Migros Ticaret AS

IST:MGROS.E

Earnings Call Transcript 2019-Q3

[Operator]

A very good day, and welcome to the Migros Quarter 3 2019 Financial Results. [Operator Instructions] I'd also like to advise all parties the conference is being recorded. And now I would like to hand over to your host for today, Affan Nomak. Please go ahead.

[Affan Nomak, executive]

Thank you, Mark. Good afternoon, and thanks to everyone for joining us today. Welcome to Migros Third Quarter 2019 Earnings Conference Call. I'm Affan Nomak, Head of IR and Risk Management. We are here with the management team. And today, we've got our CEOs, Ozgur Tort; and our CFO, Ferit Dogan. At first, Ozgur Tort will briefly talk about our operations. And then our CFO will share with you the financial review.

Before we get started, I would like to take this opportunity to remind you that there will be a Q&A session at the end of the call. And now let me turn the call over to Ozgur Tort, Migros CEO and the Board member.

[Ömer Tort, executive]

Hello, everyone. Thank you for joining us today. As usual, we will try to cover our presentation. I hope you all received it, so I will try to ease with the page numbers. Just to start with a brief overview for the presentation, we believe that we had a good quarter results. And practically, the markets are pretty much in a different shape. We have an inflation trend going downwards and the macro environment is less volatile.

We can express all those things as a good improvement for the overall macroeconomic perspective. We had an especially strong summer season. I can express it, especially, during July and August, coming from the touristic activities and strong tourism overall performance, our summer destination stores were performing quite well. We are happy to express that.

In September, we had a high base inflation coming from last year's overall results. So that is why the base impact was quite high and relatively September's top lines are relatively less than the previous months of the year in terms of growth.

When I put in place the overall sales environment, the total food retail in the country have been growing as well. Obviously, there is an important inflation element on that figure, but the total market growth was at levels of 19% on the 9 months' year-to-date figures that has been expressed by the Nielsen company, and whereas similar period Migros' overall top line growth was represented around 25%, based on, again, the significant figures.

What I can express at the moment for the country's overall outlook, the drop of inflation is important. We are chasing the impact of an [ under ] consumers' appetite. Unfortunately, I cannot say that consumer confidence is significantly improvement. Still, we are struggling to receive the confidence of the consumer in terms of spending.

Unemployment still remains high, so that is why we are still at the moment of low impact coming from the consumer appetite, but we are more positive coming for the next year's overall environment, and expecting less volatile environment coming from the macros, and hopefully the consumer confidence will improve steadily in the coming quarters.

But I assume -- I believe it's worth to elaborate today would be -- our CFO will give more details that the outlook of the company's overall leverage has been improving. In terms of the euro-denominated outlook of our exposure has been reduced by around 25% in 1 9 months' period. That's a significant improvement for our perspective, which was based on our strategy that has been expressed at the beginning of this year.

With that in hand, I will now try to go through the presentation. If we start with Page 2 on our sales evolution, on the top line of the company's growth, we have experienced 24.7% growth in the first 9 months of the year, where the third quarter itself was at the levels of 21%.

There is a slight negative impact coming from our international operations on the third quarter, thanks to Turkish lira's improvement. Just the Turkish, except the international figures, our top line growth in the last quarter was around 22%, to elaborate on it.

All in all, we are, as I expressed, in terms of gaining the traffic of the trust of the consumer was an important aim in this year, and we are very glad to express that our, especially customer traffic figures, are definitely positive, and they are improving our top line growth in an environment where we were relatively less growth coming from our physical space growth.

I will elaborate this on our capital expenditure product, especially. The main outcome of this quarter, of course, as I expressed, was that a strong summer period, followed by a low inflation environment coming as of September, with the base impact of last year, we are pretty much similarly experiencing the same in wireless in October, November figures as well.

Of course, in the outlook of the country's overall sense, the lower inflation environment is definitely for -- to everybody's benefit. So we are significantly supporting on this inflation fight, the determination, which we have been spending significant time and efforts with our own assets as well, to mainly on the fruits and vegetable, fresh meat categories, where we were one of the real figures to fight inflation overall sense and with the base impact of last year as well, I can express that this has been the case that we are experiencing at the moment.

The outcome outlook is on Page 3, with the market share evolution. To brief somebody of the space is that we are gaining 80 basis points of market share versus last year's same period for 9 months' results. And the good news is that it is both a gain at the total market and at the same time at the modern trade [ based on, again ], FMCG, Nielsen quotations. This is clearly the outcome of our overall strategy versus building the trust of the consumer in difficult times.

