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Edited Transcript of ARCLK.IS earnings conference call or presentation 30-Oct-19 4:15pm GMT

Q3 2019 Arcelik AS Earnings Call

Istanbul Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Arcelik AS earnings conference call or presentation Wednesday, October 30, 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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* 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

* R. Fulin Önder

Seker Yatirim Menkul Degerler A.S., Research Division - Equity Research 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 third 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. Welcome to our earnings call for third quarter of 2019. I will start with the quarter's highlights in our presentation. Then Orkun will continue with the sales and margins, and Hande will continue very strong with the financial information.

In third quarter 2019, Arçelik's top line has grown by 7% to TRY 8.2 billion. And our gross profitability has improved to 33.1%, better than last quarter and also year-on-year. This is mainly due to better raw material prices in quarter 3. Our OpEx-to-sales ratio has stayed at around 25.2% in third quarter. And the cash flow is -- free cash flow is quite strong in the first 9 months of this year. And our leverage -- our net working capital-to-sales ratio has gone down to 28.3%, and our leverage has been at 2.4x level.

So I'm going to hand over to Orkun to continue. Then I'll come back again on the guidance section.

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

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Good evening, everybody. I will start with the key factors affecting our margins and the sales.

As you can see our top line growth was 7%, mid-single-digit, which we haven't had for a very long time, but obviously, there are some reasons behind that. As you all know, the strong Turkish lira had a negative impact on it, especially on the international sales. And also on the international side, we had seen some depressed demands in some key markets, especially in some [EMs]. And also, you should remember that the third quarter of 2018, it really benefited from a very strong and rapid Turkish devaluation in terms of the translation impact. So these were the factors having a negative impact on the top line growth compared to the same period of last year. Contribution was obviously coming from Turkish markets and also the acquisition of Singer Bangladesh. These are the factors affecting the top line growth in this quarter.

When you look at the gross margin, a stronger Turkish lira had obviously helped us, the domestic profitability, which was also coupled with a decrease in raw material prices. These were the positive factors on the gross margin. On the other hand, obviously we had a huge exposure to pounds and euro in terms of sales. The performance of these currencies against USD, which is the major purchasing currency for our group, obviously had a negative impact. But overall, though we have seen the gross margin improving, both year-on-year and also quarter-on-quarter in the third quarter.

When you look at the EBITDA margin, you know that there's a positive impact coming from the IFRS 16 implementation starting from the beginning of this year. In this quarter, the contribution was 85 bps similar to first half, the similar levels. Negative factors are -- on the EBITDA margin is the increasing currency and logistics expenses. These had a negative impact on the margin. And as you can also remember from the first page, OpEx-sales ratio had reached slightly above 25% in this quarter.

If we start with firstly our major markets. If you remember from the previous presentations, we were outperforming the market, and our sales growth -- our sales was always positive in the first 2 quarters. In this quarter, we again outperformed the market, which continued to be double-digit negative, and our sales was slightly negative in this quarter. And as you can see from the figures, we continue to enjoy a high market share, improved market share, in the domestic market in the appliance category. In the air-conditioning segment, the decline in this quarter reached almost 19% in unit terms. And I can say our performance was better than that in the domestic market. These are the figures which we get from the local manufacturers association. So these are sell-in data. We should stress that the data, correlated with the TV is sell-out data, which shows exactly the retail demand. And in this quarter, in fact, it's not quarter because we haven't still received the September figures from the marketing research agency, but when you look at July and August figures, the market was down by 22%, similar to previous quarters in unit terms in the TV segment. And when you look at again, July and August, our market share is around 25% and we are the second player. But when you look at the first 8 months, year-to-date figures, Arçelik still leads the market in terms of unit market share in TV category as well. And as you can see from the [market] development, you know the -- by the end of June, the special consumption tax holiday ended. And as you can see from the July figures, it was negative, a huge decrease we have witnessed in July. But then with the following month, in August and in September, we see improving figures for the domestic market. And as you all know, the 9-month cumulative decrease in domestic market is 10% in Turkish market, in the appliance category.

When you move to international markets, on the left-hand side you can see the market growth figures for 6 months and 9 months, cumulative figures. As you can see from the Eastern European countries, the growth rates have decreased, which shows the negative trends in the -- especially in the third quarter. Yes, Poland, Romania, Ukraine still seems to be growing in the first 9 months, but the third quarter wasn't so bright. And Russia is negative, even when you look at the 9-month figure. When you look at the Western European market, we see similar trends for Germany, Italy and France. Spain seems to be improving, a stronger performance in third quarter. But when you look at the U.K., you know that they have been talking about some pre-buying in the U.K. market before the Brexit issue, which has been becoming more complicated every day. And we have seen now the impact of this pre-buying in the U.K. market. The growth in the first half has decreased when you look at the 9-month figures now in the U.K. market.

