFRS 16. So you may remember that we used to deduct this to make it comparable to the previous quarter. But for full year terms, this is now fully reflected here. So on our balance sheet, at the closing of the year, we have almost TRY 7 billion equivalent of cash on the balance sheet. As you can see on the upper right-hand side, in terms of the currencies, we have almost 78% hard currency denomination in our cash holdings. Almost half of it is held in dollars, 23% in euros. Normally, we do not have Turkish lira deposits, but by the end of this -- I mean last year, we had some prefinancing for our January TL loan redemptions. So they are shown here as 12% deposits, but these were actually spent for the redemptions in January, and then some of the other currency.

When you look at the details of the financial debt portfolio with the IFRS impact, we have -- we averaged almost TRY 15 billion on gross debt. But removing the IFRS impact, the total debt portfolio apart from the lease items is TRY 14.2 billion. Probably of the most interest will be the trade borrowings as we have been discussing recently. So you can see that by the end of the year, the average Turkish lira interest rate on the outstanding portfolio has come down to 18.6%. This was actually around 22% at the end of the third quarter. When you look at the yearly average, we have paid 22.5% for our [trade share of] borrowing. And for our budget for this year, we will -- we are estimating to have around 15% cost on our Turkish lira borrowings. And the debt maturity profile is quite similar to what we have been exhibiting in the previous quarters. We have, again, around 40% redemption in this year, which is mainly in Turkish lira and also our subsidiaries' working capital purpose loans. In 2021, we have the redemption of our euro-denominated Eurobonds. And also, we have some TL redemptions and those beyond the 2-year horizon are our doubled bonds and our subsidiaries financings, and also our investments on CapEx financing for the Turkish factory investment.

On the next slide, we're giving you all the details for our FX position on the balance sheet by the end of the year. As we always -- it's like we are always trying to keep a very tight percentage limited with our equity lines, so again, we have kept it at around 1.2%, and it's short FX position, which is mainly coming from our subsidiaries. On the Turkish balance sheet, we are square. But because of our subsidiaries, which do not actually have availabilities of hedging in their markets, like Pakistan, Vietnam, Indonesia, Bangladesh, we do not, unfortunately, have coverage in these countries. Therefore, they have netted out to a short position in terms of their own balance sheet.

And the final slide that I'm going to talk about is the cash flow generation. So we have been able to generate about TRY 3 billion net operational income, which is actually a very strong number, especially considering the difficult market circumstances in our main markets. We have borrowed around TRY 1.5 billion in the market. The FX conversion impact contributed by TRY 484 million. You may remember that we have not paid out any dividends this year for the sake of stronger free cash flow generation. Our CapEx has been TRY 1.3 billion, which corresponds to around EUR 230 million, which is quite within the guidance that we provide to you for the year. And in the other category, we have the Singer acquisition, which accounts for TRY 400 million. We have done some capital increases into some of our subsidiaries, those account TRY 468 million and the remaining TRY 1.6 billion are the total of the net cashouts from derivatives and loan interest payments, so this is how we have reached around TRY 7 billion cash on our balance sheet.

Now I will turn the floor to Mr. Sen for our guidance for this year.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [5]

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Our 2020 guidance is -- we have split it into 4; revenue, profitability, CapEx and working capital, which are important aspects of our business. For the revenue side, we expect the Turkish -- Turkey to grow marginally driven Turkey growth almost around 10% to 15%, organically. And on the international side, we expect a 2% to 3% growth on FX in euro, we can say. And there is going to be around 1% inorganic growth, which is mainly coming from the 1/4 of Singer Bangladesh results, which we have acquired in the second quarter 2019. And on the profitability side, our guidance for 2020, EBITDA is around 10.5%, very similar to this year. And the long-term EBITDA margin guidance is over 11.5%.

