Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to Ülker Bisküvi First Quarter 2020 Financial Results Conference Call and Webcast.

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

[Verda Tasar, executive]

Hi, everyone. This is Beste. Welcome to Ülker Bisküvi's First Quarter 2020 Financial and Operational Results Webcast. Now I hand over the ground to our CFO, Mr. Cenker Uçan. Take it away.

[Cenker Uçan, executive]

Thank you, Beste, and good afternoon, everyone. Before starting my speech, I hope everyone is safe and healthy. We are pressing through tough times and trying to adapt ourselves to this new reality. Therefore, I would like to thank you once again for joining our call.

With the start of pandemic cases all over the world, as Ülker, we have taken all necessary actions and we are closely monitoring the situation and the guidance from local authorities in all countries. Pandemic COVID-19 is not only a health crisis but also an economic one, together with the several restrictions imposed to limit the spread of the new virus in most of the major markets. Of course, this kind of huge economic and health crisis has major impacts on market routines. We have been talking -- taking solid actions to strengthen our endurance as a post-COVID action plan, which help us together with our target and sustain our presence in the market. I will explain the actions we have taken against the COVID-19 pandemic in the coming slides as well.

Earlier today, we send our press release and presentation slides, which are available on our website. When we look at the business, 2019 was a great year for Ülker. We finished 2019 in a really good shape, and we made a strong start for the year 2020. We delivered strong results in terms of top line growth and EBITDA margin. Both in our anchor market, Turkey and in our international operations, we improved our position and managed to increase both our volume and value. First quarter in Turkey, in all categories, we have launched 16 new products and each of them was very successful. I would like to mention some of the names here like in chocolate category: Metro Bal Kaymak, Albeni Viva. In Biscuit category: Hanimeller Mini and for Sakliköy brand, we launched Sakliköy Bitter.

In health and wellbeing category, we launched [indiscernible] by [indiscernible]. And in cake, we launched O'lala Bold, which were the names that comes to my mind. In Kazakhstan, we launched Albeni Caramel Cream and in Saudi, we launched Chocosandwich Dark, Biskrem Extra Kakaolu and McVitie's Caramel Lite Biscuits.

In the first quarter of the year, we continue to lead the Turkish confectionery market, with our 38.7% market share and maintain our leadership position in Saudi, Egypt, Lebanon and Qatar markets as well. An important development for us is the loan agreement that we have signed with an amount of USD 455 million and the maturity of 3 years and semi-annual interest payment with EBRD and 7 international banks, including Bank of America, Rabobank and Emirates. This is actually huge success. We appreciate these international banks for their trust during this tough times that the global markets are facing. And these agreements highlight international banks trust in our country and also our company.

Before starting our presentation, I will go over the macro figures and provide market insights, and then I will provide you with the set of financial results. And then we will have the Q&A.

Let's start with macro indicators. So seasonal and calendar adjusted retail sales volume with the constant prices increased by 1% in February 2020 compared with the previous month. As of February 2020, industrial production index realized as 111 and manufactured whole food products increased by 8% compared with the same month previous year. Consumer confidence index in Turkey realized as 58.2 in March 2020 compared to previous months, increased by 2%. A rise in general index was realized in CPI on the previous month by 0.57% in March 2020, and food inflation realized as 10% in March 2020.

So if we are looking to the Turkish confectionery market, total biscuit market was up by 1.5% in volume and increased by 20% in value terms, and total chocolate market improved by 9.7% in volume and increased by 27.7% in value terms. Total cake market increased by 1.5% in volume and increased by 11% in value terms. So in total, confectionery market grew by 3.8% in volume terms and increased by 22% in value turns. At Ülker brand of business, our volume has grown by 5% and in value, 23%, which these ratios are above the market growth and which enables us to maintain our market position in Turkey.

So in the beginning of my speech, so I mentioned that -- about COVID-19, the issue would that we are facing. During this period, we have continued to build and invest in our brands with marketing support and to focus innovations and new product developments in Q1, we have launched 16 new products during this period. And we have leveraged rising e-commerce trend and implemented our tailor-made e-commerce bundled boxes during COVID-19 to capture the growing online shopper community. We have accelerated digitalization for efficient retailers and traditional channel management, and strict measures are taken across all plants and we get all preparations for the sake of our business continuity. And lastly, our value optimization and cost efficiency projects are in process, and we will continue to recognize efficiencies during this period.

So if we are moving to the financial highlights. So as Ülker, we are operating in Turkey, around 75 years, and we are clear market leaders. And not only in Turkey, we are also a market leader in biscuit category in Saudi and Egypt. We are operating in 4 countries with 10 facilities, and our total capacity is around 1 million tons, which is the largest capacity in the region. And also, we have made all the acquisitions starting from 2016 and having very healthy financial structure.

