Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your Chorus Call operator. Welcome, and thank you for joining the Arçelik conference call and live webcast to present and discuss the second quarter 2023 financial results. At this time, I would like to turn the conference over to Mr. Özkan Çimen, Chief Financial Officer, Ms. Mine Şule Yazgan , Finance and Enterprise Risk Executive Director, and Mr. Öktem Söylemez, Investor Relations Senior Lead. Mr. Çimen, you may now proceed.
Good morning, and good afternoon, ladies and gentlemen. Welcome to our second quarter 2023 results webcast. As challenging operating environment remains persistent, I'd like to seize this moment to extend management's heartfelt gratitude to all our valued people for their dedication and hard work that have been instrumental in driving our growth journey. I will start with highlight of second quarter. We recognized TRY 47 billion revenue in the second quarter, with an annual revenue growth of 45%. Organic annual growth was 38%, and revenues were 18% higher compared to the previous quarter. The strong sales observed in this quarter in both the wholesale and retail markets in Turkey across product groups. As opposed to Turkish market, consumer demand remained under pressure in international markets.
Our consolidated EBITDA margin was 10.8 in the second quarter of 2023, marking 327 basis point annual and 150 basis points quarterly expansion. Margin expansion was mainly supported by East material costs, cost improvements, mixed improvement, and additionally improved OpEx sales ratio that has contributed to our margin expansion. Our net working capital to sales ratio as of second quarter was 24.4%. Despite negative FX conversion impact, thanks to improved EBITDA, our leverage was 2.45 as of second quarter of 2023. If you move to the next slide. In the second quarter of 2023, we generated consolidated revenue of TRY 47 billion, with a 45% year-on-year increase.
Robust unit growth in Turkey, strategic pricing initiatives, further depreciated Turkish lira and inorganic revenue generated by our recent acquisition of IHB Appliance and Asogem, were among the key factors behind the revenue growth. Organically, consolidated revenue growth was 38% compared to a year ago. Our consolidated growth profit margin for the second quarter was 23.9%, representing 233 basis points expansion compared to the same period of last year. Margin improvement has been achieved on the back of strong unit growth in Turkey, further East raw material costs, favorable euro-dollar parity. On a quarterly basis, profit margin was up by 82 basis points. In the second quarter, we achieved a consolidated EBITDA margin of 10.8%, marking an annual expansion of 327 basis points and a quarterly expansion of 150 basis points.
Lower transportation costs compared to pre-previous year, has also supported the improvement of OPEX sales ratio in the second quarter. This has led EBITDA margin expansion together with the improved growth pro-profitability. On a quarterly basis, margin expansion has been posted on the back of normalized G&A expenses. When we look at the domestic market in the coming slide, second quarter was marked by the substantial consumer demand in Turkey across product groups. MDA six wholesale market grew by 30% in April-May period on a cumulative basis compared to a year ago. Arçelik's units sold increased by 31% in the same period. Retail market was also strong in the same period, with a growth at mid to east percentage.
Lower demand due to the anticipation of further price increases and effective campaigns, together with the degrowth experienced in the same period of last year, were main drivers of the growth. Arçelik Group maintained its strong leadership position by far as of May 2023. Sales in air condition market was significantly up by 82% in April-May period on a cumulative annual basis, while we outperformed the market with 128% growth in the same period. The growth was mainly driven by pull forward demand. TV market grew by 25% in January-May period on a cumulative basis, which is driven by higher sales of low price index products, and our units were increased by 11% in the same period.
The revenues generated in Turkey in the second quarter was TRY 18.4 billion, which is registering 89% yearly and 22% quarterly growth. Annual growth was mainly driven by strong unit growth and price increases. The share of domestic market in total business was 39% in second quarter. If you move to the next slide, European market? Having 36% share in total consolidated revenue in the second quarter, revenue generated from Europe was up by 5% in EUR terms compared to a year ago, thanks mainly to price increases and inorganic revenue contribution. On an organic basis, the revenues from Europe declined by 9%, which reflects the overall demand contraction. Following the first quarter, demand in Western Europe remained weak, around 10% annual unit contraction experienced in the region in the first quarter.