And in our history, it has been the case for several different downturn periods, the customer trust is built in a better sense in this difficulty environment, with the overall position of Migros being one of the very best price point provided at the market, as I expressed, in the previous presentations as well. It is one of the drivers of our private label strategy in the last 4, 5 years, which is also supported with our fresh proposition, which is pretty much unique in the market conditions today in the organized trade.

With our own fresh food buying operations, with our own fresh meat building structures that we have introduced into the market, based on our exclusive fresh meat factory, which has been the case, and we are working together with the farmers and agriculture environment to support that low price environment, which is building the case, especially for our customer traffic into our stores, which we are glad to express at the moment.

Regarding the expansion on Page 4, the summary of our 9 months is 96 new store openings in our organic growth base. With -- all in all, 2,165 stores number has been reached at the end of 9 months.

And, basically, we are now available in 81 cities of the country and, of course, spending our expansion efforts on the main strong markets like the territories of Istanbul, [ Gianca] and Antalya, these are the main full expansion territories that we are building our presence, together with the Anatolian cities that we are now present in every single destination of the country, which is helping us basically on our consumer penetration in different household segments.

And we are glad to express that now we are reaching almost 89% of the Turkish households in which such expansions supported in our new developments of the additional cities that has been introduced, of course, together with the support of our existing store base, which is improving the traffic continuously in the last 2 years.

All in all, the space growth for this year is relatively limited, is at the levels of 1.6% at the end of the period of 9 months versus last year. Just to underline this, of course, we are still building a space optimization program, which has been already expressed several times, especially coming from the Kipa hypermarket acquisitions from Tesco.

And at the same time, the high base impact of our [ deal ] acquisitions that has been the case last year, especially beyond the inorganic growth efforts that we have been the case for Uyum & Makro stores, which took place for this year in the same period, which is impacting the base of our space growth.

But as I would like to express that this year's specific targeting is a relatively lower capital expenditure environment in these new conditions and we are providing that structure to the benefit of the shoppers at the same time, to building our efforts on the existing store base, which is improving at the same time, our efficiencies as well next to do new store expansion program.

On Page 5, we have the summary of our capital expenditures as of September ending period. We have been spending TRY 200-plus million equivalent of capital expenditures for this year. As we can already see, it is relatively lower than the previous period, which has been the case for this year at the beginning expressed strategy that our priority will be to deleverage the balance sheet and, at the same time, to maintain the space off of the company with the organic growth base.

Still, we are now in the position of upgrading our targets towards the end of the year, which will be shared by the end of this presentation, and we are glad to express that we are maintaining the store growth to the physical space growth, pretty much in the similar basis of the organic growth of previous years, with the support of our expansion program in new cities at the same time, and that there is a surplus also coming from our important negotiation powers versus the landlords at this moment.

Thanks to the market conditions today, unfortunately, the real estate environment is not very supportive for the landlords in -- based on the current macro conditions, hence, the results that we are having significant contribution coming from the landlords as well to our capital expenditure for new store expansion, which is also improving our efficiency metrics, basically, as obviously expected on the return figures of the company.

We will try to maintain this structure as long as it is -- the market condition stays the same, which is the benefit of our rental expenditures, and at the same time, capital expenditure figures for the new store expansion model.

Just on the line of space optimization that has been the case for hypermarket is still continuing, we have been rightsizing 7 of our additional hypermarkets this year to reach 21. As analysts and investors will recall, we have acquired 37 hypermarkets from the Tesco corporation, admitted under the brand of Kipa. We have totally rebranded them in the last year.

And now as of this year, we are also in the pace of continuing to right size the stores based on the recent trending environment, especially the categories of nonfood and especially on the slow-moving items to be reduced from the shelf space and to be more focused on our online business efforts, which is the obvious case all around the globe and which is one of the major drivers of our space optimization efforts as well.

This year, we will continue with one -- another one, rightsizing efforts will be completed this year. And for next year, we are planning another 7 or 8 rightsizing to continue, which will be most likely the last phase of rightsizing. So for the next year 2020, the hypermarkets right-sizing efforts will be completed as a whole.

On Page 6, you will see the gross profit evolution. As you can notice here, we have an important growth on the gross profitability of the company. We have reached at the levels of almost 27% at the 9 months results, 26.7% on gross margin figures, which are around 30% higher than last year's figures.

