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Edited Transcript of ARCLK.IS earnings conference call or presentation 29-Jul-19 4:15pm GMT

Q2 2019 Arcelik AS Earnings Call

Istanbul Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Arcelik AS earnings conference call or presentation Monday, July 29, 2019 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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* Ali Dhaloomal

BofA Merrill Lynch, Research Division - Emerging Markets Corporate Credit Analyst

* 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 am Gail, your Chorus Call operator. Welcome, and thank you for joining the Arçelik A.S. conference call and live webcast to present and discuss the second quarter 2019 financial results. (Operator Instructions) And 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, everybody online. Thank you for joining our call for quarter 2 results for 2019.

I'll start with the highlights, and Orkun will take over on sales and marketing until the financials. And Hande will present the financials. And I will continue and conclude with the guidance for 2019.

So our quarter is -- our quarterly results, our top line has grown by 29% and this is the TRY 8.4 billion of revenue in this quarter. The growth of stability has declined slightly due to Turkish depreciation. But our OpEx to sales ratio has improved to 23.7% compared to the quarter before.

We have been able to maintain around 10.6% EBITDA margin within this quarter. The effective tax rate is higher, largely due to the one-off items, which we will explain after your questions. And our net working sales -- net working capital to sales ratio has been pending still 28.4%, even though our domestic revenue has been very strong in the second quarter. And our leverage has been aiming around 2.4x quarter-on-quarter, which is flat.

So I'm now handing over to Orkun to go through the numbers. Orkun?

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

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Thank you, Mr. Sen. Good evening to everyone listening to the call.

I will start with the key factors affecting our sales and margin. As you can see, the top line growth was around 30%. And when you look at 5.5% growth was coming -- inorganic growth is coming from the acquisition of our new company in Bangladesh, Singer. Obviously, Turkish lira depreciation in the quarter has a positive impact on the top line for the international sales.

As you might have seen earlier with the market conditions in Turkey, despite a declining market, as we will give you details in the coming slides, our domestic sales was robust.

If you look to the gross margin, obviously increasing share of Turkey compared to the first quarter had a positive impact on our margin -- consolidated margin. When you take the raw material prices, we see some different signs, as we will also summarize in the raw material slide. But overall, I can say they were stable quarter-on-quarter.

Obviously, the Turkish lira devaluation, while it's impacting the top line positively on the international sales, Turkish lira devaluation has a negative impact on the domestic margin in the second quarter.

When you move to the EBITDA line, as you know, the second quarter and the third quarter has its peak season for the Turkish market, and increasing domestic sales has a positive impact on the EBITDA line. And Turkish lira devaluation, the share of Turkish lira is higher on the operating expenses. So Turkish lira devaluation is helping on the EBITDA line in case of devaluation. And similar to the Q1 level, we had seen a 100 bps contribution from the change in IFRS 16 rule.

If you look at the market, we start with Turkey. As you can see in the second quarter, the MDA-6 market was down by 8%, while our sales was very bright and our top -- our unit sales in the second quarter was up by 16% in unit terms. So as you can see, we really outperformed to market.

When you look at again the air conditioner segment, again, the market was down by more than 40%. Our sales was negative, but less than the market figure. So we again performed better than the market.

These are the selling figures through our distribution channel. When you move to the TV segment, we're addressing to the retail figure, so this is -- you can consider this is the end sale. And in this segment, we see a declining TV market, 22% decline. And in this segment, we increased our market share. Now we enjoy a market share more than 25%, and we are -- we lead the markets.

As you can see from -- in all categories, we outperformed the market, and we enjoy market share gain briefly.

As you can see from the chart below, the Turkish MDA-6 market was always negative in the first half, except June, which recorded 4% increase. We attribute the increase to the fact that June was the last month of the tax holiday for a special consumption tax, so this might be one of the reasons why we see a positive figure in June.

If we move to the international markets. Our still largest export market is Europe. When you look at West and East, in the western part, United Kingdom starts to -- continue to dominate the demand in Western Europe. It was very strong, it was more than 5% increase. As we have also communicated in the first quarter, we attribute to this the fact that this might be some kind of prebuying before the Brexit decision. Nowadays, it seems to be hard, Brexit. And also, as the market has been declining for many several quarters, the base has also come to a low level. This might be the reason of the increase.

In other markets, we haven't seen much change. Just we have the exception of France. In the first quarter, it wasn't so bright for France, but it seems to pick up in the second quarter and now it has recorded positive figure in the first 6 months.

The growth trend in Eastern Europe go down, around 4.5% for the region. Russia was strong in first quarter or it was better, let's say. But in the second quarter, also, we see some deterioration in the Russian market. And now at the end of the first -- the second quarter, it's almost flat compared to the same period of last year.

In South Africa, although we had a strong start in Q1, we have seen the retail demand slowing in the second quarter. And similarly, in Pakistan, you know the story about Pakistan, the recent devaluation of Pakistan rupee. And this always had a negative impact on the disposable income and, obviously, sellout figures.

And EMEA markets, for us, Bangladesh, we have seen stable trading conditions before the high season for cooling and air conditioner category in Bangladesh market.

When we look at our performance in these markets, a few words about Europe, which constitute around 42% of our sales. In hard currency terms, our sales was almost flat in this quarter. Our -- you may remember, in fact, we were talking about strong growth -- the continued strong growth in the second quarter. In fact, until June, that was the case. But in June, we have seen decreasing sales in June. Obviously, there are some differences in some of this development. The retailers had some high-inventory levels, so they didn't want to upload more inventory, and there are also some decrease in the sellout figures as well or decrease in growth figures in some markets. We continue to gain market share in the built-in segment, especially in Spain and Italy. And in Europe, especially Western Europe, we continue to increase that price index. It might be due to price hikes and also increase of product mix.