And when you look at some other important markets from Ems . The macroeconomic in South Africa, the sluggish environment, had a negative impact on the market. As you can see, the growth in the first half, they were almost gone away in the first 9 months. And Pakistan, you know the issue again with Pakistan. The new fiscal measures had an impact on the already low consumer confidence in the country, and we will share some country -- some details about their performance. And Bangladesh, yes, it has been growing. Still, the market is performing well. But in this market also, due to some weather and seasonality issues, we have also faced some issues, especially in the last quarter in this market as well.

If you look at our performance in each region, despite a weak -- yes, I mean, we are talking about weak revenue generation in the U.K., and you have seen the figure for the whole market in the previous page, which was reflected into our performance in the country. But when you look at the other countries in the Eurozone, we were able to report a low single-digit increase in our sales in the Eurozone. And also, we should also stress that we had a huge high base impact coming from the third quarter of 2018 due to steep Turkish lira devaluation, which really helped us in terms of becoming much more competitive in this market.

And in the Italian-Spain market -- Spanish market, we had seen some market share gains. And also, we had also reported some market share gains in the built-in segment, which had, also had a positive impact on the -- our product mix in the European markets.

When you look at, say Africa, obviously the largest market is South Africa itself. In this quarter, we had seen a slight revenue decline for our subsidiary in the third quarter. But most of the increase -- in fact, this decrease is coming from domestic demand, as you have seen in the previous page, the demand conditions in the country. And the subsidiary continues to increase its export performance. I can say that the export growth was around mid-single digits. And if you remember from previous quarters, the increases in domestic revenue and export revenue were double digits. So this quarter, it was a bit underperforming compared to previous quarters. But despite its slower growth, I can say we had seen improving profitability on the gross margin and also on other levels. Again, obviously, this was due to some measures taken and also the raw material prices helping us generally.

When you look at the Asia Pacific market, again the demand conditions in Pakistani markets are not that bright, and we had seen unit sales decline in the third quarter, in Pakistan market. But thanks to our price adjustments in the market, we continue to see growing top line, double-digit revenue growth for Dawlance in local currency.

Another important country is Bangladesh. I will -- in the coming slides, I will -- also would like to mention about Singer Bangladesh, but we can see some slowdown on the top line growth for Singer as well. And our ASEAN revenue was also around USD 25 million in this quarter.

As I said, a few words on Singer Bangladesh, our only listed subsidiary, we chose to announce their financials today. You can see in local currency the top line growth, year-end top line growth was around 5%. And we had seen some margin erosion on the gross margin, and also -- which is also reflected into other profit line. We should stress that September -- in fact, August was the last month of high season, especially for refrigerators and freezers. So in terms of refrigerator and freezer sales, September is usually -- it's not that bright month for Bangladeshi market. However, air-conditioners performed well in this quarter. However, in the market in this period, we have seen some campaigns from all market players, especially in TV segment, air-conditioner segment. And as we also joined these campaigns in the market, it's at a slight -- this resulted in some erosion in the gross margin. For the TV segment, last year there was a sports event which had positively impacted the TV demands in the country. And this year -- this quarter, we have faced -- we have felt the high base impact of TV in the country.

A few words on the raw material. As we have mentioned likely before, we continue to enjoy and see better prices in the raw material market, both for the metal and the plastic-based components. As you can see, starting with the first quarter of 2018, the index for the metal price index has been declining slightly, and the third quarter is not an exception. In the plastics, we see some more volatile, especially when you look at the first quarter of 2019, the second quarter of 2019, we had seen some slight increase. But in the third quarter, we have also seen an improving prices for the raw material components as well. And probably, we will see similar strength in the last quarter. So in terms of raw material strength, 2019, we have been seeing a good strength in this sense.

And some -- a few words on the other development parts. As you might note, early September, in Berlin, the largest and the most important trade show in our industry is held every year in Berlin, which is IFA fair. And again, this year we joined the fair with our Beko and Grundig brands, and we exhibited our cutting-edge technology products.

Another important issue is the sustainability. Sustainability is one of the pillars of our growth strategy. And Arçelik is the first and the only company which is listed in the Dow Jones Sustainability Index consecutively in the last 3 years. And this year, we again repeated this success. And in addition to that, we have become the industry leader in this index in the Household Durables category.

So having shared some info on the market and our performance now, I would like to hand over to Hande for the sales and the financials performance.