Consumer demand contracted further by around 10% year-on-year in April, May period on a cumulative basis. Meanwhile, in Russia, where the market was cycling a low base, consumer demand increased by approximately 50% in the same period. Demand remained negative in other major countries in Eastern Europe. We look at the price increases in the industry, we were not able to mitigate the unit contraction. Both, Western, Eastern Europe market contracted in value terms by close to mid-single digit percent and high single digit percent respectively. Having 22% share in total revenue in second quarter, our revenues in Western Europe were down by a low single digit in EUR, in EUR terms, reflecting the overall demand contraction despite price increases.
Having 14% share in total revenue, Arçelik's revenues were up by 20% on a yearly basis in EUR terms, thanks to price increases and also inorganic revenue contribution. move to the next slide, Africa and Middle East and APAC. The revenues from Africa and Middle East region represents around 6% of our consolidated sales in Q2. This has declined by around 25% annually in EUR terms, due to the weak demand and challenging macroeconomic environment. Contraction in consumer demand in South Africa has been decelerated compared to previous quarters, yet the market have observed declining demand and mid-teens percentage in the second quarter of 2023. Similar to the market, Defy's unit sales contracted in the second quarter compared to the previous year with a lower price.
Price increases mitigated the unit contraction. Defy's net sales increased by around 1% in local currency terms. ZAR continued to fall against EUR in the second quarter as well. Revenues in EUR terms were contracted at around high teens percent. As of June, Defy maintained its strong leadership position in the market. In Egypt, white goods market in the four months of 2023 contracted at mid-single digit recent compared to the same period of last year. Beko Egypt unit sales were contracted, yet strong pricing resulted in around 29% higher revenues in EUR terms, despite depreciated EGP. During January, April 2023 period, Beko increased its market share in Egypt in both unit and value terms compared to the same period of last year.
Revenues from APAC region, having 17% share in total revenue, were down by around 11% in EUR terms on a yearly basis in the second quarter. This contraction reflects the declining demand environment. In Pakistan, compared to a year ago, revenues contracted by around 23% in PKR terms in the second quarter, as a result of lower unit sales due to challenging economic conditions. In EUR terms, net sales contracted by 48% as a result of further depreciated Pakistani rupee. In Bangladesh, unit growth in major products and price increases supported annual growth of 34% in local currency in the second quarter, in EUR terms, net sales increased by around 9% in the same period. We'll look at the raw material price index change.
Metal raw material market prices have been slumped during the second quarter, mainly as a result of declining demand and sliding energy and input costs. Globally, declining demand, east energy and logistic costs have also resulted in lower plastic raw material market prices during this quarter. We move to the next slide, sales bridge. In second quarter, Turkish sales grew significantly by 89%, thanks to unit growth and price increases. International sales increased by 26.5%. International sales were down by slightly by 3% in the second quarter of this year compared to a year ago, if you look at organic growth. The contribution of FX conversion, in fact, in the annual international growth was 22.7%, while inorganic revenue contribution was 6.7%.
On the right-hand side, you can see our regional sales breakdown. Because of the growth in Turkey and declining markets internationally, Turkey's share in total revenue was 39% in the second quarter, while the share of Western Europe declined to 22 from 24 compared to a year ago, and the share of Eastern Europe was 14% in this quarter. I will leave the floor to Mine to continue with the financial.
Thank you very much. Good morning, and good afternoon, all. Here is the summary of our second quarter financials with yearly and quarterly comparison, given on a consolidated basis. Arçelik's consolidated net sales registered an annual growth of 45% in the second quarter. This growth was mainly driven by robust Turkey performance. Organically, revenue growth was 38%. On a quarterly basis, Arçelik's consolidated net sales increased by 18%. Arçelik posted consolidated gross margin of 31.9% in the second quarter of 2023, increased by 233 basis points on a yearly and 82 basis points on a quarterly, thanks to lower material costs together with strategic pricing.