There is, of course, an element of the impact of the imputed interest charge, which most of our analysts are doing the similar calculations, I believe. The overall sense of imputed interest is just an interest element, which is impacting the due date charges at the company.

So we can express that there is a significant improvement on the margin around 110 basis points and around 60 basis points of that impact is coming from this imputed interest charge, which is worth to notice, and the rest is our own improvements coming from our operational performance of the company.

Basically, the gross profitability improvement is mainly one of the drivers are purchasing terms are [ easy ], but at the same time, our heavy investments on the pricing strategies. So we can also express that versus the heavy price investments, we are improving our margins. This is also another item to underline.

We have been, especially on fresh foods and vegetables and fresh meat categories, margins are relatively lower than previous years. But also, at the same time, we are recovering that margin losses with our additional traffic gains and with the improvement of our other product categories terms, of course, not to mention the supply chain efficiencies are always the source of improvement at the gross profitability as well, for which was also one of the outcome for this year.

On the following pages, you can notice the numbers of EBITDA evolution of the company. By the end of 9 months' results, we have reached TRY 1.2 billion worth of EBITDA, which is around 41% higher than last year, and this is a significant improvement as well. And the third quarter itself is also another 31.5% improvement versus last year.

To elaborate on our IFRS 16 impact, which is the case starting from 2019, and hopefully starting from next year-to-date will be the same, so we will start quoting IFRS 16 numbers only coming from next year. But just for this year's comparability, we are trying to ease our analysts to make sure that the company performance can be subtracted relatively easy.

And as of IFRS 16 figures, our EBITDA has reached EUR 1.8 billion by the end of 9 months' results. Obviously, the EBITDA improvement elements are coming from our gross margin improvement, which I tried to address, and at the same time, our own improvements coming from the overall operations, in a sense.

Obviously, this year was an interesting year, where the high inflation impacted partly our stock management, but at the same time high inflation was an important element coming from our cost base, especially on the electricity cost and the energy cost item that has been important areas of improvement required.

And I'm glad to express that the majority of this cost [ base ] are subsidized by our own supply chain efficiencies coming at the levels of the shrinkage levels, the supply chain efficiencies at the inventory management next to it, with our transportation and logistics efficiencies, which are pretty much covered under our gross margin items as well.

So all in all, we have an improvement around 90 basis points, as you can see here, on the company's overall apple-to-apple compared same IFRS calculated environment. So we reached 7.1% margin in that front on the EBITDA level.

But as I try to express on the gross profit improvement as well, it is around 90 basis points of gross -- the EBITDA improvement is also partly coming from the imputed interest charges, which is important to underline as well here, around 60 basis points of this element incoming from the imputed interest, and I can express that around 30 basis points of this improvement is purely coming from our operational and gross margin improvements coming from the company's overall performance.

Finally, today, I would like to express and spend some time on our enhancing online penetration. On this Page 8, you can see our existing efforts with the new initiatives that have been taken as a structured efforts of our strategy. As we all know, Migros is present on the online market, starting from the year of 1998. So it's more than 20 years of journey for us with our online operations that Migros manage.

We started the deliveries, we have practically for next-day deliveries and same-day deliveries has been the case in the history of our company. Now I can say that our average delivery period for Migros online is reaching around 5 hours' delivery periods. And the same-day deliveries are representing significantly, almost 70% of our deliveries today at the Migros online operation.

Taking this into the hands, we have been improving our proposition to more instant delivery tables as well. We introduced to the market a 30-minute delivery time horizon, with a new initiative called Migros Hemen, which is Migros quick, Migros express in English terminology.

We can express that today we are the sole operators in the perspective of all fresh categories covered in a 30-day -- 30 minutes of delivery promise, especially for the moment, it is a limited expansion model.

We are only present in Istanbul, Ankara and new with this initiative, but one of the great assets of this operation is that we are presenting to our shoppers the same prices that we also improved our pricing point in the last decade, significantly at the Migros banner, which is now provided with a 30 minute delivery promise, with over 1,800 SKUs, which can be provided instantly to shoppers.

Another initiative that has been taking place is a partnership with one of the important platform operators in the country, namely, Trendyol. I'm sure the majority of our analysts are aware of this brand. There are 2 major important platform operators in the country under the brands of Trendyol and [ Hepsee ] product.