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

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Thank you. Let me start by the breakdown of sales according to the regions.

As we mentioned, the top line growth has been 7% in the third quarter. The Turkish revenues grew by 19%, and the international revenue also, with contribution from our Bangladesh acquisition, has grown by 2%. And looking at 9-month terms, the top line growth is 21%, whereas the Turkish and the international performance is quite similar, with Turkey growing at 20% and the international revenue growing by 22%.

In terms of the main geographies' breakdown, Turkey's share has increased in the third quarter of this year compared to last year. It accounts for around 33.4% of our consolidated revenue. The next biggest market is Western Europe. As you know, there is some slight erosion. It was slightly below 30% in this quarter. Eastern Europe again accounts for close to 17% of our revenues. Africa has lost around 2 percentage points and accounts for around 5% of our sales, and Middle East is again around 3%. There's also some slowdown in Pakistan as well. It accounts for slightly less than 3%. And the newcomer, Bangladesh, is now accounting for around 4.4% of our consolidated revenue. All the other geographies combined are around 4.6%.

So we look into the growth factors from 2018 third quarter to this quarter, Turkish revenue growth is around, in absolute terms is around TRY 445 million. We see a slight contraction in the international organic growth, around TRY 37 million contraction. Because the Turkish lira strength last year was really very dominant in our results, and it has remained quite stable, we see actually a reverse impact coming from FX for quite -- actually quite some time. There's negative TRY 223 million coming from the effect -- the Turkish lira translation effect. And the Bangladesh contribution in the third quarter is around TRY 365 million.

So looking at it in percentage terms, actually this is how the 7% top line growth has been realized.

On our next slide is the income statement. We have briefly touched upon all the factors. But again, let me summarize very briefly.

In terms of the group profit, we see some improvement. We have strength at 33.1%. This was above both the second quarter of this year and also the third quarter of last year.

Our operational profit has remained stable at 7.8% compared with last year, and this is slightly above what we have realized in the second quarter of this year.

The finance expenses have been actually coming down a bit, but there's still some interest burden that we have been carrying from the past period. So the profit before tax margin stands at 3.3%, below both last year's and also the second quarter. And the net income margin has been realized at 3.1%. At the EBITDA level, we had strength at 11% in the third quarter. And looking at the overall 9-month performance, we stand at 10.5%, which is in line with our guidance that we have provided to you.

When you look into the gross margin by segment, the white goods category has benefited from the improvements in the raw material prices, and it has trended slightly above 35% gross margin in this quarter.

There's some erosion in the consumer electronics. This is mainly due to 2 factors, actually. One of them is the lower euro-dollar parity which has had a negative impact on our electronics business since a majority of the input actually is composed of the dollar-denominated cost targets, right? And also, there been some increase in the international portion of the TV sales, which see a lower margin compared with the Turkish TV business. Therefore, it has taken the overall margin down compared to the second quarter.

In the other category, there's also some price erosion again. But the other category is composed of many items, including the small domestic appliances, air-conditioners, air pots, et cetera. The small domestic appliances, sales in the small domestic appliances, there is some slight deterioration. But on the other categories, in the air-conditioner, it is -- there's some improvement. But in the -- in all other categories, composing -- I mean, which is actually forming the whole bunch, there's again some erosion in terms of the gross margin.

On the working capital front, you can see that we are continuing our strong performance, and we are sticking to our strong KPI and our also guidance view around -- below 30% working capital-to-sales ratio. Despite the negative trading conditions in Turkey, the Turkish working capital needs have been very well controlled in this period. There has been some improvement in the receivable days. And on a consolidated level, there is also improvement again -- and they're both on the receivable side and also on the [straight cable] days. So there's -- overall, we believe that we see very good performance in terms of the working capital management in such a tough period.

On the cash and financial debts on the next slide, let me remind that this -- the numbers on this page actually exclude the IFRS 16 impact, both on the EBITDA side and also from the debt side.

You can see that our net leverage has remained stable at 2.4x. We have closed the quarter with around TRY 5.5 billion of cash and slightly above TRY 13 billion growth there.

One detail that we can note here is we have issued another Turkish lira-denominated bond in the third quarter, in July, another TRY 500 million. On the table on this page on the lower left, you can see the average coupon rate which stands at 19.8%. However, when you look at the footnote, you can see that we have actually fixed the floating-rate bond issuances in the spot market, and they actually have a fixed final cost of 19.1% on our portfolio. Still early, the Turkish lira bond market also has been in a better condition. The interest rates have been coming downhill after the central bank rates cut. You may remember that in the second quarter, the average TL interest rate on our portfolio was 25%. In this quarter, we see a 3 percentage point improvement down to 22% on TL. There is no major difference in terms of the FX borrowings. These are, again, the 2-year bonds that we have, which you all know, coming from 2013 and '14 and also our subsidiaries' borrowings in their local currency.