Consolidated EBITDA margin showed strong annual growth, expanding by 327 basis points, and quarterly growth increasing by 150 basis points and reaching 10.8% in the second quarter of this year. This growth was driven not only by an improved gross profit margin, but also by prudent management of operating expenses. OpEx to sales ratio improved by 119 basis points annually, contributing significantly to the overall margin expansion. Arçelik posted net income of TRY 683 million in the second quarter of this year. Net profit margin declined by 47 basis points annually and 145 basis points quarterly, and realized at 1.5%. The contraction mainly reflects higher financing costs and tax expenses.
If we move on to the next slide, our net debt increased by TRY 4.9 billion compared to the first quarter, mainly due to increased working capital funding and Turkish lira depreciation. As of second quarter of this year, we have TRY 28.7 billion equivalent cash in our balance sheet, with well diversification between currencies. 14% of our cash is USD denominated, 35% EUR denominated, and Turkish lira share was 21%. As a result, through improved EBITDA, our leverage was down to 2.45x at the end of second quarter, despite negative FX conversion impact. On the right-hand side, you can see our loan and bond portfolio. As of second quarter 2023, we have 61.2 billion TRY equivalent debt. 12% of total portfolio is in Turkish lira terms, while EUR has 69% share.
Our Turkish lira effective interest rate was 16.1% as of second quarter, mainly as a result of matured loans, which relatively had higher interest rates. If we move to the next slide, on the upper left corner, you can see the bridge of EBITDA margin. Better gross margin and lower OpEx to sales ratio has resulted in margin expansion. On the lower left corner, you can see our CapEx to sales ratio. CapEx to sales was 4.8% in the second quarter. On the upper right corner, net working capital to sales ratio has been shown. The ratio increased to 24.4% as of second quarter of this year, from 22.7% at first quarter, mainly due to higher inventories and FX impact.
Finally, on the lower right corner, due to increased working capital requirements and capital expenditures, we generated negative free cash flow of around TRY 1.2 billion. I'll give the floor once more to Özkan Bey for our guidance.
Thank you, Mine. Based on our most recent performance and forecast, we decided to make some adjustments to our guidance. In the first sxi months of the year, we have posted 84% of revenue growth, and in the remainder of the year, we expect revenue growth to slow down due to the negatively affected purchasing power by the high inflationary environment, the increase in VAT and other taxes, and the increasing interest rates that is reflected on credit cards. Thanks mainly to the solid performance achieved in the first half of the year in Turkey, we are upgrading our annual revenue growth guidance of Turkey from 45% to 60% this year. Due to the persistent decline in demand in international markets so far this year, we are revising our existing 6% growth of international revenues guidance.
In the first six months of the year, our international revenues in euro terms contracted by 4%. There are still uncertainties lying ahead of us, depending on the extent of demand improvement and the available strategic pricing opportunities during the second half of the year, we expect our international revenues end up the year in between around 2% contraction and around 2% growth. We do not expect material costs to be discouraging in the remainder of the year, we continue our prudent OpEx management approach, despite the challenging demand environment. Our EBITDA margin for the first half of the year was 10.1% already, despite the challenging environment and contracting markets, we are upgrading our EBITDA margin guidance from around 10%-1 0.5%.
We removed the lower bound of our net working capital sales ratio guidance, and maintained the guidance as below 25%, and we maintain our CapEx guidance of around EUR 300 million this year. This was the end of our presentation. Now you may have your questions.
The first question is from the line of Hanzade Kılıçkıran with JP Morgan. Please go ahead.
Hi, good afternoon. Thank you very much for the presentation. I have few questions, the first one is regarding the pricing environment in your key markets. How do you see them evolving in the rest of the year? The second question is about the leverage. I mean, do you have a target to increase the share of Turkish lira in your leverage? Have you started to observe any easing in the borrowing environment, either from banks or local markets, such as bonds? The third question is about the CMA decisions on Whirlpool merger. When do you expect to hear the final decision from CMA for the U.K. market? Do you see any risk on completion of the merger or any risk on the timing of the completion? I appreciate the comment around it.