We have been trying our overall -- building our ecosystem of online shoppers' catchments. And we trust that the Trendyol will be a better partner for us for the long run.

Just to let you know that Trendyol is one of the subsidiaries of Alibaba in the Turkish market, and they have great ambitions, and they have great, also, long-term commitments into the market that we are pretty much sharing the same region of online operations, and I'm glad to express a nice partnership is built here that now we are providing our FMCG portfolio in Trendyol's platform, with a unique proposition of Migros banner under this platform as well.

Another initiative that has been taking place is our back store operation, which is a new model that we are testing next to our store-based delivery model. So by monitoring majority of our stores coming representative -- significant representative levels of online percentage of shoppers' behaviors, we are now introducing back store-based models in important destinations of the large cities, which, obviously, the high-traffic zone areas.

In some destinations, in some districts of Istanbul today, about 20%, 25% of our store sales are coming from online operations, based on the store delivery models. So we also like to ease the operation for the stores here to be supported by back store model, next to our store delivery model.

Finally, another initiate which has been taking place just recently, last week, we have introduced our new model of last mile delivery efficiency under the partnership with a Paket Taxi called startup company. We have acquired 25% stake in this company to support them and to support our loan operations for the last mile efficiency.

Obviously, this is a motorcycle, biked-based last mile delivery efficiency, which is providing us significant improvement in terms of the last mile costs per delivery to the shoppers.

And we are glad to express that it is a promising market for our overall efficiency as well, not just for instant deliveries, but also our own traditional model of store-based deliveries, which I'm very positive in long term to support the company's overall growth, together with the market environment, which will be also supported in different initiatives to come.

So as of today, this will be my presentation. And now I will like to hand over to [ Jan ] for our financial results very quickly.

[Ferit Dogan, executive]

Sure. Thank you, Ozgur Tort. In the next 2 -- last 2 pages, I'll try to walk you through our deleveraging efforts, which we started for about 2 years ago, significantly.

Deleveraging has been one of our priorities, top priorities over the last couple of years, and we have seen the fruits of it, especially in 2019. In the meantime, in this period, we have had a currency shock last year, as you all know, and one of the most pronounced period of this was last year September, and last year September we had TRY 1.2 billion gross debt. And we managed to decrease that by TRY 1 billion so far.

And in terms of net debt, the improvement is better. It's TRY 1.3 billion. And of course, part of it is the currency improvement. But at the same time, the development, for example, [ in stephie remains ] as well as from organic resources and 2 assets sales has been an important element in this reduction.

And in 2018, the reduction in the gross euro debt was approximately EUR 60 million. And only in 1 year, in 2019, we are hoping to bring that up to EUR 180 million in 1 year. And we are expecting another voluntary payment towards the end of November, which will bring the cost -- debt position, euro debt position, to EUR 430 million. And that will correspond to approximately a 30% reduction in just 12 months.

Next year, we will, of course, continue with these efforts. And just to give a ballpark guidance, we are hoping to be below EUR 350 million on our gross euro exposure.

By that, what's happening is that our vulnerability to currency shocks is becoming less and less, and hopefully in the next couple of years, this will not be material anymore. And hopefully, we will not call this page deleveraging page anymore. And this is -- this is going to be one of our main objectives.

As for our guidance for this year, nothing has much changed, actually. We're upping our -- store opting cards to TRY 125 million. And we are approximately spending TRY 320 million on CapEx and our guidance for the sales growth is between 23% to 25%, as we have communicated before. So on that front, there is not much change. I don't have anything else on this point, would you like to say anything else, Ozgur, regarding this point?

[Ömer Tort, executive]

I think this is pretty much the presentation today. So as we said, the company's overall strategy is still not really different from the previous years, definitely our organic growth pace will continue, but with a priority of deleveraging, which was the outline of today's overall expression.

And I'm glad to express that we are realizing that as of this year, and next year will be the same commitment continuing, but at the same time, of course, our significant initiatives taking place, especially on the online front, are very important for us for the future growth of the company, which are the new models.

As you have noticed, we have been introducing additional new business lines, adding up on our existing 3 of them. So we are now active in 6 different business models to be expressed at the online front. And I trust that this will be the future additional growth areas of the company, next to our traditional model of supermarket growth base, which was based mainly on our organic growth targets and expressions.

This will be the presentation for today. So as usual, we will be glad to answer your questions, if there are any. So please?