Our CapEx expectation is around EUR 200 million to EUR 250 million, very similar to the years before. And our working capital to sales ratio, we expect to keep it below 30% throughout the year, which is something that we are also repeating in our calls with you. So this is more or less for our presentation. So we are expecting the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question is from the line of Kilickiran, Hanzade with JPMorgan.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [2]

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I have 2 questions. The first one is on your cash flow. This was a very strong cash flow generation CapEx and you still guide a working capital sales ratio below 30%. But do you think that you can keep your receivable days similar in Turkey in this year? Or we may just project some sort of increase in the working capital? I mean, still below 30%, but the increase from 2019. And the second question is on the raw material price trend your EBITDA margin. You come out with flat EBITDA margin. Do you think that -- I mean, can you please -- do you see any sort of upside versus the current raw material prices? And also, how much volume growth are you targeting in Turkey in 2020?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [3]

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All right. Thank you very much. On the receivables side, as you know, Hanzade, the main betterment in 2019 is coming from the Turkish market. And in 2020, we are expecting to keep this level, especially in the Turkish market on the receivables side. We do not expect an increase in the retail because we think that this is a healthy situation for both us and our dealers, and we do not really see any reason why it should be different in a year, which is expected to be better than 2019 in terms of the Turkish economy. The -- but on the other hand, on the working capital front, we expect, I mean, our intention next year for achieving the same cash flow management that we have been successful in 2019, the inventory levels, we expect to create some value on the inventory base and expect to keep this below 30% level within -- in 2020.

Your question on EBITDA, yes, we have a flat guidance. On the raw material front, yes, you're right, actually, raw materials are historically -- and some of the raw materials, not all of them but historically low in the quarter 1. But we are also having our negotiations with our suppliers. It's not going to be staying like that throughout the whole year. Most probably, we will see some increasing starting from quarter 2, which we are going to be affected most probably in quarter 3 from the raw material, but it's not going to be something which is going to be very, very effective. There will be some marginal increases in some of the materials, not all of them, by the way. So if you ask, if there would be an upside? It's really hard to say today because of this coronavirus issue in China, we really need to see when the markets will be opened in China and how the suppliers will be able to serve the market and how the prices will move. There may be some short-term price effects, positive or negative in some of the situations. So we are closely following this issue.

So I don't want to really make a comment on -- if it is going to be a -- if there's going to be an upside or not for the EBITDA.

On the volume growth question that you asked about Turkey, I'll give you -- I'll give a guidance on the market growth. So our expectation is -- to market to be flat in terms of units in Turkey. So we do not expect a downside on this actually. If there is an upside, it will be coming from here. If the market grows Arçelik will keep its market share, which has increased quite significantly this year. We would like to keep this market share throughout 2020.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [4]

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I'm trying to understand why are you expecting market to be flat, while fourth quarter shows a significant recovery trend?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [5]

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Actually -- I mean, we have just finished our results on January. We are watching the market very closely. And it's really hard from today saying that -- I mean, if the interest rate levels are going to be at that level until the end of the year, there may be an upside here, that's what I was trying to tell. But if -- and the market's expectation, as you know, the analysts and the banks are really guiding this that -- in order to really see that sustainability in the Turkish economy, we really need to have some more time. So we are a bit cautious on this, not to really guide you so positively on Turkish market. But as I told you, we don't really see a downside risk. If there is a difference, it's going to be upside.

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Operator [6]

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The next question is from a webcast participant, Michael Jacks with Bank of America. I have 3 questions. First, can you please tell me how much of the EBITDA margin uplift 10.5% came from the implementation of IFRS 16? Second question is, what is the likelihood of a dividend being declared in 2020? And third, what Turkish lira exchange rate have you used in formulating your international revenue guidance?

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [7]

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Okay. Let me take this one. For the first question, we can say that we have around 100 basis points impact coming from IFRS 16 implementation, a positive impact.

For the second one, dividends, of course, this will be confirmed by the end of the General Assembly, which will be held in March. But for our budget, we have included dividends payout, which is similar to our previous year's payout amount. So we will be confirming towards the end of March after the general assembly. And for the third question, the exchange rates actually comes from Portugal, which is the same exchange rate for full group companies. And it is quite similar to the expected inflation rate in Turkey.

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Operator [8]

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(Operator Instructions) The next question is from the line of Demirtas, Cemal with Ata Invest.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [9]

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My question is, again, related to domestic demand. You mentioned that it's likely to be flat. Do you see any destocking in your sales network, maybe in December or early January? What are the reasons behind your -- just maybe cautious market expectations? And do you see any change in the market structure in favor of organized and online versus traditional channels that maybe leads you to be more conservative?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [10]

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Demirtas, the stock level in the dealers right now at the end of the year is a very healthy level. It starts too much or it starts too well, I have to say. So this is the level that we expected it to be. So we do not really expect our sales to be really affected from the inventory levels in the -- positively or negatively from the inventory levels in the dealers. On the change in market dynamics side, we do not really see any big important impact on online or organized retailers in the market on the -- especially on the white goods front, which is the main part of our sales. I guess that's all.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [11]