Thank you very much.
Thank you for the questions. As we have tried to reflect, the international market is contracting in a double digits in almost all the markets or close to double digits. This also brings the competition to be more aggressive on sales discounts, on promotions to support volume growth. Therefore, up to now, after the beginning of Q1 and slightly in Q2, we have been able to change some of our products pricing strategically. However, it is not possible to further increase these prices. Because of the inflationary impact in all those markets and increasing interest rates, the purchasing power of the households are negatively impacted.
To give one example, for example, the month, the mortgage payments is also as a percentage of share in a household, is also increasing, which is impacting our industry's demand as well. Having said that, we are trying to improve our mix so that we maintain our increasing trend of gross profit margin for the rest of the year. Second question, the leverage, Mina will reply that.
Yes, thank you. As you already know, Arçelik cannot utilize Turkish lira loans due to regulation right now. We did not see any kind of changes in the regulation, it's quite impossible for us to increase Turkish lira loan or bond share within the entire loan portfolio. What we observed in the local market is the appetite of the banks, which we experienced kind of a flight to quality recently, because the local banks or local presence of the multinational banks prefer to allocate their loans to large conglomerates like Arçelik. The loan markets, especially in foreign currency-denominated loans, was quite alive during the recent months. We were expecting an approval from Capital Markets Board for a Eurobond issuance, which we had yesterday.
In the upcoming period, most probably, we are gonna try to understand how the market will react to a potential Eurobond issuance. We're gonna try to see if we'll have an opportunity window in the upcoming months. Thank you.
Can I ask a follow-up question here? Sorry, Özkan, I just want to ask something to Mine Hanim.
Sure, sure.
Mine Hanim, you have this, I mean, your short position, net short position after the hedging was around TRY 2 billion, I think, as far as I see on the balance sheet, but your FX losses are nearly twice higher than this. What happened here? I mean, at the current market level, should we expect much lower FX losses, because of your hedging instruments? I'm trying to understand the-.
Yeah, sure.
Level of FX losses.
Yes. The market did not allow us for quite a long time for the hedging transactions because the daily hedging transactions was quite limited. That's the reason we tried to balance our open position with different instruments, namely, like OTC, NDF, or using VOP. Of course, the cost of hedging increased as well because of the scarcity in the market. It was quite one of the reasons. Another reason is the short position of the subsidiaries, like our sub in Pakistan or Bangladesh, where we do not have the hedging market in place. That's the reason we had quite costly hedging operations in the last quarter.
These are now hedged, right? I mean, we can assume a relatively, a much better FX trend, FX losses in the second half of the year. Of course, depending on the currency.
Yes, correct. Yes, correct. The market is more, you know, flexible right now. If we do not see any other, reaction from the regulatory or bank appetite-wise, the market is now more flexible. Correct.
Thank you.
Welcome.
Okay. I will continue with the question regarding the competition authority approval process of Whirlpool potential transaction. There are two process that we are following. One is the European Commission process, the other is the U.K. CMA process, which are pretty much in terms of the deadlines are in line moving. Right now, CMA made a public announcement to complete their market test. They are gathering information from the market, they're going to review, we are planning to complete the application by the end of August, which doesn't mean, of course, the approval to be completed. It is one of the phases of the approval processes.
They will review and come back with further questions or continue to raise some questions that we need to follow up. There's no definite timeline, but what I can say is we are going in line with the authorities' processes to complete the transaction as quick as possible.
Thank you very much, Özkan Bey.
The next question is from the line of the Cemal Demirtas with Ata Invest. Please go ahead.
Thank you for the presentation. My first question is, again, related in some technical sites, related to FX losses. When, again, when I put the numbers, FX, you know, related to derivatives and FX losses under financial expenses plus trading activities, I come up with TRY 1.2 billion FX losses versus TRY 297 in the first quarter. Just, you know, putting the FX real of FX on both sides, you know, trading, financial and the derivatives. That's a big jump. How does the mechanism go? For instance, we had a sudden increase in the last, you know, period of the month.