[Operator]

[Operator Instructions] Your first question comes from the line of Cemal Demirtas, Ata Invest.

[Cemal Demirtas, analyst]

Congratulations for very good results. It's good to see that leveraging is taking place. And I see it as a real success, and I just want to congratulate you once again about your management, and I want to understand -- I have two questions.

The one is related to online penetration. Where does Migros contract now in Turkey in terms of share of online in total revenues? And what could be the targets compared to developed markets? Do you have any reference point it can reach in terms of online business for revenues? That's my first question.

And the second one is about prospects for 2020, we have low inflation environment, what could be the driver in 2020? Do you expect additional expansion after budgeting the latest acquisitions and the mergers? These are my two questions.

[Ömer Tort, executive]

Thank you very much for the questions. For the online penetration today in the global arena, of course, online growth is obvious. There is nothing to argue around the penetration strategy. Overall, we are trying to introduce as much as possible different channels. In one side, I have to express this, this is building our own platforms, building our own ecosystem here.

We are very aware that we cannot do everything by our own, so this is why we are glad to partner with last mile operations, we are glad to partner payment operations, we are glad to partner with platform operations. So this is going to be our priority, next to our own efforts or so.

So all in all, the penetration figures are low single digits still, so what I can express at the moment without disclosing much in terms of trading environment today. But when we have to compare the penetration in different markets of the benchmark figures, there is a significant high figure levels coming from China and South Korea type of countries, and on the East part of the world, the figures are reaching almost 20% level on online penetration, whereas 5% to 10% levels are now comparable figures for Western markets.

So where Turkey will stand here, it's going to be pretty much the minimum, the figures will be definitely for the levels of European and the Western markets. We might not [ less ] reach the levels of China and South Korea very rapidly.

This is the new business model, but especially for food business, the pace of growth is relatively sluggish, and this is one we take this as a great advantage of our fresh food operation capabilities. I'm trying to underline here not just a regular retailers' advantage here, but also a supply chain advantage that we all bear, we are a huge retailer at the moment, by our definition of buying from farmers, packing the goods and replenishing our own assortment, and that is relevant for fresh food operation today, fruits and vegetable, but also at the same time, that's also relevant for our fresh meat operation, which is another unique advantage of Migros with our own [ history ], which is based in Izmir, and replenishing the whole country from one destination is a great asset to control overall the structure.

So even introducing new business model, as might be expected, for revenue categories and bakery categories, this is going to be still our focus to continue, which will be support to the traditional supermarket, next to it with the offers of online penetration.

And I'm very positive that with the new generation, which is much more eligible in terms of mobile penetration in the country, the figures will be even deeper on the aggressive growth targets. So to date, what I can share is that our online operations is in terms of gross base is tripling our existing traditional model, so this is why we are spending a lot of time and effort to come up with new business models to support our existing structure as well.

The lower inflation environment, definitely, the healthier environment, so for all business segments. For food retailers, of course, high inflation is a driver of top line, but at the same time, there's a huge impact on our cost base.

So that is why we are trying to be very careful about managing our operating expenditures and that should be helping us in the coming periods. Of course, organic growth environment is still very valid in the Turkish market.

We will be opening more stores than what we expressed at the beginning of this year, so we are glad to upgrade our guidance figures for this year, and I'm positive that single figures, even higher figures, might be the case for next year. We are still working on our budgeting cycle, as anticipated.

And of course, normal inflation, which will be coming up with a lower interest environment, should be benefiting for the overall real estate market as well, which is an important driver of the physical growth.

Retailers grow together with real estate operators, as usual. So in the last couple of years especially, the real estate market downturn was a clear case in Turkish market and it was limiting the capabilities of new expansions of new greenfield projects, new shopping centers, new destination territories, which Migros is very strong in terms of presence with our unique proposition.

So in that reflection, I am more positive for the coming years regarding the low inflation, which will help the lower interest environment combined. All in all, of course, it is very important to mention that the consumer confidence and the unemployment figures should be also supportive here in order to be more positive for the coming quarters.

[Operator]

Your next question comes from the line of Hanzade Kilickiran, JP Morgan.

[Hanzade Kilickiran, analyst]

I have three questions. The first one is regarding your like-for-like growth. I know that you are not disclosing this, but is it reasonable to assume something over 20%, because I can see that you have only 1% space expansion. And you mentioned about strong traffic growth, and is it reasonable to assume that the traffic in smaller stores comparable, something over 2%?