In terms of our maturity profile for 2019, in the fourth quarter there is still around 17% of the total portfolio that's still to be refinanced in the remainder of the year. And in 2020, around 27% of our debts will be due again and it will be refinanced. The remaining longer-tenor bonds are the Eurobonds again that we have, and also the EIB financing for our Arctic investment, which is shown as the farthest maturity, around -- we show this, 2020-plus, as a 4% stake on the portfolio.

And on the upper right side, you can see the cash breakdown by currency. Similar to the previous quarter, dollar, our dollar deposits actually have now a bigger stake in our holdings. Around 66% is dollar denominated. Around 21% is euro denominated. And there are the other currencies which are on our subsidiary balance sheet. And only around 6% of our cash holdings is in Turkish lira terms.

On the next page are the details related to our FX hedging. As we always mention, we follow a very strict FX hedging policy. Again in this quarter, we have been sticking with our KPIs, and the net FX position that we have on a consolidated basis compared to the FX proportion stands at 2.4% short position. The short position against the Turkish lira is actually coming from -- it's not shorting on our Turkish book. And also coming from Pakistan and Vietnam, which by nature are unfortunately not able to be hedged because of the local currency regulation.

On the next slide are the details related to our cash flow. As we have mentioned, in this quarter, we have again, done a good job in terms of creating free cash flow. And the net operational cash flow in the first 9 months of the year is almost close to TRY 2 billion now. Around TRY 579 million is coming from the bank borrowings. There's the positive impacts on 9-month terms coming from FX conversion. The CapEx that we have invested that they have spent in the first 9 months is around TRY 900 million. And the other item which actually includes the Bangladesh acquisition, the interest payments on our loan portfolio and also the net cash flow coming from the derivative accounts for a negative TRY 1.8 billion, which has actually brought us from TRY 5.3 billion at the beginning of the year to close to TRY 5.5 billion at the end of September.

I will now turn the floor again 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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The 2019 guidance, we only have 1 quarter left. Then we are not changing the guidance. And yes, sticking to our guidance since quarter 2.

White goods market volume growth in global is expected around 2%, and we expect Turkey around 15% contraction in the Turkish market.

On the revenue growth side, we expect to grow between 20% and 25% in Turkish lira terms.

And our EBITDA expectation for the end of the year is around 10.5%, which is the case right now. And the EBITDA margin for the long term is 12% in the long term.

So our presentation is finished. So we are ready for -- if you have any 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 Kurbay Berna with BGC Partners.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [2]

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I have 3 questions. The first one is about your domestic market contraction guidance at -- you kept it around 15%. The first 9 months' contraction was 10%. It seems like you expect a heavy contraction in the fourth quarter of the year. I was wondering if there's anything particularly driving that, given that the sentiment seems to be improving.

My second question is about your sales to the U.K. Could you tell us what percentage of your revenue came from the U.K. in the first 9 months of this year? And in terms of the technicalities of Brexit, if there's a no-deal Brexit, what exactly happens in terms of the import rules for the U.K.?

And my final question is, you mentioned that around 17% of the existing debts will be rolled in the fourth quarter and your current TL borrowing cost is 22%. Where do you think this will come to at the end of the year? And is there -- do you see particularly significant room for reducing this cost further for the fourth quarter but particularly looking into 2020?

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

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Right. For the domestic market contraction, our expectation for the first, as you said, the first 3 quarters is around 10% contraction. The third quarter was 12% itself. And the expectation from the White Goods Manufacturers Association, TÜRKBESD, in Turkey. This is then, this is a kind of a consensus between the producers. So the fourth quarter, we expect it to be a little bit uppish. So -- but we expect actually 15% around -- we are guiding at 15%. But most probably, it's going to be less than that. So we expect 2, 3 points maybe lower than amount. But our guidance is around, so it's really hard to foresee what's going to happen next in Turkey. So for now, 15% is the maximum amount that we may have to see, let's say, for the 2019.