Could we assume that in the following quarters, the operational impact will be, you know, change in currency will be more positive, but just because of a, you know, sudden increase in the currency, we record some big losses? I would like to understand, as Hanzade asked the question, similar question, I would like to understand how, you know, if we see a smoother Turkish lira depreciation, how these balances will change. In this quarter we see, yes, a little bit improvement in the... Not a little bit, better, than you know, the improvement in EBITDA, but most of the gains in that EBITDA was just offset by the, you know, the FX side. I would like to understand that mechanism.
Again, your credit finance charges trading activities was as big as, you know, in the first quarter, TRY 544 million. It was similar. I would like to understand how this will go also in the, you know, in the third quarter. It's my, you know, first question. Then maybe, after answering this question, I can ask two other questions. Thank you.
Thank you, Cemal Bey. As Mine explained, our open position, we were having difficulties to close our open position because of the limited hedging mechanisms in the Q1 and partially in Q2. We have been able to close most of our open positions with the instruments that we have used, but those instruments are not cheap instruments. They are around 40% annually costly instruments. To hedge our positions, which was around EUR 600 million, we need to assume a yearly cost of 40% almost. That means every time we make an hedge, we need to book it as an interest expense.
That helped us to prevent making a huge loss at the end of Q2 when the currency depreciated to euro and dollar. That is an mechanism, but it's a costly mechanism. If the hedge market cost comes down from 40%- 30% or even 25%, that means our FX net that you see in our P&L would be lower compared to Q2. Credit charge, we are making some factoring to improve our liquidity, which continued in Q1 and Q2 at the same level as you mentioned, and this will probably continue to be the same as in the coming quarters.
Related to FX gains, could we assume, you know, slower pace in the second half? Just, you know, FX gain and losses, you know, that big number.
Cemal Bey, if the cost of hedging comes down, it will come down. If the cost of hedging is at this level, then, it will be pretty much the same number.
Mm-hmm. Related to that, you know, that's one of the problem in Turkey against the, you know, the exporters or international, you know, the companies which have high international business. You know, it's one of the difficulty we have been facing. Do you expect any change from the regulators, you know, those changes which had negative impact on your operations, obviously? Do you expect any change in those operations? Because the minister, you know, the treasury minister underlined that they will support the exporters, and they will just support the investment. Do you see any indication from that side?
Actually, being one of the major exporters in Turkey, we are following closely on all the regulations and all the incentives that's going to be declared. Right now, we don't have any information that is very different than the current applications. However, there are some incentives, tax incentives being discussed, we are closing in detail. The currency actually is helping to improve our profit as well, in the second quarter. Those levels would also help in the coming quarter as well. That's what I can say right now, because we don't have any concrete incentives or any other supports that we have declared.
Okay. My second question is about the, you know, the domestic and international front. We see strong growth in the domestic, you mentioned. But do you see any softening in July or the, you know, for the future? About the inventory levels of your distribution, you know, system, your, you know, operation system, do you see any, you know, decline in the inventories or any increase lately? That's the one part of the question, because for the full year, you expect 60% growth in Turkey operations. Related to international, I think, which is the key issue for us to predict actually. Pardon.
Do you, especially, you know, in some market there's a slowdown, you made some price increases, but I see, you know, lower guidance on that. Is it related to weak performance in the first half, or do you still, you know, expect the same mood to continue in the second half of the year? Or do you expect any recovery at some point, maybe in 2024? I mean, I just, would like to, you know, understand your perspective, for the maybe... You know, it's very hard question, but at least, you know, if we, if we can elaborate that, it will be very helpful.