When you look at Africa, obviously, our major subsidiaries declined. And when you look at Defy in the domestic market, that was a top line growth in low teens.

In addition to domestic sales, the company is also exporting to Sub-Sahara region, as you know, and we have seen around 30% growth in local currency. So that was again a strong quarter for Defy. And for Defy, it was the first time in its history to record above ZAR 1 million, both in Q1 and Q2 each. So that was their first time.

And when you look at the Asia Pacific, as I just mentioned, due to the decreasing demand in Pakistan, our sales in Pakistan in the second quarter was flat in local currency. And obviously, the devaluation of rupee had a negative impact down the margin. We have done some and we plan some price increase in the coming quarters in order to offset this impact.

In Bangladesh market, as we will share some figures with you, there was strong growth and improving margin. We continue through our expansion in ASEAN markets and both in terms of revenue, and also our production in Thailand increase as well.

If you look about the new company in our group. As you can see in local currency, there were strong top line growth year-on-year, 25% top line growth. And as you can see, profitability in each line, there was strong development. That was in line with the group's policy. There was strong focus on the OpEx management and you can see this from the margin. And there was huge volume increase in the air conditioner category, and we expect this to continue. And also, we expect the cooling segment to perform well in the third quarter as these are the peak season for these 2 categories in Bangladesh market.

A few words on the raw material trends. As you can see, there is slight improvement when you look at it on a quarter-on-quarter basis on the metal price. But also if you compare it with the same period of last year, there is a huge decrease. We see -- we have seen some increase in the copper prices in the market, but overall, it was stable, slightly positive, let's say, quarter-on-quarter.

When you look at the plastic side, we see some increase, especially when you look at they are coming from the AGS or [follow trend]. These are the categories we have seen increasing the market prices. And we look at the [overall] sale prices, we see again positive trend on the TV segment. So overall, the raw material prices were stable briefly in the second quarter.

Now I would like to hand over to Ms. Hande Saridal for the sales and the financial performance.

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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 breakdown of the sales by region. As we have mentioned, consolidated sales grew by 29% compared with the same period of last year. Breaking this down to performance in international, we see that international sales have grown by 33% whereas Turkish sales grew by 24%.

When you're looking through this by first half comparisons, Turkey is again up by 20% whereas the international markets sales are up by 36%.

In terms of the geographical breakdown. By the end of second quarter, now Turkish sales has contracted down to below 35%, to be exact 34.7%. Western Europe is also down for 28.1%; Eastern Europe has a slight increase, almost growth of 14%. There is some improvement in African sales as well, up to 6.6%. Middle East represents around 2.8%; Pakistan, slightly down to 5.3%. The newcomer Bangladesh is now representing 4.3% of the consolidated revenue. And all the other markets combined have a share of 4.3% in terms of the second quarter rolling numbers -- sales numbers, sorry.

When you look into how the sales have evolved compared to the second quarter of 2018, we see that Turkish growth, which I mentioned to be 24%, represents around TRY 564 million contribution to the revenue. When we strip the FX impact of the international sales, which is the biggest item on the sales trajectory, represented by TRY 1 billion, we see that especially because of the low June sales in the international market, there's a slight negative number, TRY 85 million negative coming from the international organic part. And the Bangladesh acquisition accounts for TRY 361 million on the sales bridge.

Moving on to the financials for the second quarter. The group's profit, as we have initially mentioned, is down mainly because of the weaker Turkish lira. In the first quarter of this year, it was around 32.4%. In the second quarter, it was down to 31.4%, down by 100 basis points. Overall, it's comparably higher compared to last year.

The operating profit line actually benefits from the weaker TL because of the larger portion of the TL-based cost. EBIT is now around 7.5%, which is up by 130 basis points compared to first quarter. And results from the profit before tax is at 3.6%. On the net income line, again, as we have initially mentioned, the effective tax rate actually is higher in this quarter, and the net profit margin is down to 2.8%. As mentioned, there are other impacts on this tax revenue mainly coming from our international operations. And there's also the impact of the Turkish operations, mainly the income from the derivatives instrument.

On the EBITDA line, we have seen the 10.6% margin on the EBITDA, generating TRY 893 million EBITDA in the second quarter. When you look at the first half, the EBITDA margin stands at 10.2%, which generates the sales trend to the TRY 1.6 billion on the EBITDA line.

In the margin by segment, it's a consolidated level, as mentioned. We stand at 31.4%. On the white goods side, we see the impact of the [fixture] weakness and also the impact of some of the promotions in Turkey, mainly in the [premium] segment, which brings the gross profit down to 32.5% for the White Goods segment. Customer electronics is up to slightly above 25%. And the other segments, which includes the air conditioners and the small domestic appliances mainly has remained pretty stable at 29.3%.

On the working capital item, you can see that we are well within our KPI level. We always iterate that the aim for -- stands below 30%. At the end of June, we have seen the 28.4% net working capital to sales ratio. When you look into the items despite the high seasonality of the Turkish market and the weakness especially in the market, we see that we have a very strong performance in terms of the receivables. Our fixture receivables are up by 23% with the corporate trade receivables are up by 15%. At the inventory level, it is up by 12%, and the trade is stable. Trading expense have increased by 17%, which was that there's an increase in the net working capital number by 11% only, despite the higher FX rate.