In Q1, we have announced the revenues at [ TRY 2.2 billion TRY 376 million ] (sic) [ TRY 2.376 billion ] with a growth rate of 22.3%, and our gross profit has increased by 33%, and our gross profit margin has improved by 240 basis points and reached more than 30%. This is the highest gross profit margin in our history, we have seen positive impacts of input costs and sustainable growth in Turkey and also in the international markets.

Our EBITDA has grown by 25% compared to last quarter, and our EBITDA margin has improved by 50 basis points, and we have announced the EBITDA margin at 17.5% as of March 2020. And our free cash flow is our main priority, and we are continuing to focus to create more free cash. And we have created TRY 57 million free cash as of 2020, which is higher than last quarter.

On Page 10, so we have covered most of the figures, but I would like to show you that our volume growth, consolidated volume growth is 5.3%. So as I mentioned, that we have sustainable growth rates and our gross profit margin and EBITDA margin increasing compared to previous month. So we have a net loss in equity holders of the parent, which is mainly coming from the favorable decrease of liquid funds due to pandemic effects on global financial markets for temporary period, and we are expecting to have better values in the coming periods.

So now I would like to start with our confectionery volume and value numbers. So we have started 2020 with successful performance in all categories. And our total confectionery volume increased by 5%, and we have a revenue growth around 23%, and our biscuit volume has increased by 1.8%. So thanks to the successful launches in Turkey. And we have a revenue growth around 20% in biscuit category. And chocolate volume has increased by 13.5% and which are driven mainly new launches in chocolate category and marketing activities in all chocolate categories. And our revenue growth in chocolate category is around nearly 30% and our cake volume growth is 2.6%, and total revenue contribution is 2%.

So as you know, that one of our assets is we have a very successful export and international operations, and we -- and these operations are contributing very positively to our financial statements. So in 2019, the share of the international operations and export operation was around 38%. And we are seeing the similar numbers in terms of revenue as of 2020. And our EBITDA share in our total portfolio is 47%. So as you know, that this is a big asset for us, which enables us to create a natural hedge mechanism for our financial statements.

Now I would like to go to our domestic operations. So as you know that we are very strong, #1 in Turkey. And our total market share in confectionary cat business is 38.7%. So with the aim of being a market leader in biscuit category in line with our strategy, as you might remember, we became #1 in the beginning of 2019 in biscuit category. And as of March 2020, we were able to increase our market share in biscuit category. And currently, our market share is 41%. In chocolate, we are very dominant, and our market share is nearly 3x higher than #2. And we have a flat market share, which is around 42%. And we are very strong #2 in cake business, and our market share is in line with previous years, and we have a market share at 23%.

So as I mentioned in the beginning of my presentation, we -- although during this difficult period, we are continuing to focus our NPD processes and in 2000 -- in the first quarter of 2020, we have launched 16 new products, which we are seeing on the right side of the presentation, and we are supporting these NPDs with our marketing investments, and we believe that these NPDs will contribute to our revenue growth and also profitable side. On the left side, we are seeing the pictures of the synergy products. So these synergy products are quite important category for us because we are acting for Godiva as a production and exporting to all around countries and exporting to all the world. And the total contribution of the synergy products was TRY 424 million in 2019, and the total contribution as of March 2020 is TRY 117 million. So we believe that this momentum will continue and we are going to produce more McVitie's and Godiva and exporting to all countries.

So if we are looking to the financial statements for Turkey, the total volume has increased by 4% compared to last year and we have a revenue growth around 22%. And our gross profit for Turkey operations increased by 33% and with an improvement of 200 basis compared to previous month -- previous year. And our gross profit margin is 24%. And with positive contribution and efficiencies from our synergy projects, our EBITDA has ended up with 15% in Turkey.

Branded business is quite important for us, and we are continuing to focus more on our branded business. And the share of the branded business are similar to previous year. And the share of the branded business in terms of volume was 89% and it has increased to 90% of total portfolio in terms of volume. And in terms of revenue, the share of the branded business has increased from 93% to 94%. We will keep our strategy to focus more branded products in order to increase our profitability and also our market share.

So now I'm moving to export and international operations. So within our strategy to be in these other geographies, we have defined our strategy and starting from 2016, we made 5 acquisitions. And now we are seeing positive impacts of these acquisitions. So let's cover this by country by country. So now I would like to start with our second largest market, Saudi. So in Saudi, as Ülker, we have market share around 16%. And if we are adding McVitie's market share, which is around 8%, our total market share as Ülker, our market share is 24%, which is a 10 percentage point higher than #2. We are very strong in Saudi and we are seeing positive impacts also producing McVitie's in Saudi.