And the second question is about your online business? Do you see any margin difference between online and store sales? Because I understand you have now similar pricing, and I try to understand the cost efficiencies here.

And the third question is on your leverage. What is the percentage of Turkish euro loans that you are expected to roll over next year at low interest rate? I'm trying to understand the impact of the low interest rate on your profitability next year.

[Ömer Tort, executive]

Thank you for all the questions. They are very relevant for our existing hot issues today, obviously, focusing our existing store base next to the expansion. Same-store growth figures, I mean, just to repeat myself, it is, of course, an easy task to disclose the like-for-like figures very straightforward.

But I've expressed several times, we have different store formats coming from 40 square meters up to 8,000 square meter with different banners. So there is going to be too much breaking down in order to really express and not overstate or understate one format to another. So this is the only reason that we are not disclosing the like-for-like at the moment.

Just to give you the sense of our top line growth, which is equivalent to 24.57% levels, we have a space growth at the end of period around 1.6%, but just to notice, the top line growth is an element of average space growth, not just the ending period.

So the average space growth of the company was at the levels of 4% to 4.5% level. So we should be deducting almost 4% to 4.5% from our 9 months' figures in order to really sense like-for-like levels, which are pretty much the figures that you are expressing. .

And the overall sense of the same-store growth today, what I can share at the moment that we are building our traffic to the building -- increasing our traffic, which is the case for the last 7 years that we are improving our existing store base customer traffic.

I take this as a very positive outcome, based on our marketing policy, pricing policy, private label, fresh product portfolio policies, these are all combined efforts that we are building year-to-year -- year-on-year growth with our customer traffic, which is an important gain for the company.

Obviously, in this environment of macro conditions, shoppers are very careful about their spending. So this is why our baskets are not at the levels of growth that we are all aiming for, but in terms of inflation comparable to today, I can express that our basket growth today are even higher than the inflation, so -- which is particularly an advantage for the company. So this is why our efforts are focusing on the installed base.

And at the same time, of course, rightsizing the stores which are under the challenge of significant nonfood category downturns, which is big-ticket items, of course, for this type of macro conditions are relatively more difficult to sustain the growth base of large ticket items.

So it was an [ embattled ] strategy for us, especially on electronics, furniture, textile, large ticket items, around the reconstruction for the last 3 years in the company, especially with the takeover of Kipa stores, this has been the case, and we are doing this step-by-step strategy to put more focus on fresh foods, to put more focus on service counters and to be combined for more variety on FMCG, pet food and branded items to support the customer traffic, whereas giving less space deliberately to nonfood categories, which are low stock turns and, obviously, in this type of market conditions, are shifting towards lower ticket items rather than high ticket items.

Regarding the margin profile of online versus physical stores, what I can express today, the same price policy is relevant, and we like to maintain this for coming periods. I cannot give you the full picture of how long we will continue on that front, but our existing policy is clearly the same: offering the shoppers the same price online and offline.

The outcome of it is very important because this is an extra service that we are providing to the shoppers with the same pricing portfolio. However, still, online is relatively higher gross profitability, thanks to the basket size that we deliver.

So shoppers are keen enough to appreciate our same price policy online and off-line. And also, they are appreciating our efforts on servicing them in the same-day deliveries, even within 30 minutes deliveries promises, so we are improving continuously our basket size in that front.

And tactically, of course, there are some minimum shopping thresholds, which is also helpful to higher the basket size. So in that sense, the contribution coming from the gross margin at the online operations are larger than the regular physical stores.

Of course, the bottom line is more important than the gross profit only. Obviously, the logistics cost is an important element here, with an extra delivery charge in some part of the territories of lower basket size, which is also managing to trade-off the cost of delivery versus the delivery charge model. And I believe -- personally, I am a believer of long-term view in this online structuring of the retailing operations.

And all in all, the delivery charge will be lowered in the coming periods, based on the new models of last mile, and based on the new technologies to be delivered for the shoppers. So that will be helping the retailers and online operators to lower their cost base.

So I'm positive that we can sustain the same price policy in the coming periods with a similar strategy, with the exception of some dedicated promotions might be relevant for online, and some dedicated promotions might be relevant for online and/or off-line exclusive, so this might be the difference for the shoppers to appreciate with the service that we provide.

Regarding our leverage, I will be glad to have [ Jan ] respond to your question for the Turkish lira figures equivalent.