Of course, good management on the working capital side has its impact from the financial debt part as well. Looking just the gross debt, you can see that we have around TRY 13.3 billion worth of gross debt. And we carry 5.6 -- TRY 5.7 billion of cash on our balance sheet, totaling a net debt of around TRY 7.5 billion.

On the financial profile, of course, it's actually our debt is a major item where we continue to fund the working capital with the Turkish lira. The effective interest rate stands at 25%. However, in the coming period, with the interest rate cuts from the Central Bank, which has materialized last week and the ones that are expected in the remainder of the year, we are expecting to have around 200 to 250 basis points improvement in the overall Turkish lira borrowing cost.

We have some reductions coming back in August and September, which are coming from last year as higher interest rates. So those will be off the portfolio, and the new ones will be coming in at the lower rate. Therefore, this is the reason why we're expecting to see this influence by the end of the in the Turkish lira borrowing curve.

You can see that Bangladesh actually has been added to the portfolio, the Bangladesh sector. With the acquisition of Singer Bangladesh, there is now around TRY 268 million worth of new borrowings added to the portfolio. And despite the cash that has increased up for this acquisition, our net levels stand at a very have healthy level of 2.4x when you look at the June financials.

In terms of the cash breakdown by currency, you may notice some changes compared with the first quarter, which are an increasing portion in both the Turkish lira portion and the dollar. The reason for the Turkish lift is because we have continued to keep collecting from our dealers in Turkey. And therefore, this has resulted in some positive TL numbers on our balance sheet, and we have started making deposits with this, so there's now a 9% representation in the Turkish lira portion. And the reason why there is some shift from Europe to the dollars is because of the ongoing negative rates in the euro deposits rate outside of Turkey. We have shifted these mainly into dollar to benefit from the higher deposit rates in the dollar deposit market.

One item, which has actually happened last week after we have announced the June financials, is the conditions in the TL bond market, which we have completed last week, as I mentioned. They have printed another TRY 500 million 2-year maturity bond. This bond's spread is lower. The first bond was [2-year maturity] LIBOR plus 75 -- 60 basis points. This one is down to 50 basis points. And similar to the first bond, we have fixed this bond issuance in the swap market -- in the interest rates swap market. And this is now going to be represented by a fixed Turkish lira cost, which is very competitive, around 18% on our portfolio.

Next slide is the FX hedging. As we always iterate, we have a very strong KPI and a very [curved] follow up OpEx KPI on our financials from an [overall] consolidated level. Similar to previous quarters, we have ended the June period with again around 3% of our equity on the exposure against Turkish lira. The exposure again is coming mainly from our international subsidiaries where the hedging capabilities are quite limited. The impact coming from the total balance sheet is pretty minimal as of June numbers.

Here, there's another news that I would like to focus on. When we had issued the dollar-denominated bonds starting 2013, it actually ended in a cost [in the booked] transaction because we didn't have enough dollar effects making this dollar a liability on our balance sheet. So the whole proceeds of the bonds were actually swapped into euros and pounds in order to match the currency mainly on our previous year books. However, as we found, the double invoicings actually increased, and they had [more of the] receivables on our balance sheet. And also because we have started holding more dollars rather than euros on our balance sheet, we have actually materialized some matching dollar effects against this dollar liability. And it's had -- and the transaction was [fighting] the money, so we thought it was a good time to unwind this transaction. So last week, this hedge is now out of our books, and we will continue to hedge the remainder of the exposure, which is quite minimal through the usual hedging activity that we do for the other balance sheet cycle.

And the final slide that I would like to mention regarding the cash flow. We continue to generate positive free cash flow from our net operations in the first half, which accounts for TRY 1.3 billion. We have TRY 488 million net bank borrowings in the first half, with the impact of FX conversion, which is close to TRY 300 million.

The CapEx number that we have spent in the first half accounts for close to TRY 600 million, which is close to EUR 90 million. And in the other column, which is again one of the biggest tickets, actually is composed of the Bangladesh acquisition, which is around TRY 420 million. And the rest is the other -- usual other items, which means the interest payments and all the derivative items and all the other items on the income statement. So we have [and you see] cash and cash equivalent cycle is TRY 5.7 billion, as I have mentioned on the financial debt slide.

So I will now turn the floor over to Polat Sen for the guidance.

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

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For 2019, guidance actually -- we are living in a turbulent time in Turkey, and this is really affecting our guidance. So our expectations on growing exchange rate, our expectations on the seasonality is changing, mainly due to the special consumption tax reduction has been cut off. So we decided to change our guidance on some of the items that you're going to see.

So on the White Goods market volume growth on global side, we have no change. It's still standing at 2% growth level. But on the Turkey side, the expectation of the Turkish market is around 15% contraction. Previously, it was 10%. Even though Arçelik has been performing over the market in the first half, the expectations from the second half is worse, mainly due to the special consumption tax reduction has been gone. And there was quite a full demand for the first half from the second half.

In the first half, the market has decreased by almost 9%. So 15% contraction overall the 2019 means almost 20% reduction in the second half of the year for Turkey. So that was the main reason. So that also is in effect on our revenue. The Turkish market, our second half performance is expected to be parallel to the market as well. But also, there is a currency impact. I mean in our 25% to 30% growth expectation, the currency was higher than the level that we are right now, and it seems like there will be a currency effect. Also, there are some currency effect like we found in some other currencies like Pakistan rupee and South African rand. So when we take them all into the equation, we decided to decrease our revenue growth to 20% to 25% in Turkish lira terms.