So for our FMC, I mean the first acquired company, we have a volume growth around 12% and our revenues have grown by 14%. And in line with these growth rates, our EBITDA has grown 14% and our EBITDA margin is flat, which is 18.8%. And for the second McVitie’s facility, I mean, IBC, we have here a flat volume and revenue growth, and our EBITDA has improved by 4.5%. And our EBITDA margin is 1 percentage point higher and is totaled 28.8%.

So on Page 22, we would like to show you the trend of our Saudi business. So in the last 3 years, we became strong #1 in the region in terms of market share and our market share is increasing each consecutive quarter in the market. And by integrating of our operations, IBC and FMC, we decreased our cost to serve in the region by creating synergies in procurement, production and distribution side. So in 2016, the EBITDA margin of our Saudi business was 13.6%. With these synergies and the acquisition of IBC, currently as of 2020, our EBITDA margin is nearly 25%. So if we are moving to Egypt. So as you might remember, at year-end '19, we became #1 in biscuit category in Egypt. And currently, we are maintaining our position and our market share is 16.9%, which is 0.4 percentage points higher than #2. And in terms of financial results, our total volume in Egypt has grown by 9% and our revenues have increased by 10%. And similar rate -- growth rate in EBITDA, we have 11% and our EBITDA margin is flat in Egypt, which is 15.2%. So if we are moving to UI MENA, the company who owns the production and distribution line of McVitie's in MENA side. We have 3% growth in UI MENA, and our EBITDA has grown 3%. And our EBITDA margin is 100 basis points higher than last year. And currently, our EBITDA margin is 32.4%.

And for Kazakhstan, as you might remember that we were discussing it last year, we have completed our CapEx investment in Kazakhstan. And we have committed to increase our profitability in Kazakhstan for 2020. And now we are seeing positive impacts of this new CapEx investment, and our business is growing tremendously in Kazakhstan. We have a volume growth around 30% and our revenue growth is 43%. And I mean, very strong EBITDA growth by 85%. And currently, our EBITDA margin in Kazakhstan is 14%. So we believe that this momentum will continue in Kazakhstan. So as you might remember, 2 years ago, the EBITDA margin in Kazakhstan was 6% to 7%. Now we have doubled our EBITDA margin, and we believe that -- I mean this EBITDA margin, will continue to increase.

So in terms of market share. So in Saudi, our market share is flat in line with '19 and currently, our biscuit market in Saudi is 24.3%. And we have improvement in Egypt by 120 basis points, and currently, our market share is 19 -- 16.9%. And we have also a strong growth in terms of market share in Kazakhstan in chocolate countline business, and currently, our market share is 20.3%. So as you clearly see that we maintain our position in all geographies that we are operating in. And on Page 27, we are seeing the pictures of our products in Saudi, Egypt and Kazakhstan. And so we are continuing to focus of the new products in the international businesses as well.

So if we are looking to the financial results, we have a volume growth around 8% as of March 2020. And our total revenues have grown by 22%. And our gross profit margin increased by 330 basis points and reached to more than 40%. And we have EBITDA margin at 21.5%, which is 50 basis points higher than last year.

So like in Turkey, we are continuing to focus branded business in our export and international markets, and the share of our branded business is also continuing to increase in international markets. So in terms of volume, it was 81% of total, which was branded, has increased to 84%. And in terms of revenue, the share of the branded business has increased from 83% to 86%.

Now I would like to move to balance sheet figures. So we have very healthy net debt-to-EBITDA ratio, which is a 0.6 multiple. It is slightly above last year. And in terms of net working capital days, we have reduced our trade receivable days. However, it has increased in trade payable days, which is mainly coming due to the eventual procurement that we made in 2020, but we are seeing a positive impact to our profitability. For the maturity breakdown, so after the new syndication, USD 455 million will be under a long-term basis. So we have also no maturity mismatch for 2020. And in terms of free cash flow, our free cash flow is -- has increased from TRY 34 million to TRY 57 million. So this is our main priority. We are continuing to focus for free cash flow and continuing to increase compared to last year.

So as I mentioned in the beginning of my presentation, we have a very successful syndication and the loan total was USD 455 million. And we achieved great success by reaching growth total in such global instable environment because of COVID-19 pandemic. So from 2017, we -- I mean, we don't have any FX exposure. So we are FX short term position was already hedged by using cross currency swap. So in total, we are long in U.S. dollar and short in euros, but the total net position is equivalent to TRY 451 million as of March 2020.