You asked about the U.K. sales ratio. And we do know -- 8.5% of our sales in U.K. If there is a no-deal Brexit, yes, we are considering our options as well. As you know, we have our factory in Romania up and running for washing machines and for the refrigerators. So if there is no deal, there is no producer in U.K., and if there is going to be a kind of an agreement between the UN, U.K, then it's going to be -- we are going to use our Romanian facility. If there is no deal for anyone, then it's the same for all the players actually, in all the -- because there's no producing in the U.K. for the white goods. So everybody is going to be on the same basis. So we don't really expect a big negative sales issue from the Brexit situation. And as you said, our fourth quarter borrowing is around -- we are going to roll around 17% of our overall portfolio. And now the interest rates are below 15%, and we expect the fourth quarter's or, let's say, the end of the year's rate, maybe below 20%.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [4]

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And if I may just ask one more question on the Brexit side. You mentioned that if there is a deal struck between the EU and the U.K., then you could export from your Romanian plant, as Romania is part of the EU. But wouldn't that actually extend to Turkey as well in that case, because Turkey is part of the Customs Union? Or is there another technicality there?

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

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It's the possibility. If the EU can make -- it may have its own deal, and Turkey may be out of it or could be in this deal. So it's not very clear. So in all 3 cases, if no deal, we don't really see any change. If there's a deal with -- which is the worst case for us actually, to have a deal with EU but not with Turkey. And we are going to use our Romanian facility, which is the worst-case scenario. But our expectation with Brexit situation is, we expect to have a solution, actually. Even though we have a plan for the worst case, we expect -- we don't really expect that the possibility, low on our side.

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Berna Kurbay, BGC Partners, Inc., Research Division - Director [6]

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And also on the domestic market side, so the outlook for the fourth quarter, you basically seeing a similar contraction in the fourth quarter into the -- as in the previous quarters. That's not because of an inventory issue with the dealers or anything? Just a...

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

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No, no. Our inventory is quite healthy right now. We have around 3.5 months of inventory at the dealers, which is a healthy situation. Until the end of the year, we do not really plan to push them because pushing them creates net working capital issues later on. So we would like to see the sell-out, and that's how we are planning. But as you know, in -- especially in December, things are getting slower in Turkey and around the world. So it's basically 2.5 months for us. And you already have seen, October is almost finished now. And we think that the contraction should be very similar to third quarter.

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Operator [8]

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(Operator Instructions) The next question is from the line of Kilickiran Hanzade with JPMorgan.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [9]

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I just wanted to ask about the market expectations, and a kind of follow-up. You mentioned that the manufacturers are giving the guidance like around 15% contraction for the full year. But we already observed 7% volume tick up in September, and we are already aware of the fact that 4Q has a very low base. And so why do you think that there will be still negative contraction? I mean, a contraction in the fourth quarter in terms of volume? Is there a possibility to see a positive volume in the fourth Q? This is my first question. And second question is about the margins. Your run rate on the margin is now in the guidance. But you have a very strong margin in the third quarter, and you mentioned that the raw material price trend is still very positive. And if you see some tick up in Turkish margins, is there any chance for exceeding your guidance in terms of margins for the full year? And do you have any sort of guidance for 2020?

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

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For the market expectation, as I told, the truth that, all the producers are giving their expectations, and this is more or less what comes up. As you said, in September, yes there's a tick up in the market, but we do not really expect to see the continuation of this because we know what the demand is in the market, and it's getting toughish for people to buy at the end of the year. And to be honest with you, it's -- there's no basic -- some basis that I can share with you which is going to be very clear for you. This is just the expectation of all the producers, actually. And partially, as you said and as you have seen, Arcelik has performed better than the market. So we expect to have a better-than-the-market performance as well. So I would like to give you -- we would like to concentrate on our own performance for the fourth quarter, so maybe we do not expect to -- Arcelik may not be less than, let's say, may not contract as the market contracts, let's say.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [11]

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But Polat Sen, I try to understand because these manufacturers are, have been giving very low guidance, and I guess they are playing around taking more incentives. So just supply the higher demand in Turkey. But you have a market share close to 60%. So actually, market volume is mostly you. I mean you are a good indicator for the market, obviously. And so do you see any contraction on your side in the fourth quarter in terms of volume?

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

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Yes. Our expectation is to have a shrinkage in the -- in our volumes as well for the fourth quarter. It is how we made our end of the year forecast. So this is the expectation on our side as well.

So your second question was about the margins. The third quarter margin is quite strong, as you said. The full year margin guidance, we do not really expect -- as I told you, 2.5 months for us, the last quarter, after the middle of December, then not much movement in the products. So we would like to actually be around 10.5%. So we do not really expect to see a much better margin than that. So this quarter it was 11%. And next quarter, we expect 10.5%, mainly due to less sales expectation in December. The third question was? There was 2 questions, right?

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [13]

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Yes. There were 2 questions. But maybe I'll -- can I ask one more question, if possible?