On the EBITDA margin side, in the first half, we have been able to come up with 10.2% EBITDA margin. In the second half, our expectation -- due to our expectation to Turkish market weaker than our initial guidance, and the pricing ability may be a little bit more limited to the -- due to the weak demand, we expect the Turkish -- the domestic part of the overall sales rate to be less than the first quarter.

On the international [capital] side, we also think that it may not be as high as we initially expected, mainly due to the strong Turkish lira. So we decided to revise our EBITDA margin for 2019 to 10.5%. Previously, it was 11.5%. And now we are remaining our EBITDA margin long term around 12%, which we think that is achievable once the Turkish market is going to be back on its foot -- feet. So that's more or less that we can say about our presentation.

So we'd like to get some questions from you in order to clear the issues that you have -- you may have in your mind.

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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, and I'm trying to understand your guidance for 2019. The first one is about the Turkish market. In the first half, you performed extremely well. You said that your volumes are up like 16% in the MDA-6 segment, but the market was down around 8%. And now for the second half, you are saying that you will be in line with the market, but you are cutting the market volume by 15%. So I couldn't understand, you still performed better than your initial guidance in Turkey. So -- I mean can you please explain why Turkey drives your revenue guidance lower, even though you are still performing better than your initial guidance?

And the second question is about the currency. So I understand you are looking for Turkish lira depreciation in the second half, if I'm right. Would you please let me know about the -- let us know about the lira-dollar rate that you are forecasting. And if you are looking for lira appreciation, this is quite positive for your Turkish lira -- Turkey margins because you have currency in your cost. But you mentioned that Turkish margins may be down because of the pricing difficulty, but you already increased your prices more than you need. So I couldn't really understand what drives margins down.

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

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Right. Let me clear the Turkish market situation. The numbers that you have been talking about is 15% growth in MDA-6. It was only for quarter 2.

For the first half, let's divide the year into 2. For the first half, the market was down by 9% for the first half, [partly] has been growing by 10%, only MDA-6 I'm talking about only.

In the second half of the year, or let's say, the overall expectation of the full year is around 16% contraction in the Turkish market. So this means the Turkish market is going to be going down by almost 20% in the second half of the year. So what we are expecting for -- actually, we are going to be in line with the market in the second half. So we have been able to go up to almost 58%, 59% market share in the first half. But we have been also sharing some of you when you were asking that the thing that is not sustainable. But we are not going to lose all of them, but we are going to be keeping, as you know, our normal level is around 50% market share. So we are going to be keeping around 55%.

So that's why during the second half, our expectation is going to be [minus so much is] because we expect that our competitors is going to make a move as well because they have lost a lot of market share. And they have to do something about it. And that is going to create some pressure on the margins, some pressure on our sales. And we do not want to give up all our profitability for that. So that's why we have been guiding 20% decrease compared to last year's second half.

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

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So does this mean that even though you have a very weak second half because of the market dynamics, which is obvious, of course, you -- I mean versus your guidance in the beginning of the year, you seem to be still in track of your guidance in terms of volume. Because you also outperformed in the first half because that means that you will have a volume contraction, of course, less than 15% that you see for Turkey, right? Okay.

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

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Yes. When you compare with the first half, in the beginning of the year, yes, you're right. Our expectation was to be in line, and we weren't really expecting that amount of market share gain. So that was there, and you're right about it.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [6]

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So this doesn't affect your revenue guidance, I mean, [count].

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [7]

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You mean in terms of revenue, Turkish lira revenue terms?

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [8]

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Yes. Probably [I am not sure] if I understand.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [9]

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Yes, it should be right. I mean you're right about this one on the revenue guidance side. But the currency, on the other hand was the main factor actually, which affected our guidance on the revenue. Because in the beginning of the year, you also know that the expectations from the currency were -- the depreciation was really, really high, and we made our budget accordingly, but that didn't happen that much.

So if you're asking me that we are expecting a Turkish lira appreciation for the second half of the year, I can say that we are not. We expect a slight amount of depreciation again. I can't share the numbers with you, but we expect a depreciation, but not as much as we have guided in the beginning of the year. But much lower than what it was. So that was the reason on the currency side.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [10]

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But still, the better currency from a Turkish lira perspective still provides a better margin for Turkey, right?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [11]

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The issue is that in the first half of the year, we weren't able to increase our prices as we want it to be. We were planning some increases. But because of the special consumption tax was extended, we couldn't do it. We didn't want to increase the prices while the government was trying to keep the prices lower.

So that was the reason actually of our -- so in the guidance that we have given in the beginning of the year, we haven't really foreseen the special consumption tax extension. So we didn't guide you accordingly. So it -- and until the end of June, we didn't even know if it was going to be cut off or it was going to be continuing. So it was a hard time to make a guidance because it's really changing the seasonality of the company, and it's really changing the capacity utilization ratios. It really has a lot of effect in it. So it's not easy to explain with only one golden rule thing that Turkish market is going to be affected positively from the better rate.

Actually, the market is making its price accordingly. So if the expectations are -- if the currency is not really moving towards the direction -- towards the higher direction, then we don't increase the prices. So that is keeping our profitability at the same levels.

As we say always, we are the price maker and the market maker in Turkey, so we are really trying to feel the cost of the market. And the market is making the price at the end of the day. So the profitability in Turkey is not really changing according to appreciation or depreciation in the long term. So at the end of the day, we are landing to a point that is more or less the same level of profitability.

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Operator [12]

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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 [13]

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My first question is about your FX position. And as far as I see, in the second quarter, you are around TRY 69 million FX gain compared to TRY 170 million FX income in first quarter. Could you tell us how this picture changed starting by third quarter when TL starts appreciation? That's my first question.