So as you might remember, 2019 was very successful year for us. We have a net sales around TRY 7.8 billion and our EBITDA margin was 16.7%. So now for 2020, we have set our guidance for net sales as TRY 9 billion, and we are expecting to reach a 17% EBITDA margin.

Now I am opening the call for your questions. Thank you very much.

[Operator]

[Operator Instructions] The first question comes from Ece Mandaci from Unlu & Co.

[Ece Baysal, analyst]

I will have two questions, if I may. One is on your revenue growth guidance. Since you have announced already 22% growth in the first quarter, is there -- could there be any upside to your revenue growth guidance of 16% growth for full year? Since April also has passed, have you seen similar revenue growth as in first quarter in April? Or is there any possibility of the coming demand in Saudi Arabia, especially? If you give some color on that front, it would be great.

And second question is on your financial investments. You're classifying these investments in short term and you reported an impairment on that asset. For the coming quarters, could there be an accounting change? And could you classify that asset has helped maturity? What's your plan on that?

[Cenker Uçan, executive]

Okay. Thank you very much. So with regards to your question, so I mean, as we mentioned that due to COVID-19, we are now passing through tough times in all around the world. So I mean, for our Q2 performance, so there might be slightly lower performance in our gifting space due to the [ curfew ] in Q2 because gifting is quite an important business for us. But due to the new, latest situation, there might be a slightly lower performance, but we are aiming to compensate the gap in other categories. So for the total, actually, we are not seeing any material mismatch to our guidance and we believe that continue to meet our guidance for 2020. And so we will also keep you updated during our Q2 call.

With regards to your second question, actually, it is not impairment. It is a fair value loss and so I mean, these liquid funds are originally short-term oriented products. So therefore, we are continuing to classify and account it under short-term assets. But of course, I mean in our funding strategy, I mean, we are going to keep these liquid funds for a long-term period.

[Operator]

The next question comes from Harry Whelpton from Vergent Asset Management.

[Harry Whelpton, analyst]

I have 3 main questions. The first is related to the cash outflow from the purchase of other businesses or share of funds or debt instruments, if you could expand on that and just give some clarity. And then second of all, if you could talk about the distribution channels, and if you're noticing any pressure on the traditional channel, which is probably less able to fund itself, whether you're having to extend credit terms for these retail channels during the impact of the crisis. And then lastly is on the margins for domestic and international. As you mentioned, they're now in the highest levels that we've seen recently. So if you could give a bit more color on what have been the real key drivers recently. And whether you expect there to be much room for them to grow further, that would be really helpful.

[Cenker Uçan, executive]

So for your first question, I mean, we are talking about in the cash flow side. So it is due to the -- I mean, Godiva capital increase. And also, I mean -- so what was your first question?

[Harry Whelpton, analyst]

Yes. It was related to the outflow on the cash flow statement.

[Cenker Uçan, executive]

Okay, TRY 943 million. So I mean, this -- I mean due to the classification of the liquid funds, so it is the -- I mean in 2020, will be some portion have been funded under liquid funds. So that's why it's -- you are seeing a movement in the cash flow side.

And for your second question, so other...

[Harry Whelpton, analyst]

On the -- you said it's a reclassification from one type of fund to another, is that right?

[Cenker Uçan, executive]

Yes. So as of 2019, it was under cash equivalents. And in 2020, some -- these related movement has been classified under these liquid funds. So that's why you are seeing a movement in the cash flow side.

[Harry Whelpton, analyst]

Okay. So it moved from a cash item, from cash on hand to investment...

[Cenker Uçan, executive]

Exactly. So for your channel question, so we have monitored increasing shift to modern channel from traditional channel. And e-commerce business, home delivery and pickup services are gaining importance with the experience of long tiers. We quickly adopted our supply chain in that way. So in terms of cash flow side, we have not seen any collection issues from our retailers or distributors. Of course, as Ülker, we are the market leader and considering [indiscernible] of course, there might be some support if there is a need. We might consider to support our customers if needed, as we did in previous years.

And so in terms of margins, so in Turkey and in the international side, we had a very successful Q1, and we believe that continue this momentum in the following quarters. Of course, Q2 is quite crucial for us because due to the COVID-19 impact, there might be upside and downside. But as I mentioned in the beginning of the presentation, we are monitoring our factories and we are monitoring the market, and we are also listening our -- the needs of our customers. So we will have a more better pictures in May. But so far as of April, we have not noticed any issue as of April 2020.