Yes. Thank you, Cemal Bey. Let me start with the international markets. The quantities are declining, and there's double digits in many markets, and our first half growth was, if we exclude the impact of the acquisition, it's around 4% decline in sales. Our guidance is that at the end of the year, this might be -2% or +2%. We do not expect recovery in the second half, but in some of the markets we expect that double digit to be in a close to, let's say, mid-teens level. In some markets, this will be a long recovery period, but in some markets, it will be better than a double-digit contraction.
Therefore, our guidance is that it will not be 4% at the end of the year, but it might be minus. If you look at the next year, we do not expect a higher quantity growth than the GDP. However, as I said, there are risks which is impacting households' consumption capabilities, and this is a barrier for the further growth, which we are constantly monitoring each and every market. We are also, like other players in the market, we are trying to improve the retail sales through strategic discounts and pricing methods. When it comes to Turkey, we had a very good half year. Right now, the sales are going in the same trend, but the risks are on the board.
Those risks are mainly related to, despite the minimum wage hikes, the expected improvement on purchasing power could not be achieved due to trade storage in the markets. The rapid increase in inflation, which will follow, and the hikes in the VAT and maybe in Special Consumption Tax. This all will impact the behaviors or the purchasing power of the consumers in the second half. There is also the interest rates and financial systems and the installments that we are doing right now, which have been limited. This is also impacts the, our sales. Therefore, we do not expect as a strong growth as in the first half, and the pace of the growth will be slowing down in the second half of the year.
Thank you. The last question I would like to ask is about the, you know, the tax side. Did you apply the 25%, you know, for the full first half? That's my question, because there were questions about that, because it's, you know, it's already announced. Did you apply 25% for the full year, including first quarter? The other one is the tax expense. I think, well, is it related to, you know, you recorded deferred tax expense in, you know, this quarter. Would it be related to currency side or for the future quarters? Should we expect much less contribution from the, you know, the tax income?
Basically, the question is, what should we expect for the effective tax in the second half of the year? Thank you. That was my last question. Thank you very much.
Thank you. Thank you. For your first question, CIT rates, we haven't made any changes in our financials because it's not in place as of June. So there's no tax in our P&L related to this change. The first tax asset, there are two reasons of the change quarter versus quarter two, one is related to increased financial costs, because current regulation doesn't allow all the financing expenses to be deducted from the tax base. Therefore, with the increased FX interest rate and the FX loss, we are not able to deduct it from our tax base, therefore, our effective rate is negatively impacted. Second impact is coming from the incentives, CapEx incentives in Turkey.
In first quarter, we had a high incentive, booked as an before-tax asset, and in the second half, due to the reasons that I explained, it is limited. Going forward, I think it is better to use the half year figures as a benchmark for the future.
Özkan Bey, related to this 25%, you know, the corporate tax, you mentioned that it was after June, so you didn't apply. Is it, you know, there a flexibility on that recording? Because in my mind-
No.
If we think.
It's not a flexibility. It is not recorded, and the auditors also confirmed that it should not be recorded. If you're asking the total impact, it might be around TRY 250 million-TRY 300 million, Turkish lira levels, if we were have accounted that.
Thank you. Thank you, because that was important, because, you know, when we talked to several companies, some of them were saying it will be implied and others... I just want to understand, there's a specific thing on that. You know, of course, you don't know the other companies, but that's why I asked that question. You know, the audit judgment is on that, and, you know, this number will be added in the third quarter as a expense, right? That's also because it will-
Yes.
you know, includes, the first half, right?
Yes, it will. Right.
Okay. Thank you. Thank you. It was very helpful, Özkan Bey.
Thank you.
Thank you. Appreciate it.
Thank you.
The next question is from the line of Latha Krishnan with Bank of America Merrill Lynch. Please go ahead.
Yes, thank you for the presentation. I just have one question. I wanted to understand about your dividends. You did delay it in the, you know, from the normal period, so any guidance you can provide on that?
Yeah, the dividend in the general assembly was approved, and the timing of that dividend is set as September, so we continue with that decision.
We should expect the payment in September then?
Yes, exactly. The date that we announced.
Okay. Thank you.
Thank you.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Çimen for any closing comments.