My second question is about the domestic market's expectation. I understand that that's, the wholesale markets, wholesale market estimates. Do you see any increase in the natural levels overall in Turkish White Goods markets? Is there anything related to that lead us -- lead you to cut the growth expectations? That's my second question.

And the third one is about the other markets, like TV and the other products in Turkey and its arrangement. How do you see the growth prospects in those markets and in those business segments?

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

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Let me answer about the domestic market expectation about this wholesale market situation. Yes, the numbers that we are giving you is the wholesale market. What we are trying to do is we are trying to keep the inventory level in the dealers as healthy as possible. So we begin this first 6 months result. Actually, the inventory level is quite healthy in our dealers.

And at the end of the second quarter, they have made good sales, actually. They have got a lot of inventory, but they have been able to sell them out. So still, the inventory level is a healthy level, but we expect that the demand has been really pulled to the second quarter from first quarter. So that's why our expectation like that.

For the other markets that you asked for, I didn't answer the question very well. You talked about how were the sales are related or...

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [15]

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I'm asking in domestic markets, TV and consumer electronics and others, how do you see the trend? Both in Turkey and international markets.

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Orkun Inanbil, Arçelik Anonim Sirketi - IR Manager [16]

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Cemal, when you get TV markets, obviously, as you remember, there were some regulations on the installment. And with the new regulations, we see some relief in terms of extending the installment period. So in the second quarter, the market was down by 22% and the 6 months decreased also around 25%. With the new regulations, with the expansion of the installment, we probably see some relief and this -- that around 25% decline will be decreasing in the second quarter. This is obviously we assume that there will be no change in the regulation, and the currency will be stable. And we aim to continue our leadership in the TV segment.

In the air conditioner segment, obviously, as you get estimates, it really depends on weather condition. And as far as we all see the -- it's not very hot this season of summer. And now also, the special consumption tax probably in results, and [in that]. But therefore, probably we'll see the continuation of the decrease in the second half as well in the air conditioner segment.

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [17]

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And Cemal, let me take your question regarding the FX position. And we have some one-off things in the first half because of the unique market conditions, let me say. In the first quarter, it was even a bigger number on the FX change side, mainly because of the abnormalities in the swap market and also the volatility in the Turkish lira has also had a positive impact on our, let me say, outstanding transactions. And there was also the impacts of our long position, which coincided with a weakening Turkish lira and the long position was stopped because of the Bangladesh acquisition. So all of these combined actually had a big impact in Q1.

In Q2, the number is much lower, but still, as you rightly mentioned, we recorded around TRY 65 million of FX gains. The reason being again the same reasons actually because we have a very big chunk of FX-denominated balance sheets. Therefore, the volatility in the Turkish lira market mainly through the months, when -- coincides with the positive flow of the export items and the import items throughout the month because of the invoicing differences since we're not able to hedge the cash flow, let me say, on a daily basis. Then we may have some positive impact.

Plus, when you look at our balance sheet position overall, we are naturally long FX against Turkish lira, which means when we are hedging our balance sheet, we're usually selling in the forward market, meaning we're benefiting from the interest rate differential between the Turkish lira and the -- either the dollar or the euro that we're selling. That's why in this period again, we also benefited in terms of funding from the devaluation of the outstanding derivative items on the portfolio.

However, going forward, even when we're budgeting actually, regarding our budgets, we never account for any FX gain or loss because, as we always say, this is not an income, or income item for us. So we never try to benefit from the FX move. But as a result of the big notional that we have, it is sometimes a result.

So for the remainder of the year, because of the [online] of the Eurobond hedge that I have mentioned, for July, we may have some positive impact coming from the difference of the FX rate against Turkish lira between the 30th of June and the dates that we [onlined] the transaction. But apart from that, we're not -- we cannot see now ahead a forecast for the FX gain going forward. So we're aiming to keep it at 0, let me say, for the remainder of the year.

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Operator [18]

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(Operator Instructions) We have a follow-up question from Hanzade Kilickiran with JPMorgan.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [19]

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Polat, I'm trying to ask about the reasons behind a very weak market expectations in the second half. Would you please elaborate this? Because you mentioned about the first half as a kind of build up coming from lot of demand. But your numbers point out the "low volume" in the second half, if the market's going to be down another 25%. This is even lower than a volume that we saw in 2008, 2009 crisis. So apparently, Turkey's cutting rates, so why are looking for an even more negative consumer demand in Turkey?

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

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Actually, I don't know if you have been able to follow the press release of the Turkish white goods producers association. That was their -- 15% was their number as well. So as one of -- as the [half] of the overall market, we see that as well.

Actually, the first 2 quarters has been unexpectedly better, mainly due to the special consumption tax reduction. And the ability of the Turkish consumers to buy is getting harder and harder, actually, in the second half. So they have -- the ones who really need have taken their demand to the first 2 quarters instead of buying in the second half of the year. And we do not really see a big change in the consumer sentiment.

And to be honest with you, on the construction side, which is really related to our reduce in sales as well, we see a big drop in new houses. And that is also affecting the overall number. So those are piling up all together, and we are ending up with this 15% market volume contraction.

Hence, I mean maybe actually -- I mean, because at the end of the day, we are going to see the results, but we know that our -- when you look at the opposite side, our competitors have lost significant amount of market share in the first 6 months and most of them are going to be attacking back in order to get some of this back from us. So that's why when we say that they may get some of it back from us for the overall year, but we think that we are going to keep some of it.

