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Edited Transcript of ULKER.IS earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 Ulker Biskuvi Sanayi AS Earnings Call

Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Ulker Biskuvi Sanayi AS earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cenker Uçan

Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food

* Verda Beste Tasar

Ülker Bisküvi Sanayi A.S. - Director of IR

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Conference Call Participants

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* Cemal Demirtas

Ata Invest Co., Research Division - Head of Research

* Harry Whelpton;Vergent Asset Management;Analyst

* Kayahan Azmi Demirak

Is Yatirim Menkul Degerler A.S., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Ülker Bisküvi Third Quarter 2019 Financial Results Announcement Conference Call and Webcast.

I now hand over to Beste Tasar, Investor Relation Officer. Madam, please go ahead.

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Verda Beste Tasar, Ülker Bisküvi Sanayi A.S. - Director of IR [2]

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Hello, everybody. This is Beste. Thank you for joining our call today.

Now I leave the ground for our CFO, Mr. Cenker Uçan. Cenker?

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [3]

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Thank you. Good afternoon, everybody. We are pleased to report another quarter of strong top line growth continuing the momentum of first half of year. As you know, in 2016, we launch our new strategy, which intended to accelerate our growth by focusing on the consumer, driving operational excellence and building a winning growth culture, not only in our core market in Turkey also in the international front. Today's results are proof that this strategy has been working well and that we are making progress in line with our goal to create attractive long-term and sustainable growth.

As of September 2019, we are very proud to announce that we almost reached our full year 2018 revenue within 9 months and even already surpassed the annual EBITDA level of yearly 2018. In addition to that, I would like to highlight that we left another successful quarter behind with another strong EBITDA margin of 16.6% and approaching to year-end, which will be the year of record.

In our anchor market, Turkey, we demonstrated a robust financial performance with an excellent top line growth. We have solidified our leadership in confectionary market despite of all economic uncertainty and agile market conditions.

In this fragile conjecture, we have selectively launched innovative products in key areas. We have achieved to become #1 in biscuit category in terms of market share. We have been very careful about price positioning, and we have overachieved our sales and profit targets. We are keeping our perception as optimistic going forward when we look at the remaining of the year.

In our international operations, we gained market share in all regions. In Egypt, we became the volume leader in biscuit category and closing the gap between market leaders in value terms. In Saudi, we continue to maintain our strong market leadership position thanks to new product launches and improved penetration. In addition to that, increasing shelf visibility and successful Eid and back-to-school period, we made a positive contribution to our sales just like in Turkey and in many regions. In Kazakhstan, we are enjoying positive contributions of new line. And as I commented before, we have reached double-digit EBITDA margins in our Kazakhstan factory.

To sum up, [maintain] of becoming regional leading company, we created important synergies and maintained our profitable growth in the regions we operate in. Before starting our presentation, I will go over the macro figures and provide market insights, and then I will provide you with the details of financial results. Finally, I will make the closing comment, and then we will have Q&A.

Let's take a look at macro indicators. Seasonal and calendar-adjusted retail sales volume with constant prices increased by 0.3% in August 2019 compared with the previous month. As of August 2019, Industry Production index realized as 19 -- 99.3. Manufacture of food products decreased by 2% compared with the same month of the year.

Consumer confidence index in Turkey realized as 50 -- 55.8 in September 2019. Compared to previous month, contracted by 4%. A rise in general index was realized in CPI on the previous month by 0.99% in September 2019, and food inflation realized as 9.52% in September.

For the Turkish confectionary market, due to the downsizing activities, total confectionary market decreased by 4% in volume terms. In value terms, confectionary market increased by 22.7%. Whereas, Ülker-branded growth is 0.8% in volume, 28.3% in value terms.