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Maybe as a follow-up, the market you are mentioning is the wholesale market. Do you see any -- because we pursue that end user is still consuming in the -- in Turkish markets. Lately, the indications we are receiving from the field, the end user is still consuming that's why I ask whether it's fast destocking at the wholesale level. So that's what's kind of surprising for me. So at least, if you are seeing any flat or contraction in January after a very weak last year. So that's -- that was the reason I asked that question.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [12]

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I understand. If you want, I can answer that one. Actually, we are not surprised. We know that we are very close to following up our installations, as you know, after results. So we know how quickly our products are moving in the market. So that's why I said we are actively feeding the market according to the needs of the market. That's why I said there is a healthy level. So we do not really see the destocking because we have enough stocks, which in order to feed that, that's why I answered like that.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [13]

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Okay. And one question about your domestic revenue growth. You mentioned that it was 32%. And you have 3 different products segment. Could you just roughly make an estimate of how much price contribution was in that revenue growth? Just to -- because we have different products, but do you have any chance to give any -- what was the, I think, as -- like the model, we think it as a model. What was the approximate price contribution that -- to your revenue growth, if you have any guess?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [14]

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Just a moment. Just checking some numbers here.

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Orkun Inanbil, Arçelik Anonim Sirketi - IR Manager [15]

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Demirtas, the increase for the whole year for the domestic sales in Turkey is around 23% for the whole product categories. And if you divide into different categories, as Hande mentioned, in only air-conditioning category, we had a decline, I would say, around mid-single-digit decline in the air-conditioning category, and it is not the peak season. In fact, as you can estimate, it's a good season for this category. When you look at the other categories, as you say, I mean, we have different models, different -- many SKUs. So there were some price adjustments during the year. But I would say that it was SKU-based or product group-based. To give you some color on the value increases, the top line growth for white goods was higher than -- are higher than 23%. For the consumer electronics segment, I would say it was slightly below than the -- again, the increase in Turkish market, which is 23%. For the small domestic appliance category, it's even higher than the white goods category. I don't know whether it gives you some color, but that's what I can say for the time being. So in all categories, except air-conditioners, there was a double-digit high -- double-digit increase in all categories, except the air-conditioning part.

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Operator [16]

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

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [17]

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I also have a couple of questions. The first one is about the comment you made about keeping market share in Turkey in 2020. You foresee a flat market, and do you intend to keep the market share gains from last year? So should we read that as you willing to perhaps compete on pricing this year to keep those huge market share gains from last year? That's my first question. My second question is about whether you see any disruption in your supply chain because of the coronavirus at any of your factories across the world at this point? And do you view that as a problem or potential problem?

My third question is about also comments you made on the impact of incentives in the fourth quarter, I calculate that there's around TRY 44 million of claims and incentives recorded in the fourth quarter of 2019. This figure was TRY 31 million in 4Q '18. And I think you said TRY 13 million of the TRY 44 million in the last quarter of the year was owing to TURQUALITY, but there were other components as well. And these are all one-off? Is that a correct way to interpret this? And this is -- this amount is around 0.5% in terms of margins. So excluding that and IFRS 16 impact to your margin and the -- EBITDA margin was around 9%, is this the correct way to look at it? Yes, those are my questions.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [18]

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Thank you. I'll give the last question to Hande. The first 2, I'll answer. Yes, we are intending to keep the market share that we won this year. And as you -- as I said, we expect the market to be flat in terms of units. But what we would like to do this year is, yes, of course, there's an inflation effect in Turkey. So we are going to be reflecting that through our prices when it is needed. But on the other hand, we also have built in some mix changes within 2020, because 2019 was a bit tough for the Turkish consumer so the mix has been deteriorated when you compare it with the other years. But in 2020, we expect to at least receive some of the mix loss that we had in Turkey. So there will be some effect on the mix side as well on the revenue. On the supply chain, the coronavirus, yes, of course, you can see from everywhere that Chinese -- all the Chinese factories are going to be closed until 17th of February. And as you know, we have a washing machine factory in China, which is going to be closed by then. Actually, we have already -- I mean, before this, we have already planned this closure. Luckily we didn't lose any production until now. But of course, we do not know what's going to happen on 17th. If everything is opening up on 17th, there's no risk in terms of supply chain and our -- all the suppliers are going to be sending the raw materials and the components to us. And we think that we can manage it until the end of March by different supply chain methodologies and alternative suppliers. But of course, if China is not going to be open after -- even after March, it's going to be a problem for -- not only Arçelik, it's going to be a problem for everybody else in the world. So we are closely following the issue, and we try to minimize our risk there. We are talking to all our alternative suppliers. There's a very good risk mitigation team right now just working on this. But our expectation is China to be opened up on 17th. On the incentive side, I'm going to be handing over to Hande.