So that's why we said that Arçelik is going to be acting at the same level with market in the second half. Actually, maybe we may -- there are some, let's say, scenarios that we are also running about if the competitors are not going to be that, let's say, aggressive or if the consumer sentiment or the construction industry is not going to be that depressed. In these cases, this number may go down. We do not expect a downside when we say 15% market contraction, but we can say that we can remain expect for the second half of the year upside instead of a downside. So we just want to be realistic on the expectations for the second half. That's why we have built our numbers like that.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [21]

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And so -- okay, I understand there is an important slowdown in the construction. And that puts Turkey back to 2008, even though everything grows. I understand. So there's a huge accumulated pent-up demand in 2020.

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

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Yes. If you look at only house-to-house, yes, you're right about this. But when you look at the whole year because we think that the seasonality is changing very dramatically due to the special consumption tax issue, which we don't have in 2008, '09, whatever year that you're talking about. So it's better for -- I mean I think it is better to compare full year versus full year when we are comparing the years. The second half is really -- this year, second half is really getting affected because of this special consumption tax reduction issue.

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Operator [23]

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The next question is from the line of Ali Dhaloomal with Bank of America Merrill Lynch.

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Ali Dhaloomal, BofA Merrill Lynch, Research Division - Emerging Markets Corporate Credit Analyst [24]

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I had just a couple of quick questions to follow up on what you just said. I mean first on Turkey, can you tell us a little bit about the pricing thesis that you are planning for the second half, especially the third quarter that I guess you have some visibility on. Maybe fourth quarter, as you said, market conditions maybe quite weak so you still don't have visibility on that.

And then second question about international sales. I mean in second quarter, you had the 2.1% contraction organically. Can you elaborate on the markets there that have been down? Because when I look at the Slide 5, it looks like, I mean, most of your markets have been performing quite well. So if you can just give us some color there.

And the last question is just about leverage. I was wondering if you have any plan to reduce your gross debt because, I mean, you are running with quite high cash position. I mean given the cost of funding locally, I mean, it's still going down, but do you have any plan to pay back some of the debt? Or will you keep this large cash position for the foreseeable future?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [25]

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Thank you. I'll answer the Turkey price increases on third quarter. We have increased our prices actually mainly after the special consumption tax, but this is going to be covering the special consumption tax only. And in the coming part of the third quarter, we are really closely following the currency, the euro and dollar rates. And also, at the same time, we are closely following how the market is going to be reacting to these market share losses. So what we are planning is we are planning to keep our market share, as I explained you in the previous questions. And if we need to increase the prices in order not to lose the profitability, we will increase the prices.

But it is really hard to foresee right now. There's no -- there's not going to be any increases on the -- in currency. Turkish lira is not going to depreciate. I don't think that we are in need of increasing the prices. But if we do, if there is going to be an increase in depreciation, we also are going to be increasing our prices.

We are also closely following up the raw material index. As Orkun has explained, compared to the first quarter, the second quarter, you have seen some increases on the plastics side mainly. And we expect to see some increases there as well. If they need to -- if they really see this is affecting our pricing or the profitability, we are going to also consider increasing the prices accordingly.

So our view is that, we have the ability to increase the prices, but we really need to see what -- how the market is going to evolve. Right now, it seems like there's no need. But within 1 month, things can change very dramatically in Turkey. If it is so, we can increase the prices right away the following month. So that's what I can say.

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Orkun Inanbil, Arçelik Anonim Sirketi - IR Manager [26]

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Regarding the international market, obviously, it's not that easy as Turkey. Even in markets like Pakistan, where we are the leading player. I mean you know the rupee devaluation in the first half, the rupee devaluated somewhere around 14%. We increased our prices in major categories like refrigerator, but I can say it's just helpful the devaluation. And we plan to continue these price increases in the second half in order to compensate for the loss due to the devaluation.

In some major West European markets, like U.K. and France, we've been trying to do some price adjustments. But obviously, it's not very easy. It really takes long time to negotiate with retailers. And it also depends on the product mix, even if we increase the prices on apples-to-apples basis, there might be some trading down so -- despite the diluting the price increases.

So the pricing ability of this obviously different from geography to geography. And in the second half, we will try to do a -- in geographies, especially, which has affected us in terms of devaluation.

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [27]

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Let me take your question regarding the leverage and whether we would actually use the cash to pay on the balance sheet in order to reduce some part of the debt and reduce the leverage.

First, when you look at the breakdown actually, around half of the cash is not -- is actually owned by the parent company, which there is the majority of the debt. So the rest of the cash, almost half of the cash sits with the subsidiaries.

And when you look at the nature of the cash, as I have mentioned throughout the presentation, yes, there is some stake around 9% in Turkish lira terms. But those will be used in order to redeem some parts of the [goods share] that's coming up in August and September.

Probably the remainder of the cash is actually in hard currency. So the way that we can use this cash in order to pay our Turkish lira debt is by selling our hard currency cash into Turkish lira, which would mean part of business that's on the FX position, which can, of course, be handled. But this is not the way that we prefer it at this point especially when there's so much and decreasing in the markets. And we [have seen] the cash position that we hope actually now total up, especially in terms of the resiliency of the currency and in terms of the rating agency's notion of Arçelik because this is actually what marks us PFC positive rating on Turkey. It was because we have hard currency cash and the location of the cash, which sits with the international entities that help us keep our BB spot credit rating, where Turkey has been receiving opposite. They're downgraded throughout the last 3 years.