[Ferit Dogan, executive]

Sure. As you all know, the lending rates in the country came down very fast and very deep and for an organization like ours, it takes time to get adjusted to it. At the end of the day, we maintain by the end of the year, we will have approximately TRY 1.3 billion debt and with an average maturity of close to 2 years.

So naturally, it's a tradeoff, when the interest rates are coming down very fast, it takes a bit of time for us to get adjusted to it. But obviously, between September and the year-end, we are bringing the interest cost on average blended rate for about 20 basis points already. So we are taking some 200 basis points already.

And next year, this will continue. Next year, our refinancing is going to be approximately around TRY 300 [ 200 ] million and the new rates, of course, we will benefit from the new rates already, which already started this process.

[Operator]

Your next question comes from the line of Akif Dasiran, TEB Investment.

[Mehmet Akif Dasiran, analyst]

This is Akif from BNP Paribas. Thank you for the presentation. I have to two questions, if I may. First one related with gross margin in the third quarter, I'm trying to understand the impact of information in your gross margin, because in the third quarter, it was your -- gross margins in a quarter that food inflation was negative [ contributor for ] the real sector.

But I just -- in your sales, unlike the other -- your competitors, you have tobacco and alcohol beverages as well, but we have seen major supply hikes in the third quarter. So my question is, is there any material impact of these categories, the price hikes in this category in your gross margin in the third quarter?

And my second question will be related to your 2019 guidance. You maintained your EBITDA margin guidance unchanged, which seems a bit cautious considering your first 3 quarters' performance. I would appreciate if you elaborate more on your expectations on fourth quarter.

[Ömer Tort, executive]

Thank you for the questions. To start with our gross profit evolution, I tried to express this, I mean the stock management is an important element, of course, in this high inflation environment, but as you correctly expressed, inflation drivers for the last 3, 4 quarters was mainly coming from fresh food inflation.

And fresh food inflation is a very volatile one, depending on the supply or the demand scarcity or demand hikes coming from the seasonality of the products. It is really hard to manage that. I mean it is hard for manufacturers, it is definitely hard for retailers. But to ease your mind, the fresh food inflation is the real volatility, whereas there are not much stocks on fresh fruit.

So the impact of this type of hikes are not relevant for stock levels of your operations. So that is why, yes, there is a fluctuation, but the impact, which is coming from the fresh fruit, is no relevance for your inventories that you are keeping up, because your inventories are mainly on the FMCG and nonfood categories.

So the movements of gross margins are pretty much coming, as I tried to express during the presentation. Part of it is now improvement on the supply chain, which is an important one. And a part of it is coming from the impact of the imported imputed interest charge that we are putting on the due dates the term payments.

As you know, Migros' overall situation is at the levels of around 90 days of payables and there is an inherent interest charge on the cost of goods sold or the type of purchases that we have. So the fluctuation that we're seeing from one year to another is an outcome of the interest charges at the payment terms that we are representing in the market today.

And as I said, 1/3 of it is our own improvements and almost 2/3 of it is coming from this interest movement, which is a part of the inflation hikes as well. So the short answer to your question, the less we have inflational hikes or volatilities are becoming less, the interest charges will be less volatile as well and its comparabilities of one quarter to another or 1 year to another will be relatively easier.

And we are positively trust that next year we're not going to cause such significant hikes coming from either from inflation or central bank positioning coming from volatile environments.

And regarding our guidance levels for the end of year, the figures that we are sharing is pretty much cautious coming for the existing moment, interest charges are going significantly lower, back-to-back with central bank's overall policy, there is a significant lower interest churn coming for the October and November -- from September and October outcomes, so we are trying to monitor that as well.

And that item, which is a financial charge, I know that at the end of it is the financial outcome, that includes interest fluctuations might be just differentiating that difference that we are coming up.

But on the regular -- on our operating profit levels, we don't see any fluctuation at the moment, and we trust that there is an even upside to be realized coming on the fourth quarter, although results with a better operating expenditure platform is the impact of lower interest -- I mean lower expenditures and inflation.

[Operator]

We have no further questions. I will now call -- hand the call back to Affan.

[Affan Nomak, executive]

Everyone, we thank you one more time for participating in Migros Q3 Conference Call. If you have any follow-up questions, please feel free to contact with our IR team any time. Thank you.

[Ömer Tort, executive]

Have a good day. Thank you.

[Operator]

Thank you, all presenters. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of the day.