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [19]

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So on the incentive side, so it was TRY 13 million from TURQUALITY, another TRY 13 million was coming from Russian incentives. And we had around TRY 15 million coming from an R&D incentive in Turkey. So this sum up to around TRY 40 million in the fourth quarter. Most of this was recorded in the fourth quarter.

So excluding this and also the IFRS impact, we exclude that and it comes to almost around 9% on the EBITDA margin.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [20]

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But I have to add something here. You said those are onetime incentives, but they are not. We have been receiving TURQUALITY for the last 8 years almost. And we have been also receiving R&D incentives for a long -- even longer time. So it's not correct to recognize those incomes as a onetime thing. Because of those incentives, we are making more R&D. Because of those incentives, we are spending more marketing money in order to increase our existence as a brand in the market. So I would recommend you to take into consideration this as well.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [21]

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In fact, as you say, in the fourth quarter of the previous year, there was also a lump sum amount of over TRY 30 million. So I guess, I mean, some parts of it, in one way or another, repeats and this usually falls in the last quarter of the year, would it be fair to assume that going forward?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [22]

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Exactly.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [23]

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Okay. And if I may ask just one final question. In terms of your guidance on the international front, you're guiding for 2% to 3% organic growth and then 1% inorganic growth. And when I look at 2019, the slides you have for the performance of the volumes in different markets, and then how that was reflected onto your revenue per se, it seems that European markets, more or less, it's rather well. I mean, just more than the organic growth figures that you had managed. So it seems like it's mostly the other markets that didn't do as well. And some of these markets had quite bad years like Pakistan, South Africa, do you think we've seen the troughs here in some of these other markets that you have exposure to? I mean, your guidance suggests that you don't necessarily see that, but I was wondering if there's any color you could share on places like Pakistan, India, South Africa in -- going into 2020.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [24]

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All right. On the European market side, yes, you're right. They have contributed better than the other markets. We had some issues, especially on Middle East, North Africa, mainly due to disturbances in different markets, let me say. And in some of the markets, there's -- regulations are getting more and more, there's some over regulation in some of the markets. We have been affected from those. So European markets contributed better than the other markets. But as you said, especially, Pakistan and South Africa, have been lower than our expectation when we were starting the year. Pakistan, you already know the situation there. In South Africa, the country is not growing for the last 5 years, enough. So next year, actually, when we were budgeting, when we were guiding you 2% to 3%, plus 1% growth in the international side, we have taken into account that -- we are expecting Pakistan to stand up again. We do not expect a big growth, but it is -- a small growth in Pakistan could be expected. But on the South Africa side, most probably, the market is going to be flat. You asked about India as well. But India, as you know, is not reflected through our results directly in equity accounting methodology, as we have 50% share as a joint venture in the company. But of course, we are selling India from Turkey or from some other factories like Thailand, that is going to continue. But I don't think that it is too significant for the overall top line for Arçelik.

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Operator [25]

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

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [26]

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Polat, my question is also related to China. We all know that Chinese manufacturers are a big threat, particularly in the European market. And with all the production now shutdown, do you think that this could be some positive impact overall in the first Q, on your numbers?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [27]

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As I told you, I mean, if the market is going to be opened in China on 17th, I do not really expect a big impact in the market. But as I said, if it's going to continue -- this crisis is going to continue until the end of the month, that is going to be a problem for everybody because everybody is receiving components, raw materials from China, not only us but our competitors as well. So it's not only the Chinese supply is going to be affected, it's going to be us as well. So my expectation is that this price is not going to be really changing the competitive structure of the market in Europe mainly.

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Operator [28]

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(Operator Instructions) We have a follow-up question from the line of Demirtas, Cemal with Ata Invest.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [29]

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My question is about investments, the investments in the Asian markets. Could you give us some updates on that? Maybe I missed the line. My line was not good, maybe I missed that portion. But could you just elaborate the investments you're having right now?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [30]

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In Thailand, you mean, right, Demirtas?