Total biscuit market was down by 3.1% in volume and increased by 28.9% in value terms, and our growth is for 31.8% in value. Total chocolate market contracted by 5% in volume and increased by 21.7% in value terms. And at Ülker, we grew by 29.1% in that value. Total cake market shrank by 11.2% in volume and increased by 17.8% in value terms, and our growth is 13.3% as of cumulative 2019. So as you might notice that we have grown more than the market growth in Turkey. So that this clearly shows us, it is helping us to gain market share in our anchor markets.

At Ülker, we are operating in Turkey over 70 years, and we are the leading confectionery company in Turkey. And not only in Turkey, after our successful acquisitions in 2 years, we became the largest producer of the region, including Middle East, North Africa and Central Asia. In the last 3 years, we have invested around TRY 800 million for CapEx in order to increase our capacity and efficiencies, which enables us to decrease our fixed cost. And after the finalization of IBC acquisition, number of facilities reached to 10 in 4 countries. And as of today, our capacity exceeded more than 1 million tons, which is the largest production capacity in the region.

So if we are starting with our cumulative 9-month financial results, our revenue has reached to TRY 5.7 billion with a growth rate of around 36%. And as I noticed that, this revenue has been already in line with the 2018 yearly figures. And although we have 36% growth rate in revenue, our gross profit have increased more than this growth rate, and our gross profit margin improved by 100 basis point and reached to 27.3%. And with the efficiencies in operating expenses, we have a growth of around 45% in EBITDA, and our EBITDA margin has improved by 110 basis point and reached to 17%.

On the balance sheet side, we keep our unique position in the market without getting short FX position. And moreover, we improved our net debt to EBITDA ratio from 1.6 to 1.4x. Cash flow is our main priority. We have generated nearly TRY 200 million free cash as of September 2019, while we have minus TRY 239 million free cash outflow in 2018, and we kept ourselves full focus on cash generation in the coming years again.

So our strong organic growth continued in the third quarter in all regions. And for our quarterly results, we have a volume growth around 6%, and our revenue have increased by 31%. And we have a gross profit growth around 30%. And currently, as of third quarter '19, our EBITDA margin is 16.6%, which is 20 basis point higher than last year, and our net income is 14% higher than last year.

So as I already covered the cumulative figures, maybe I can touch on the net income side for cumulative base. So we have a growth around 30% in net income. And currently, our cumulative net income reached to more than TRY 740 million.

So for our total sales and volume figures. Total confectionery volume increased by 6%, and this increase is mainly coming from the portfolio mix and positive contribution of our Eid period and back-to-school period, and we have a revenue growth around 31% in third quarter. And our total consolidated biscuit volume increased by 8.6%, where we have a revenue growth around 28% in biscuit category.

And chocolate volume increased by 5.3% thanks to increase in gifting and share -- gifting category in Eid period, and we have a revenue growth around 36% in chocolate. And our cake volume was contracted by 6.6%. As you know that, there was a sharp decline in total Turkish cake market. And we have a revenue growth around 19% in cake category in terms of value.

For a cumulative basis, we have a volume growth around 4%, and our total revenue increase is around 35%. And we have a volume growth in biscuit around 6.5%, and the revenue growth is 36%. And the -- our chocolate volume has increased by 4.4%, and chocolate sales has grown by 36% in value. And there is a decline in our cake volume around 11%. Although we have the volume decline, we have a revenue growth in cake side, and the growth is around 19%.

So after 2016, we are paying more attention for our international and export operations, and the weight of these businesses are increasing in our total consolidated figures. As you might see that in 2018, the total contribution of international businesses was 35% in total revenues, and it has increased to 38%. And in terms of EBITDA contribution, the total contribution of international business was 44% of total has increased to around 47%. This is quite important asset for us, which is helping to create us a natural hedging mechanism.

So if we are going to domestic operation financial results, so let me start with the market share information. So as you might remember that we have a mission to be #1 also in biscuit category, and we have achieved this target in 2019, and we became #1 in biscuit category. And as of year-to-date '19, we gained market share in biscuit category, and our market share has increased from 40.5% to 41%.