So the intention is as we continue to generate Turkish lira through our operations. Yes, we use that to redeem the -- mainly the Turkish lira debt. However, when you look at the FX redemption, those are mainly out on the longer horizon, starting from September 2021 and then in '23, the 2 bonds that we have. But currently, we're not planning to have a buyback on these 2 bond.

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Operator [28]

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(Operator Instructions) And the next question is from the line of Berna Kurbay with BGC Partners.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [29]

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I have got 3 questions. The first one is on your EBITDA margin guidance of 10.5% for full year 2019. That still foresees a slightly better margin in the second half of the year versus the first half. And I was wondering whether you're expecting this to be mainly driven by efficiencies at the OpEx level or the gross margin level. I know you mentioned a few factors here and there, but I was wondering if there was particularly something that you see improving in the second half on either the gross margin side or the OpEx side.

My second question is, again, on the domestic markets, but I wanted to tie it to the working capital. It sounds like you've done very well in the first half. Your sales to the dealers increased much higher than what we see as the market's wholesale figures. And you're saying that this is actually reflected on the retail side as well, and your market share has jumped. But it seems like the contraction that you expect in the second half of the year came as a bit of a surprise. It wasn't perhaps expected until the end of last month when the government decided not to continue with the special consumption tax cut. So I was wondering whether there's some inventory accumulation somewhere either at Arçelik -- I mean I can see that as of the first half, working capital looks extremely fine. But is there any -- I mean should we worry about seeing a higher working capital to sales ratio in the remainder of the year than the 28% you had?

And my final question is about your air conditioner sales. And I was wondering if the heat waves in Europe is in any way affecting your sales there. Are you seeing increased demand?

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Orkun Inanbil, Arçelik Anonim Sirketi - IR Manager [30]

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You take the easy question. I'll take the others.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [31]

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For the EBITDA margin guidance, yes, as we said, we are 10.2% in the first half. And if we are expecting 10.5% in the whole year, it means that increase in the second half. You're right about it. And our expectation is mainly due to the -- actually, as I told, we have increased our prices by almost 6.7% at best in Turkey right now. The effect of the special consumption tax on our costs is around 4.4%. So there is going to be some profit effect on our profitability. So that is going to be helping, first of all.

And the other thing is that we -- the first quarter was a little bit weak, mainly in international sales because that's the last quarter of 2018. So we expect some pricing increases, and we expect some profitability increases in the international side as well, which we have been closely following up.

And as you have pointed out yourself, OpEx is another item that we have been working on at the company. So we are expecting a better OpEx ratio in the remainder of the year when compared to the first half of the year. So those are the reasons about our EBITDA margin guidance.

On our net working capital side, yes, as you said, it's actually exceptionally good. So we have been increasing our sales. We've been increasing our market share. And I mean everybody is -- and we are in a very turbulent time and the financial crisis in Turkey, where our dealers are told that they are having difficulty in expecting the cash. But what we have done is we have been able to manage their inventory very closely. And we didn't really want them to take on extra burden, and they're -- starting from 2018. So when we came to 2019, we were really healthy, and we told them that we are going to be increasing their profitability, and we were increasing our prices.

So we gave them some more profitability, some more margin on sales. But we told them that the important thing to keep this system going on is we shouldn't be really asking for more and more terms from Arçelik. So -- and we planned our company accordingly. Our companies, we're not for the dealers, I mean for the wholesale, I mean. We have structured our company, giving more days to them. And it worked out. At the same time, they have earned money. They have sold, and the sellout has been really good as well. I mean better than their expectation. So this formula worked out.

And at the end of the day, our net working capital has decreased to 28.4%. And in the second half of the year, we do not really see anything that is jeopardizing this situation. So we are planning to still remain at under the 30% that we'll reach our target. And I think that I don't really see any big danger, which is going to be affecting us negatively on that because we know that they are collecting money, and they are not deep debt -- bad debt on their collection. And when they don't have that debt, they know that this is how they can work actually, and they have to collect and they have to pay off debt in order to get some new orders.

So everybody is working accordingly on our dealer system. So our plan is not to give them more payment terms. So that's why I expect the second half good as well. And that's also expected from to our cash flow numbers, I have to say. I mean it's one of the highest professional cash flows that we have ever presented in the first half of the year. So I think that, that also gives some idea about the exchange.

On the A/C sales side, I'm giving the word to Orkun.

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Orkun Inanbil, Arçelik Anonim Sirketi - IR Manager [32]

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Berna, I mean as you know, on the international side, especially as a way to commission in Europe, you refer, in our -- yes, we are selling air conditioners to some markets. But I can't say, for example, in the U.K., we do not sell A/Cs, for example, and it's one of the biggest markets for us in general. When you get to markets we sell like Italy, or just taking -- yes, in Italy for example, or France, we see double-digit increases in air conditioner sales units. But if you consider that most of our sales in Europe is coming from white goods, these increases actually do not make much sense in terms of the top line or the profit line.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [33]

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That was all very helpful. If I may just ask one more thing. On the working capital side, Polat, that you explained it in detail. I guess I was wondering that as of the end of the first half, your working capital is, as you said, extremely good cash flows, extremely good. And you also mentioned during the presentation that the dealer inventory levels were okay.

But if this slow down, this expectation of the slowdown in the second half of the year is to the tune of 20%, is there not maybe an elevated level of inventory at the dealer level now because you weren't necessarily forecasting that late in June? That was my -- that was what I was trying to understand.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [34]

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Actually, what we are planning is again, I mean, our Turkish team's plan is today, we have a healthy position on the inventory at the dealer. So a 20% contraction in the market in the second half is also -- has an effect on our dealers as well, as you rightly pointed out.