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [31]

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Yes. Yes.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [32]

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Right. On our Asian markets, actually, we have been able to grow, especially in -- when you look at -- you remember that we have made this investment for mainly ASEAN countries. And we have opened up some subsidiaries in Thailand, Vietnam, Malaysia and very recently Indonesia. And when you look at these main countries that we are serving from Thai factory, we have been able to grow almost 20% within this year. So our expectation, our growth is continuing within this region. In -- but at the same time, I can tell that the factory capacity utilization is also increasing every year, and we expect to -- we are also sending products from Thai factory to some of the markets because some of the products are just being produced in Thai factory. We are sending products to Africa, India, sometimes Europe, even Turkey sometimes. So our Thai factory is [10 million-foot] right now, and will continue to get more efficient in the coming years.

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Operator [33]

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We'll have a follow-up question from the line of Kurbay, Berna with BGC Partners.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [34]

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I was just looking at the impact of currency, net currency gains and hedging gains on your income statement. And if I calculate correctly, it's around TRY 277 million for the full year, the net positive impact going through the income statement. I know that we have discussed in previous conference calls that majority of that is nonrecurring, but I was wondering if there is any change there?

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [35]

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Berna, yes, you're right, the majority of that actually comes from the first 9 months of the year. In the final quarter, we had some smaller positive income as well, mainly because of the swap points from our hedging operations. I mean, when you look at our initial FX position, we are normal on the balance sheet. So our hedging is always selling forward FX against Turkish lira, which means a positive FX income because of the swap point of -- because of the higher interest rates on TL compared to FX. So there may be some minimal income because of this swap point calculation. But apart from that, we are not expecting to see any such big-sized FX impact on the balance sheet, unless, of course, the markets remain normal.

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Operator [36]

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The next question is from our webcast participants. Yavuz Vidal with Pamco. Two questions. First, what would be interest expense savings in 2020 and further in 2021 from lower rate environment? Second question is, could you share effective tax rate in your 2020 budget?

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [37]

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I'll take this one as well. So full year 2020, as I have explained during the presentation, we expect the average (inaudible) on the borrowings to come down towards 15%, which means there will definitely be some saving on the interest expense side, but we need to keep in mind that the loan portfolio naturally will increase because of the expected increase in the revenue. So those may be compensating for each other. Plus, again, let me repeat that we have incorporated and (inaudible) inflation, devaluate for FX, which means our interest expense is coming from the FX-denominated financial liabilities, will also have a negative or, let's say, increasing impact on the interest expense. So our budget actually shows that we will probably print a level which is very similar to 2019 overall because of all these impacts. But in 2021, of course, the major defending factor will be the subsidiary interest rate environment, of course. But majority of our fixed rate borrowings coming from 2019 will have expired by 2021. So if interest rates continue to be favorable like it is nowadays, then 2021, of course, depending on the growth of the portfolio, depending on the debt management field the interest level will come down, interest expense level will be determined by the size of the debt portfolio. For your second question, the effective tax rate on the budget is, again, mid-teens, as we have been guiding for 2019 as well.

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Operator [38]

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(Operator Instructions) Next question is a follow-up question from our webcast participant, Michael Jacks with Bank of America.

Final question, please. To what extent have you noticed the impact of the major Chinese entrants in Europe during the last year? Are Arçelik's market share losses in the Free Standing segment are results of this? In which product categories do you see the strongest level of Chinese competition?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [39]

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The Chinese, as you remember, they have acquired 2 European companies, 1 Italian and 1 Slovenian company. We do not really see a big impact in both of them. One of the -- actually, one of the Chinese brands that I was talking about has been winning market share for some time. But that's a very low price point and to be honest with you, the Chinese brand itself is mainly winning from trade brands. So it's not really affecting our market share negatively. And we do not have an important market share loss in overall Europe. Actually, we are almost flat compared to last year. And I can tell that Arçelik is not affected from the Chinese coming to Europe, at least in 2019.

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Operator [40]

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

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [41]

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I would like to thank everybody who joined our call. We are going to be ready for your questions, as the Investor Relations team when you are more into the numbers. Thank you very much, and good evening to everybody.

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Operator [42]

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Ladies and gentlemen, there are no further -- the conference has now concluded -- apologies, and you may disconnect your telephone. Thank you for calling and have a pleasant evening.