[Operator]

The next question comes from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

Congratulations for the strong operating performance part. But again, my question is related to reclassification. Actually, I was a little bit disappointed with this because I have difficulty to understand the dynamics in that front. Because you're recording it under the cash and cash equivalents in fourth quarter and in the first quarter, you changed it to the liquid funds. But we see that in the first quarter, you have a liquid assets, which is likely to be similar to time deposit because of lower fluctuation -- significant fluctuations in previous quarters. It's not a very similar. So you were recording under that. But now in one quarter, we are seeing a significant loss, fair value loss. So maybe this is the correct way of showing the number now compared to past but I want to understand how could we go forward with this. What could -- because this is a significant number. So the business size is much more simple now than 5 years ago. I'm very comfortable. And it's really -- you're just doing what you are -- what you need to do. So that's why this is very much clear. But could you give us some clarification on that front? Because we don't have any details of the fund.

[Cenker Uçan, executive]

Okay. Cemal, so due to the line, I didn't get your latest sentence as you were saying that business was clear but for the [indiscernible]

[Cemal Demirtas, analyst]

The operating -- yes, over the last 5, 10 years, you're operating -- the structure is much more clear. But this side, the balance sheet side and this transition to -- from cash and cash equivalent to liquid fund is the question mark in my mind right now because in one quarter, you record the significant loss index, and it's a financial investment in the short-term item. So I would -- could you give us some comforting thing or the indication for the future. Or are we just going to assume that, that could be volatility and ignore it? I just -- I don't know if you can share anything further to be more comfortable because one -- in one quarter, I see an item in the cash and cash equivalents moving into financial investment, which is a liquid fund and which has a very volatile characteristics. So maybe what -- how could we be looking? Or I may be making the wrong analysis, just I want to hear your perspective on that.

[Cenker Uçan, executive]

Okay. Thank you, Cemal. So I mean I understand your concerns, but let me explain you. So I mean from the starting take of the placement, I mean, in line with IFRS policies and with the approval of the independent auditors, those liquid funds classified under cash and cash equivalents, with the fact that annual return will be expected to be equal to international placement return. So that's why, I mean in '19, these funds were accounted under cash and cash equivalents. And as you know very well, I mean, not only you and also other analysts, in 2019, the returns of these funds were above the general market conditions, by the way.

So for 2020, so I mean, considering this instable global environment due to the COVID-19 pandemic, we have evaluated the accounting treatment of the liquid funds together with the independent auditors, and decided to account those assets under this financial assets. So I mean, because currently, as we said, we don't have any funding issue and considering the placement interest rates being close to nearly zero, we have stated our strategy to invest these liquid funds for long-term purposes. So I mean, we are now -- due to the pandemic, I mean, this period is temporary and we strongly believe that -- I mean, once these markets stabilize, our returns will be in line with previous years. So therefore, I mean, these funds will be continuing to account under this financial asset. And we are monitoring the market. And I can say that as of -- I mean, considering the indices position in global economies, we are seeing improvement in this -- in the value of this liquid part.

[Operator]

Next question comes from Metin Esendal from Renaissance Capital.

[Metin Esendal, analyst]

I got a question, I think it's a follow-up to last one. Can you tell us what is the mandate of this liquid mutual funds actually? And what is the expected return in a normal year? And maybe we expect some reverse in these losses in the remaining part of the year, given that financial markets have recovered from the lows. Then I have another question after this one.

[Cenker Uçan, executive]

So I mean, I can say that the return of these funds was 12% in '19 -- I mean for 2020. I mean, we are monitoring the markets. So there is not any -- I mean, it's going to be in line with the market dynamics. So we will see. But as I mentioned, that is so far, there is improvement in terms of value of March figures.

[Metin Esendal, analyst]

Okay. Maybe if you give some numbers compared to March end, do you see positive figures in -- as of April end? Or -- that will be great if you share any colors on these funds, given that they are quite sizable.

[Cenker Uçan, executive]

Yes. I mean, Metin, currently, I mean, there is no need to talk about the numbers, but I can -- honestly say that, I mean, satisfactory number of total has compensated.

[Metin Esendal, analyst]

Okay. Understood. And the second question [indiscernible]

[Cenker Uçan, executive]

Of course, it is going to -- I mean, in line with the market dynamics. So I mean if in -- as of Q1, if the markets will be much, much better, of course, we are continuing to get these returns. But as I told you, I mean, we have 12% return as of '19. So from a cash perspective, we should consider the returns that we have recognized as of '19 as well, while we are making no calculations.

[Metin Esendal, analyst]

Okay. Second question on syndication loan. And a total of USD 455 million loan was secured recently, but it was higher than the original syndication, which matured in April. So do you expect a similar rollout for the remaining second tranche, which is maturing in November? That's my second question.