And as you know that in chocolate, we are very strong, and we are very dominant in chocolate market. And having this strength, we have also gained market share in our chocolate category, and our market share has increased from 39.3% to 41%. And in cake, we have maintained our strong #2 position, and our market share in cake was flat, which is around 23.2%.

So as we are continuing to evolve to the new product development processes and R&D processes, and we have a new -- we have a group for our synergy products that we are producing Godiva and McVitie's brands in our facilities, and we are calling this portfolio as synergy products. And you might remember that the total contribution of the synergy products was around TRY 322 million in 2018 on a yearly basis. And within the 9 months, we are very close these numbers, and the total contribution of the synergy products for 2019 is TRY 263 million. We believe that we are going to achieve last year's figures, and we will be more focusing to these synergy products in the coming years.

And for our Ülker-brand products, the -- on the right side, you are seeing the pictures of our new launches in 2019. This section is quite important process for us because, in order to maintain our market leadership position, we are continuing to launch new products in the coming year as well. And for these products that we launched in 2019, the total contribution is TRY 88 million as of 2019.

So for our third quarter turkey-only financial results, the total volume growth is around 4.2%, and we have a revenue growth around 32%, with a effective sizing and pricing initiative. And our gross profit increased by 41.9%. And our gross profit margin has improved by 140 basis point and reached to more than 20%. And the main drivers of this improvement is mainly coming from cost efficiency in supply chain projects. And for third quarter, we have EBITDA margin around 14% in Turkey, which is 80 basis point higher than last quarter.

Our cumulative Turkey financial results, we have a volume growth around 2%. Despite declining key markets in Turkey, we have volume growth in a cumulative basis, and our revenue growth is around nearly 30%. And our gross profit has improved by 36% compared to last year, and we have margin improvement around 100 basis points in gross profit margin. And our EBITDA is very close to 15%, which is higher than last year. And we have yearly -- we have 9-month EBITDA margin around 14.6%. So in line with our strategy, we are branded-focused company, and the share of the branded portfolio is similar to previous years in terms of volume and in terms of value.

Now I would like to cover the export and international operations. So with the strategy of operating in emerging markets, we have acquired the facilities in Egypt, Saudi and in Kazakhstan in order to create the production up for these regions, for Middle East, North Africa and Central Asia. And we have completed these acquisitions and focused to create more synergies between facilities in 2019, and we are going -- we will be also covering during our financial results, we are seeing positive contribution of these synergy activities, especially in Saudi.

And in Saudi, we are very strong in terms of market share. And as Ülker only, we have 16.1% market share in Saudi. And if we are adding our second brand, McVitie's, which has 8.3% market share, our total market share is 24.4%, and our market share is 10 percentage points higher than #2. And in terms of financial results of the first acquired entity, FMC, we have a volume growth around 4%. And the -- we're having correct pricing activities, our revenue growth is 14%, and our EBITDA margin is 15.1%, which is 40 basis point higher than last year.

And in terms of our second facilities financial results, we have a flat volume and 2% revenue growth, and the EBITDA margin in IBC is around 28%. So as you might remember that we have acquired this entity in 2018 and with having synergy projects, we have increased our EBITDA margin in IBC and in FMC.

So on the next slide, you are seeing the profitability and the business growth in Saudi. Once we have acquired the first entity in Saudi, our EBITDA margin was 13.6%. And now we have reached to more than 20% EBITDA margin in Saudi thanks to the having synergy projects and different initiatives that we launched in Saudi. It is helping a lot, allowed us to -- in order to increase our market share and having sustainable growth and also profitability.

In Egypt, we became #1 in volume, and we are very close to #1 in value terms. Our market share is 16.6%, and we are minimizing the gap between #1. And we have a volume growth around 6% and 11% revenue growth. As you might remember that we have started to produce McVitie's in Egypt, which is helping us to increase our revenue and profitability. And currently, our EBITDA margin in Egypt market is 17.4%, which is 220 basis point higher than last year. And we believe that we are going to maintain our position in Egypt in terms of profitability and in terms of market share.