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

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Yes.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [15]

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About the borrowing, I mean, rollovers in your loans. Hande mentioned that 17% of the loans are going to rollovers in the fourth quarter and 27% in 2020. This percentage doesn't include the bonds, right? I mean I just want to be sure about that ratio calculation.

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [16]

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Yes, sure, because the bonds are actually due, I mean the PR bonds are actually due in 2021.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [17]

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But your share, 17% of the rollover is only for the total borrowing excluding the bond? It's -- I mean, I should assume like that's right? It's not on the overall borrowing ratio.

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [18]

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No. No. I see, sorry. No. It is actually inclusive of all of them. So it's not only the loans, the total borrowings, let's say.

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

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Okay. So it includes the bonds. All right. Okay. So you will roll over roughly TRY 5.7 billion over the next -- I mean, in 20 -- in the fourth q and 2020?

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [20]

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Yes. Around that. Yes, that's right.

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Operator [21]

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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 [22]

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My question is related to your FX position. As far as I see it from your detailed financials, you almost had no FX gain or loss in third quarter, unlike the first and second quarters. In first quarter, you realized TRY 107 million. And in second quarter, you realized TRY 69 million FX gain. Could you further elaborate your FX position? Or maybe if we go with these currency levels, what could we expect in the fourth quarter? I'm trying to understand how things will change because in third quarter, despite TL depreciation, you mentioned -- you almost managed to being square in terms of financial gains and losses. How did you manage that? And how do you see the following quarters?

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [23]

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Yes. Sure. I mean the idea is always actually to have a square position, and that would create no gain or loss from the FX. But naturally, there are some volatilities since they have more than 30 currencies. You may remember that in the first half, there were a lot of -- there was a lot of market volatility. The spot market disruption actually levers us in the right direction since we are naturally long FX and we sell this FX forward against Turkish lira. So we had benefited automatically from the increase of swap points in the market during that distortion. So this -- we had also, I said that this was a one-off impact and this was not really the idea or the targets in our FX management.

You may also remember that in the second quarter earnings call, I had mentioned that we had also terminated the cross-currency swap that we had related to our dollar-denominated Eurobond. This was actually realized in July, but it was already done while we were announcing the results. So I had mentioned that. So this transaction is now out of the books. It was actually a good match on our portfolio up until some time. But recently, it has caused some mismatches on the balance sheet, the reason being, while the FX cash flow is being accumulated and because of the negative euro deposit rates, we had decided to keep majority of our FX in dollars, as you have also seen in the presentation. So having the dollar cash plus this transaction, where we have swapped the dollar liabilities to euros and pounds actually caused an overhedged position which needed hedging itself. So it was really very complex and it caused a lot of volatilities in terms of our P&L. It is now out of the books. That more is -- we now have a more -- we had a leaner position, let me say, in terms of the FX management. So going forward, since this volatility has been now -- is now out, we expect to see really very small FX gains or losses as we used to have.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [24]

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And then a follow-up question again, so related to your income from associates. We see from your Indian operations, I guess, Voltas, there was some losses in first and second quarter, to a sum of around TRY 28 million to TRY 30 million. And we see deceleration in that. In the third quarter, you have much less, around TRY 8 million loss in that front. How do things go in that operation? How do you see the outlook in Asia? That's my other question.

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [25]

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Sorry, I couldn't really follow-up on the notes at this moment. But it's not regarding the Indian operations. It's just because the investment is still going on, and the test production will probably start towards the end of the year, and the serial production will start by the beginning of next year. So during this period, there are naturally some losses incurred since the sales are very limited at this point.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [26]

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And about your effective tax, we see lower in third quarter again with the current levels. Should we expect a similar pattern for the rest of the year in fourth quarter?

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

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Well, for the past 5 years, really no predictability in terms of where we can utilize the incentives, the tax incentives that we have. This quarter has been one of those, and the effective tax rate in this quarter has been around 6%. But our guidance going forward would still be around low teens. I think this makes more sense in terms of the future prospects.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [28]

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And the last one is -- my last question is about the consumer electronics business, how do you see -- in third quarter, we see some decline, and the prices of -- and raw material prices are declining in the TV side. How do you see the picture for you going forward in the consumer electronics side? How the profitability will affects both in consumer electronics and maybe the others, which also have some share in your revenue?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [29]

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Our profitability in the consumer electronics side this quarter was around 22.5%. But starting from the beginning of fourth quarter, we launched our new product, especially in Germany, it's taken a lot of attention with Amazon Fire TV, which we are the first -- actually one of the first companies who adopted Amazon Fire TV on the TVs. And we have been able to get an important amount of orders in Germany. So in the fourth quarter, we expect better sales, especially on the international side. In Turkey, the market is shrinking on the consumer electronics side, unfortunately. And we haven't been able to get enough attraction from the market in order to increase our sales, and this is affecting -- even though the raw material prices are not really moving a lot, I have to say, in the last -- third quarter. Because of the loss of the volume, we have been losing some profitability. But in fourth quarter, we expect to be back again in the -- sometime in quarter 2 and quarter 3 for the TV business that we have. And -- but the main deciding factor is going to be the success of our new product, especially in Germany.