[Cenker Uçan, executive]

Okay. I mean -- so we launched the syndication. And so based on the figures, I mean, during this difficult environment, we got USD 455 million. So for November, we have not decided the road map yet. So therefore, this additional USD 80 million will be our pocket money for renewing our November syndication.

[Operator]

The next question comes from Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

I have two questions, and I need to confirm one, frankly. So the first question is about the demand. You mentioned about that, I mean, your volume performance in the second quarter looks okay at the moment. Can you please share some volume performance numerically so far, you in observed in Saudi, Turkey, Egypt and maybe because they keep some after the curfews? I mean, is there any sort of decline in the volume? Or you are still registering some sort of volume growth in these countries after March? And the second question is about your cash position. I was expecting you to use your cash position to repay your debt, but you get a new loan. So I mean, why do you keep very high cash position on your balance sheet at the moment? And this cash outflow from the balance sheet related to these liquid assets. I just want to confirm, if the total is TRY 943 million. So I understand TRY 568 million is related to the liquid asset and the rest, which is TRY 375 million, is it related to Godiva capital increase?

[Cenker Uçan, executive]

Actually, I think there are some mismatch in the numbers. I mean, there is no number for Godiva capital increase.

[Hanzade Kilickiran, analyst]

And so I couldn't find, I mean, because the disclosure showed that there were 3 building reclassification, and on the cash outflow the number is TRY 943 million. So I presume that TRY 568 million, which is the investment loss is recorded under dividend -- I mean, cash outflow from the investment. So what is the rest of the money? I mean, TRY 375 million?

[Cenker Uçan, executive]

Hanzade, so let's talk this offline because we couldn't follow your numbers. But let's start with the questions that for the demand. So I mean, we have set a guidance for 2020 in revenue and EBITDA side. Actually, now we are closing the April currently. So actually, I didn't have a proper data for the revenue and volume side. But I can say that, I mean, this guidance includes all these conditions that we are observing in April. So we have also May and June. So as I mentioned that, and currently, we are waiting lower performance in our gifting sales due to the curfew in Turkey. But we aim to compensate the gap in our other categories. So we will have a better picture at the end of May in terms of Q2. But as I told you that our guidance has been already considered these risks and opportunities for our yearly figures. So for the cash position side, actually, we are very, very happy to have this syndication and to renew, I mean, this syndication in April 2020, because we have 3-year loan. And considering the uncertainties in the market, I mean, we have -- I mean, it is more safe to have sufficient cash on the balance sheet side. So we believe that these uncertainties will end up in one day. And as Ülker, we are continuing to invest in our facilities and also in our businesses. As you know, that there might be some acquisition opportunities in Turkey or in other countries. So I mean, we are confident that we did a great job in order to renew this syndication, although having COVID-19 impact in global markets.

[Hanzade Kilickiran, analyst]

So you prefer to take the currency risk, I understand?

[Cenker Uçan, executive]

Currency risk, we don't have any FX exposure on the balance sheet, as you know that.

[Hanzade Kilickiran, analyst]

No, on the EBRD loan. It's still a loan, right?

[Cenker Uçan, executive]

Yes. That is the U.S. dollar-euro mismatch, as far as I understand your question. But we are monitoring this policy as well. But as you know, that we have enjoyed this penalty decline in the last 2 years. So if we believe that there is a need of hedging instrument, we can fix this penalty going forward.

[Operator]

[Operator Instructions] The next question comes from Erdem Hafizoglu from BGC Partners.

[Erdem Hafizoglu, analyst]

Regarding the working capital, we see some increase in the first quarter. Is that any seasonal issues as you previously commented that you are targeting to reduce working capital in 2020 as well? So are you going to take some improvement in the following quarters?

[Cenker Uçan, executive]

Sorry, I have difficulty to hear your, Erdem.

[Erdem Hafizoglu, analyst]

Can you hear me now?

[Cenker Uçan, executive]

Yes, better.

[Erdem Hafizoglu, analyst]

Excellent. My question is regarding the working capital. We see some increase in the first quarter. Is this a seasonal issue? Or your previous comments were on some improvement in 2020 as well as we see in the last quarter of 2019. So should we expect some improvement in the following quarters of the years? I want to hear your comments on that.

[Cenker Uçan, executive]

Okay. So I mean, this is the comparative of -- with year-end. So if we are looking to the March 2019 net working capital day, so you can also follow it as [ 72 days ]. So compared to previous quarters, March to March, we are seeing improvement in 2020. But I mean except, COVID-19, I mean, in Q2 we are continuing to focus our free cash. Cash flow is our main priority. So as you might remember, as of 2019, we have created more than TRY 400 million free cash and we are continuing to increase our free cash flow ratios.

[Operator]

The next question comes from [ Emre Tamas ] from [ Tamco ].