But what we are saying is we would like to go even lower in the dealers matching levels. We don't want them to keep on getting inventory, which they're not going to be able to sell, which is going to be very expensive for them because of the financing cost. So we are going to keep on following up our dealers inventory levels very, very closely in the second half because we know that this 20% contraction may figure, if we do not really follow up closely. We don't want to really get into a situation that we are going to be giving them some more days extra. And our plan is to avoid it as we have done in 2018 and '19 first half.

And we feel confident on this because now we have some experience on how to manage the inventory levels of our dealers. And they are believing us, to be honest because in these very turbulent times, there -- we are the only dealers in white goods dealers in the country, which is really making money. And they are happy about it. And I think that our credibility on the dealer side is more than ever. I can say that.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [35]

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And also you mentioned that there is an impact of the special consumption tax as you reflected it onto the prices once the cuts is taken back. And can you just remind us where this profit impact is coming from? Is it an inventory impact or...

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [36]

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I'll tell you the summary. As you know, the special consumption tax is 6.7%, and it is on the prices that Arçelik is selling to its Turkish subsidiary. But the numbers that you see when we were -- when the special consumption tax came, we cut this amount of -- but the 6.7% is on Arçelik sales price to Arçelik Turkey. But the 6.7% is equal to almost 4.4% on the Turkish subsidiary sales.

So that's what I'm saying. We have increased our prices by almost 6.7%, but the cost of the special consumption tax to us is around 4.4%. So there is a profit effect on our domestic sales. If you need more explanation on this, I think our IR team can give you some more explanation after the call.

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Operator [37]

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The next question is a follow-up question from Mr. Cemal Demirtas with Ata Invest.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [38]

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I have a question regarding your Bangladesh operations. As you mentioned, 5.5% inorganic growth is coming from Bangladesh. And the margin there is around 15.2%. And I see 20 bps contribution -- additional contribution from Bangladesh. How do you see the trend? Is it in line with your expectations? And do you expect a momentum in third quarter and fourth quarter? As far as I know, the third quarter is the high season. Do you have any expectation for the full year in TL or in U.S. dollar terms in that market?

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

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We do not disclose our expectations on Singer Bangladesh until the end of the year, but Singer Bangladesh is also a listed company in the Bangladesh Stock Exchange. We do not want to contradict to what they said. So -- but our expectation is -- for Bangladesh is very much in line with our expectations, I have to say. And we are still at the stage that we are working on a strategic plan for the future. How we are going to invest and how much we are going to invest in which product in the country, which is going to be ready in quarter 3.

And starting from 2020, we are going to be even increasing our market share, our existence in Bangladesh. I'm not able to answer the numbers according to your question because I do not want to disclose any information that Singer Bangladesh didn't. But we will check that. If they have also disclosed this information, our IR team can give you some more color on this.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [40]

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Okay. And one last question about the India operations. I've seen your income from especially it's [vault] bank, I see around TRY 30 million loss from those operations. What do you expect from that going forward in the second half of the year and maybe for 2020 from the India operations?

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

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Our Indian operations, as you know, it's a new operation. It's -- we are trying to build our factory there. At the end of the year, our factory is going to be ready. What we are trying to do right now is we are trying to test the market with the products that they are buying all around the world from Arçelik factories and from some other outsourced product. We are not really very much checking the -- because in India, there are a lot of custom specs when you buy products outside India. We just did not want to stop our operations because right now, our factory is going to be up and running. We would like to be ready for the market. So we see this most in 2019, which has already been calculated in our feasibility study. And we see this as an entrance fee to the market.

But what I can tell about India is our sales is going, in terms of units, it's going great. And once our factory is there, it seems like we are going to be -- and our product has been very much receptive by the market. And once our costs are right in the new factory, the profitability is going to come as well.

And the expectations are still there, I mean for India. I think that this is going to be our highest growing country in the coming -- in the next 5 years, around until 2025. We are going to grow very, very quickly in India. And all the signs are right there and we are almost in all the markets, the currency is really high. So for India, we do not have anything surprise for us right now. We expect all the surprises for the coming years.

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Operator [42]

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We have another follow-up question from Berna Kurbay with BGC Partners.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [43]

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I just wanted to ask about the effective tax rate. In the first half, did this 19%, if I calculate correctly, and the 23% in the second quarter alone. What's the outlook for the full year or the second half?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [44]

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Let me tell you about that. In the second quarter, there are some one-off items. The main one is coming from our [Burmese] subsidiary. There was a release of the provision due to a lawsuit that we had, and that affected the deferred tax item. So that was the -- one of the reasons. And other than that, there were 2 more items.

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Orkun Inanbil, Arçelik Anonim Sirketi - IR Manager [45]

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The second one was coming from Pakistan, the Dawlance, which has been enjoying some incentive, which were canceled. And we had to pay back this debt at once the incentive that we received. So we had to pay the tax related with that. And on top of that, these are the one-off items. That's why we said [these aren't] typical because Singer is also the newcomer to the group. When you get the financials, you see the effective tax is around [27.8%]. So these are the reasons why we had such a high effective tax rate in the second quarter.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [46]

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In the second half, our expectation is around -- I mean for the overall year, we expect around 17% effective tax rate, but it may change. It's just 17%, right? So they could change the government regulations or some other stuff. But at the end of the year, we are expecting to see this number.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [47]

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17% for the full year, right?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [48]

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Yes.

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Operator [49]

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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 [50]

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I'd like to thank everybody who participated in the call. Thank you very much. If you have some further questions, please contact our IR team after this call. Thank you.

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Operator [51]

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