For UI MENA, as you know, that this company is the owner of McVitie's distribution and production rights located in Dubai. We have flat financial figures. We have very profitable business in Amir. And currently, our EBITDA margin is 32.2%, which is similar to last year.

And for Kazakhstan, so as you know that we have completed the investment process in Kazakhstan, and our business in Kazakhstan is growing very rapidly. In volume terms, we have a volume growth around 21% and around 40% revenue growth. And having very strong profitability in Kazakhstan, although we have 2% in EBITDA margin in '18, currently, our cumulative EBITDA margin is 12.7%. And I can clearly say that this momentum will continue in the coming years as well, and we are going to expand our export opportunities in Kazakhstan, and this will help us to have a very profitable business in Kazakhstan as we did in other regions as well. So in terms of market share, we are #3 in comp line chocolate segment, and our market share is 13.3%.

So in terms of market share, as you might see that, in all the regions, we gained market share in Saudi. We are very strong #1 in biscuit category, and we gained 1 percentage point market share in Saudi. Our market share is 24.4%.

In Egypt, we gained 2 percentage point market share in biscuit category. And currently, our market share is 16.6%.

And in Kazakhstan, we have very tremendous market share gain. In Kazakhstan, we had 9.4% market share in 2018. And as of 2019, our market share reached more than 13%.

So if we are covering the financial results so far, international businesses, we have a volume growth around 10% in third quarter compared to last year. And we -- the revenue growth is 31%, and we have a gross profit increase around 20%. So as you might remember that due to the high FX in 2018, we have a very strong base. So that's why we have a gross profit growth around 20%, and our EBITDA margin is 21%, which is similar to 2018.

And in terms of cumulative figures, we have a volume growth around 9%, and the total revenue growth is 48%, which is coming mainly with the new launches in international markets and also having positive contribution of FX for cumulative basis. And our gross profit increased 46%, and we have a cumulative EBITDA margin around 21%, which is 90 basis point higher than last year.

And as we have a strategy in Turkey, we are implementing this strategy for our international businesses as well. The share of our branded portfolio in export and international markets are also increasing. The share of the branded business in terms of volume was 77% in 2018, and it has improved to 79%. And in terms of revenue, the share of the branded portfolio has improved from 80% to 84% in international branded business. And we are maintaining this structure in the coming period in order to increase our profitability and also maintaining our market share.

For balance sheet side, so we have very healthy balance sheet structure. So our net debt to EBITDA has improved from 1.6x to 1.4x, and we have 50-50 maturity, short-term and long-term breakdown for our borrowings. As you might remember that we have 2 syndications launched from international global banks with a maturity of April 2020 and November 2020. So we believe that we are going to have very favorable processes in 2020.

So due to the volatile environment of Turkey, we -- our average working capital days have increased slightly. It was 62 days, and it has increased to 76 days. And free cash flow is our main priority. As you might remember that, due to the volatile environment, we have a minus free cash outflow in 2018. And now we have reached to around TRY 200 million free cash, and we can clearly say that this momentum and this increased trend will continue in the coming quarters as well.

And in terms of FX position. So as we get -- we are one of the unique companies operating in Turkey not having FX position on the balance sheet side. So as you might remember that, in '17 April, we have converted our net FX exposure into Turkish lira by using cross-currency swaps. And currently, we are long in U.S. dollars and short in euros, and the net FX position is around USD 10 million long in hand total, we can say that.

So we have prepared a slide for Godiva Belgium capital increase as you noticed that during our public announcement. So let me give you a brief explanation. So as of 10th of October 2019, other shareholders use their receivables from Godiva Belgium amounting to around EUR 560 million in a capital increase. And our company does not have any receivables from Godiva Belgium to be issued in this capital increase.