[Unknown Analyst]

The -- I'm going to attempt to get an understanding of this number on the cash flow. Two people called and asked earlier, but hopefully, I'll do a third attempt on it, then hopefully, we'll get an answer. There is an item on your cash flow statement that says, a purchase of cash outflow for purchases of liquid funds, and the amount is TRY 943 million. So the question is, is this -- did you guys purchase new units of this fund during the quarter and that's why you have a TRY 943 million outflow? Or is this something else? Because the total reclassification amount is TRY 3.8 billion, which is not anywhere near close to this TRY 943 million number. So I'm trying -- I'm having a difficult time comparing the 2 numbers.

[Cenker Uçan, executive]

Okay. So as you know, that we have classified our cash and cash equivalent balances and liquid asset in '19, in line with 2020. So this, minus TRY 943 million was in the cash as at 2019. And in the first quarter, I mean, we have bought some liquid asset. I mean, we have evaluated this money under liquid asset as at 2020.

[Unknown Analyst]

Right. But the balance that you show on the balance sheet is -- before reclassification is TRY 3.8 billion. So what is that TRY 3.8 billion number?

[Cenker Uçan, executive]

It's not the classification. It is -- there was a cash balance as of 2019, so TRY 940 million of this total has been moved to liquid asset due to the purchase of liquid funds. Okay?

[Unknown Analyst]

Okay. So you made a new purchase during the quarter. You added to your position in the liquid fund in the quarter. Right. And the second question I have is, again, this was treated as a cash equivalent and in the footnotes, it calls this a liquid fund. Can you -- and there was a question earlier, which I don't think we got an answer, but can you talk about what kind of a fund this is? Is this a -- for -- since this is a short-term fund, I'm assuming this is a money market fund. But I am having a very tough time understanding how a money market fund could make 15% in one year and then lose almost 15% in one quarter in this environment. And even though the markets rallied, I'm assuming you're not really expecting the recovery of this TRY 500 million in the second quarter so far. So then my assumption is, this is not really a money market fund. And in that case, how do you classify this as a cash equivalent? Because for a consumer product company, I'm having a very difficult time with all this leverage that you have, all this debt on your balance sheet for you to make such a risky investment in a volatile fund and classifying it as cash or cash equivalent, it just -- I am having a very difficult time understanding those numbers. So is it an equity fund? What kind of a fund is this?

[Cenker Uçan, executive]

I mean, for your last comments, so as I mentioned that considering the interest rates, which are close to zero, I mean, our strategy was to invest these liquid assets, liquid funds in '19. So I mean, all this accounting treatment has been considered and aligned with independent auditors. So therefore -- I mean, as I am underlining again, the return of these funds was 12%, that's it. So therefore, I mean while you are mentioning about the loss, you should also include the return before '19 in order to make a proper analysis. So for the nature of these liquid assets, so there it has been included some funds. I mean, and also some equity investment and also some government loans and other instruments. So therefore, I mean, considering the nature of these assets, we are recognizing under this line, in line with IFRS standards.

[Unknown Analyst]

And for the -- the market had a really strong recovery in April since the quarter end. So would it be fair to assume that you recovered a good portion of this TRY 500 million loss in the -- so far in the second quarter? Or would it not be accurate to assume that?

[Cenker Uçan, executive]

If I made it [indiscernible] I'm not giving any specific number, but what I am repeating again, I mean in April -- I mean, it is in line with the global market indices and environment. We have started to recover in a satisfactory manner.

[Operator]

The next question comes from Ali Al-Nasser from Vergent Asset Management.

[Ali Al-Nasser, analyst]

A quick follow-up on the last question, please. A lot of it you've answered, but just a follow-up. These equities and debt instruments, are they local equities? Are they international equities? Are they local bonds, international bonds? And who are they managed by? And did I hear you say that you've invested more in Q1? Or can you just confirm if that's the case, please? So that's my first question.

[Cenker Uçan, executive]

Okay. All these funds are in global markets. So -- and it is managed by global fund managers, okay?

[Ali Al-Nasser, analyst]

And did you -- can you just confirm if you've invested more money into these funds in first quarter?

[Cenker Uçan, executive]

I mean, so we have thought that some portion have been invested in the first quarter, as you see in the cash flow side.

[Ali Al-Nasser, analyst]

Okay. And can you just explain maybe -- but I don't know enough about that side of the business, but just what would be the logic of investing? I mean, if investing more money into the funds, is there a particular view that you're taking? And can you just elaborate on why you would invest more money in this type of environment, which I would assume there's a little higher risk than...