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Operator [30]

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(Operator Instructions) The next question is from the line of Onder Fulin with Seker Invest.

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R. Fulin Önder, Seker Yatirim Menkul Degerler A.S., Research Division - Equity Research Analyst [31]

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Two questions, if I may. I'm not sure if you have the numbers readily available. But I was wondering, at what capacity utilization rate your Romanian company, Romanian facilities run? And also, what percentage of sales volume in Europe is exported from Turkey?

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

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So your first question is our capacity utilization in Romania for the washing machine factory or for the new factory or for the refrigerator factory?

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R. Fulin Önder, Seker Yatirim Menkul Degerler A.S., Research Division - Equity Research Analyst [33]

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Both of them, if possible, both refrigerators and...

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

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Our refrigerator factory is running at a high utilization ratio, the refrigerator factory. I don't have the exact number in front of me right now. I think Orkun can give you some information, but it should be more than 88%. That's what I can say. And on the washing machine side, it's a new factory. And we have been trying to fill in the shifts. And actually, we are using all the capacity that we have right now, especially in the last quarter, we are going to be using right. The first 9 months, obviously, because of the low production movement, the tests for trial production, the capacity utilization was low. But in fourth quarter, we expect to utilize the whole capacity actually that we have in Romania. And you have asked about -- the second question, can you remind us again, please?

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R. Fulin Önder, Seker Yatirim Menkul Degerler A.S., Research Division - Equity Research Analyst [35]

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Sure. What percentage of your European sales volume is exported from Turkey?

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

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We do not have the number in front of us. Let us get back to you about this one tomorrow to you, all right?

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R. Fulin Önder, Seker Yatirim Menkul Degerler A.S., Research Division - Equity Research Analyst [37]

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Yes, you can (inaudible) also. That would be very helpful.

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Operator [38]

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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 [39]

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I have a question about the competition in Turkey. Last time in the Q2 numbers, you mentioned that you were expecting some sort of pick up in the competition from the local producers in the third quarter and also in the rest of the year. Do you start to see any sort of recovery in the competition, I mean a comeback from the competition? And the second -- not yet. Okay. But I think there is competition in the TV but not in the white goods, right?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [40]

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Yes. And I'm talking about white goods. Yes, you're right.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [41]

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Okay. And there are some -- I mean, I couldn't confirm this, so I need to ask you. But Haier, the Chinese manufacturer, are they increasing capacity in Turkey, production capacity in Turkey?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [42]

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I do not know specifically. I do not have specific information about this. But we heard that Haier has plans to invest in Turkey, but I do not really know what the plans are in detail.

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Hanzade Kilickiran, JP Morgan Chase & Co, Research Division - Analyst [43]

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Do you think that such a production, I mean, new investment in Turkey could be a threat for your European sales, because I think probably they are investing -- they could invest only for European market, right, not for the Turkish market, probably?

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

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Yes. It seems like that, most probably for the European market. But Haier is the biggest producer in the world right now by far, I have to say, in terms of quantity. So I do not think that their existence is really going to be affected from a new factory in -- I mean, why they are not in the European market is not because Haier doesn't have a factory close to the European market. They have acquired the brand Candy. And with this one, they want to make an impact. Candy already has a market share in the European market, and I think that they are trying to really work on this. Candy is one of our competitors in the European market. In some of the markets, they are more effective. Some of the markets, they are not. But we do not really expect to see a big impact right now until we see their -- the details of their plan, actually. It's really hard to comment on this with this information that I have right now.

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Operator [45]

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(Operator Instructions) We have a question from one of our webcast participants. The name is Jacks Michael with Merrill Lynch. "Greetings, Hande and Orkun. Given Central Bank rate cuts, how much of this should filter through to your effective borrowing rate in fourth quarter on Turkish-denominated borrowings? Question 2, what is updated CapEx guidance for 2019?"