So as seen in this slide, we have prepared 2 scenarios, so attending to capital increase and not, for illustration purposes. In our current situation on the left side, I mean, not attending to capital increase, assuming that Godiva will pay $1 billion dividend. And with this scenario, our net cash will be around USD 129 million.

So in the scenario 2, on the right side, had we attended to this capital increase, our net cash will drop to USD 73 million, which is USD 56 million lower than our current station. So therefore, in order to maximize our cash position, our Board (inaudible) including the independent board member decided not to participate in this capital increase. So we believe that we are going to get this dividend income around USD 130 million in 2020.

So for our guidance. So as you might remember that, in August, you notice we have revised our guidance. And now we're having a very strong financial results in third quarter. We are revising our guidance for year-end. And we are increasing our net sales from TRY 7.55 million to TRY 7.7 million. And our EBITDA margin was 16.5%, and we are keeping this EBITDA margin at 16.5% as a 2019 yearly guidance.

So actually, we remain confident in our strategies and in our ability to deliver our financial comments -- commitments for the remaining of the year. We are already so excited to reach year-end with the successful results and share this success with our -- all our shareholders and partners.

Now I would like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Kayahan Demirak from Is Investment.

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Kayahan Azmi Demirak, Is Yatirim Menkul Degerler A.S., Research Division - Research Analyst [2]

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I have 3 questions. Let me just ask them one by one. The first one, do you see any normalization in the cash cycle in the coming periods from these levels? I mean particularly for the receivables in the Turkey operations. I mean given that -- given the fact that the interest rates are coming down and the outlook in Turkey improving, should we expect a recovery in Turkey in 2020 in terms of the receivables policy?

And the second question is that regarding your year-end guidance. I mean that indicates a relatively weak fourth quarter. So is there any particular reason for that? Or you're just taking a conservative approach?

And the third one, as far as I can see, the valuation of Godiva Belgium in your third quarter financials came down by almost 20% from TRY 1.7 million to TRY 1.4 million. So is there any reason that necessitated that kind of change in the valuation of Godiva Belgium?

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [3]

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Okay. Thank you, Kayahan. So let me start with the cash question about receivables. So as you know that we are paying a lot attention for our free cash, so it is clearly showing us we have created free cash in June and in September. So we believe that this momentum will continue in the coming quarters and 2020. So -- but please also keep in our mind, so we have also international operations and also, due to the FX increase, it is also impacting our revenue growth and also receivable growth. But we know that we are going to increase our net working capital ratios in a better way.

So for our guidance, so actually, I can say that, considering the market dynamics and also the other businesses, so I can clearly say that we are going to achieve this guidance. So I cannot say that it's conservative. So it is prepared based on our best estimate.

And for Godiva, I can say that, actually, as you might remember, in June, we have revised the Godiva fair value based on our best estimate. So once the Godiva Belgium general assembly has been done, we have used the updated report for our valuation purposes. So that's why you are seeing a change compared to June Godiva fair value figures.

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Operator [4]

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The next question comes from Cemal Demirtas from Ata Invest.

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Cemal Demirtas, Ata Invest Co., Research Division - Head of Research [5]

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My question is again about Godiva Belgium capital increase. When do you think it will be, like, completed? And the potential dividend you mentioned in your presentation is going to be in early 2020. Or is there a possibility that it will come out in fourth quarter? That's my first question.

And the second question is about the domestic market conditions. You realize volume growth as well as price increase. How do you see the trend, at least, in the indications from the markets in fourth quarter from your channels?

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [6]

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So Cemal, actually, this dividend -- for Godiva dividend, so it is dependent on the general assembly of Godiva Belgium. So as you know, this company is operating in Belgium, and so there are some legal and tax procedures in Belgium. So therefore, actually, Yildiz Holding is also pushing the team of Godiva in order to speed up the process. So actually, I cannot comment on that when it is going to be in 2020. So actually, in my personal view, I mean, to say that to get this dividend in 2020 would be more fair, but the team of Yildiz Holding is trying to speed up the process to get this dividend as much as early way.