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Hande Saridal, Arçelik Anonim Sirketi - Finance Director [46]

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Okay. When we roll over our fourth quarter redemption, probably you will see slightly below 20% on our Turkish lira borrowings. But the major impact is actually going to come at the beginning of next year because we have heavier redemptions starting with the new year. So 2020, we will see a deeper impact.

In terms of the CapEx guidance, currently, what we have on the books in the first 9 months is around TRY 150 million. Normally, the CapEx spend in the final quarter is usually much more. So we still stick to our guidance of around TRY 260 million for full year.

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Operator [47]

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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 [48]

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All right. Thank you very much.

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Operator [49]

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I apologize. Mr. Sen, I apologize. We have a new audio participant question. There -- most of them are follow-up questions. It's a -- follow-up question is from Onder Fulin with Seker Invest.

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R. Fulin Önder, Seker Yatirim Menkul Degerler A.S., Research Division - Equity Research Analyst [50]

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Sorry for the interruption. I was wondering if there is any clear answer to this question on Brexit. Since you were in the business and occasionally talking to buyers, chains, do you think there will be a policy change in the U.K. in terms of white goods imports? I can see that everything is up in mid-air right now, but are you sensing such a policy change going forward, looking at your order books or market?

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Orkun Inanbil, Arçelik Anonim Sirketi - IR Manager [51]

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Well, well, in fact, when you look at the U.K. market, as Mr. Sen also mentioned, likely there is no local manufacturing in our industry. So it depends on -- whether there will be hard Brexit or an agreement, agreed Brexit, in the case of a no-deal Brexit, and obviously, if Turkey -- if U.K. signs a deal with the EU and Turkey stays out of this agreement, then as we have said, we have the Romanian option. We have the manufacturing facility for washing machines and the refrigerators, and we can use this facility as our export hub to U.K. market. We are always exporting some from Romania to U.K., and we can increase this amount. But the -- our expectation -- to be frank, our expectation is not that, because the U.K. and Turkey are really good trading partners. And therefore, we think that there will be a free trade agreement, some kind of free trade agreement between Turkey and U.K., whether Turkey will be part of the -- again, become part of Customs Union or a separate free trade agreement, that's where we don't think we will face much bad scenario even in case of a hard Brexit. And to add on top of this, actually we do not really see any purchasing behavior change to our customers to us.

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Operator [52]

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And one last follow-up question from Mr. Demirtas Cemal with Ata Invest.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [53]

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My question is again about the European markets. We see slower growth in Western Europe and slightly better in Eastern Europe. How do you see the market share dynamics? As we see from western white goods, they are producing for OEMs and we see more significant increase in these volumes, but I know they are not comparable with you. But in any case, do you see any specific change in the channels, for instance like technology stores or the other channels you are using? Do you see any players have the upper hand? Or are you sharing your market share in declining markets? Or are you maintaining your position?

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [54]

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All markets have different dynamics, I have to say. And U.K. is totally different than with France, what's happening in France or what's happening in Germany. So it's really hard to make a general comment on Europe itself or with Western and Eastern Europe. So yes, in different markets, there are different developments. For example, in France, we see a rise of online players. In U.K, it's already been more mature online and offline, and we don't really see too much difference in the last years. So -- but in terms of players, in terms of our competitors, we do not really see somebody who is having a better position than the other. And we do not really -- but in different markets, we see different developments. For example, Candy is very -- is gaining market share, especially in Italy, we see that, due mainly to their policies that they are implementing in the country. But it really changes from country to country. It could be better -- if you have some specific questions about any market, we are more than happy to answer you on, maybe tomorrow, in more detail or we can give you more satisfying answers.

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Operator [55]

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Ladies and gentlemen, there are no further questions at this time. Mr. Sen, please proceed with any closing comments. Thank you.

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Polat Sen, Arçelik Anonim Sirketi - CFO and Assistant GM of Finance & Accounting [56]

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I'd like to thank everybody who attended the call. I just want to make a very small remark, especially our, we didn't get any questions about the cash flow creation, the cash flow generation. (inaudible) been able to go in that top line in Turkey. Actually, this is one of our -- one of the best results in our third quarters compared to the years before. We have been able to create a free cash flow of almost TRY 1.1 billion. Even though we had to spend much more especially cash out for the interest, we know that the interest is really coming back and we are going to see a better result, especially after Q1 in 2020. So if we can keep up with the cash generation like that, and this is the expectation actually, the measures that we have taken is sustainable measures. And with the interest rates going down, we may expect better cash flow for us, especially in 2020. I just wanted to make this remark before the closing. Thank you very much for everybody attending the call at this time. If you have any further questions, please contact us tomorrow. Thank you.

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Operator [57]

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