For the domestic side, actually, we had very strong volume growth, and this growth will continue in fourth quarter because, as you might remember, that we have taken the necessary actions in the last quarter of 2018. So in terms of market dynamics, we are not seeing any erosion in the market from the consumer perspective. And actually, for fourth quarter and for 2020, we are going to make a very strong start based on our plans.

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Operator [7]

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(Operator Instructions) The next question comes from Harry Whelpton from Vergent.

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Harry Whelpton;Vergent Asset Management;Analyst, [8]

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Congratulations on the result. I just wanted to ask a few brief questions. First, is the reason for market share reduction in Saudi from last quarter. The second one is on A&P spending and why that's come down quite significantly.

And then on the receivable days, you mentioned this was from supporting the supply chain, and how long do you expect this to continue? Or is this something we should see as normal?

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [9]

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Actually, thank you. For Saudi market share, so we are preparing this for MAT purposes. So that's why you might see that our market share might drop compared to June. So -- but this is the model that the marketing people are using. So we are not losing market share. It is just mathematical calculation. As you might see that compared to last year, we have gained market share in Saudi and continuing to gain market share. So for the trade payable days, so as you know that we are operating in volatile environment, so that's why the procurement processes are quite important for us.

We are looking for advantageable and favorable prices during our supply chain and procurement processes. So due to the advantageable procurement processes, you might see that the trade payables are declining, but it is helping us for our gross profit expansion. For receivables side, so I think I have covered it as during Kayahan's question. So we are pushing for our processes in order to decline our receivable days. And we believe that, and we hope that these receivable collection days will be normalized in 2020.

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Harry Whelpton;Vergent Asset Management;Analyst, [10]

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Okay. And on the A&P, the advertising spending -- marketing spending?

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [11]

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So what is your question? A&P...

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Harry Whelpton;Vergent Asset Management;Analyst, [12]

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Yes. It came down from about 7.5% to 6.9% of sales. Just there seems to be a downward trend in the spending that's going on A&P and even you're launching new synergy products, I'm just wondering why...

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [13]

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Actually, we have huge amount of growth rate in revenue side, so you might see that. But now I think there is a seasonality and impact, so you will be seeing in the fourth quarter more marketing spending in Turkey and also in the other regions as well.

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Harry Whelpton;Vergent Asset Management;Analyst, [14]

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Okay. And just a follow-up question on the -- I think you mentioned the synergy product hit about TRY 263 million in the 9 months of 2019. How large should we expect this to go like a rough estimate for 2019? Basically, the question being is this a segment that's growing particularly fast? Or is this basically in line with the rest of the business?

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [15]

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Actually, it's going to be around TRY 350 million level because we are launching new Godiva products for export purposes. So I think you might think that around TRY 350 million on a yearly basis in 2019.

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Harry Whelpton;Vergent Asset Management;Analyst, [16]

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Okay. And that's growing at about 17% versus top line of the consolidated business going up 36%. So I'm just wondering why is that growing slower than the overall business?

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [17]

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So because in -- this business has different dynamics. So I mean, the Ülker products are very well known in Turkey and in divisions. So now we are investing these brands starting from 2019. So I think the growth rate should not be similar like the growth rate of Ülker.

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Operator [18]

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(Operator Instructions) We have no other questions. Dear speaker, back to you for the conclusion.

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Cenker Uçan, Ülker Bisküvi Sanayi A.S. - CFO & Group VP of Food [19]

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Okay. Thank you. So I would like to thank everyone for joining the call. We very much enjoyed it. And obviously, we look forward to updating everyone in our upcoming full year results. I wish you a good day.

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Operator [20]

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Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation. You may now disconnect.