[Cenker Uçan, executive]

Yes. Yes. I have explained these questions. I mean, I think it is the third time. And I actually -- I mean, considering the market dynamics, we are expecting to get better returns compared to bank placement. And as you know, that we have recognized USD 55 million in 2019. So I mean, I would expect these questions while we get these returns in '19 as well. Okay?

[Ali Al-Nasser, analyst]

Yes, sure. But I think we classify differently in '19, if I understood.

[Cenker Uçan, executive]

Yes. I mean, this was already recognized in the P&L. And all of you have seen the -- as other interest income. I mean -- so therefore, I mean, we have to look these numbers on a cumulative basis, considering the [indiscernible] margin in '19. But if we are looking at only 2020, it is not going to be worse because as I told you, in '19 our strategy, we are going to keep this fund for long term, not short term. So therefore, I mean we are now -- I mean, not only Turkey, for global markets, we are passing through tough times. And one day, these markets would be normalized. And as of April, it has been already improved and these 2020 losses would be recovered.

So in terms of timing, I mean we will see together. But I mean, the main sentence is we are going to keep these funds for long term. As Ülker, we don't have any funding issue and considering these interest rates, I mean, we believe -- we strongly believe that we are going to gain higher recoveries in 2020, in line with the stabilization of the market. Thank you. Okay.

[Ali Al-Nasser, analyst]

Okay. Great. Just one more -- a few more actually. Just on the Godiva, can you remind us how much was raised from the sale? And how much you invested in the new business? And how much is left in the company? And what you intend on doing with that cash? So that's the second question.

Third is on percentage of sales that are used for gifting. You talked about that being a softer time today. So just maybe if you can elaborate on the percentage of sales that comes from gifting?

And then the last question is on the synergy products. Are the margins of synergy products higher or lower than the Ülker products that are not related to McVitie's and Godiva?

[Cenker Uçan, executive]

Okay. Thanks. So I mean, for your first question. So I mean, as you know, that we have attended the capital increase in Godiva New York as at year-end. I mean USD 60 million capital increase has been made. And we have a dividend income as at year-end. And now the business is continuing in a global shape, and they have ambition to open new stores. So we are going to see positive returns from our Godiva New York investment as we did in Belgium side.

So for gifting products, the total number is around -- I mean, yearly number is TRY 300 million level. So I mean, that might be lower performance due to the curfew, but it is not going to be a material amount to our financial statements because as I told you, we have considered all these risk and opportunities, while we were setting our year-end guidance. So as we will have a better picture in May. And also, I mean, from our operational perspective, from our business results, we don't have any issue, and you can also clearly see in our financial results. And this momentum will continue because during this COVID environment are -- all seems [indiscernible], and we have continued to serve our customers. And we believe that we are not going to face any issue as of Q2 as well. For synergy products, yes, I mean, due to -- I mean, if you are talking about export purposes, of course, these products portfolio profitability are slightly higher than Ülker portfolio considering their price positioning. And so due to the synergy products, we are increasing our profitability.

[Ali Al-Nasser, analyst]

Understood. I just wanted to follow-up on your answer to the Godiva question. Just -- if you can give me some numbers, please, in U.S. dollars because I think you saw the U.S. dollar will be invested moving forward. How much was the proceeds? How much was invested and how much is left in the company?

[Cenker Uçan, executive]

I mean, are we talking about total?

[Ali Al-Nasser, analyst]

Yes. I mean, if you look at how much you raised from the sale of Belgium or the Godiva Belgium business and then how much you invested in the new and how much is left in the company today from the cash. Because my recollection is that there was a plan to pay a dividend with some of the proceeds. So I just wanted to have the numbers if we could start there.

[Cenker Uçan, executive]

Yes. The dividend amount was around, as far as I remember, USD 130 million. I mean we got this dividend in '19. And I mean, for the capital increase, I mean, all these transactions were in '19 and the capital increase was USD 60 million.

[Ali Al-Nasser, analyst]

So basically, for the remainder, USD 70 million, what is the utilization of those proceeds?

[Cenker Uçan, executive]

What do you mean utilization?

[Ali Al-Nasser, analyst]

Sorry, where do you intend on investing these? Or do you intend on paying a dividend? Or -- because I remember, at some point in our conversations, there was a plan to pay a dividend from the sale of Godiva.

[Cenker Uçan, executive]

So for the sale of Godiva, so I mean, we got cash and reduced our debt and we will look for further opportunities.

[Ali Al-Nasser, analyst]

So the USD 70 million, you used to pay back -- you pay down debt. And basically, the rest will be used to do M&A, for example, or opportunity?

[Cenker Uçan, executive]

Yes. Yes, we will consider, considering the macroeconomic environment.

[Ali Al-Nasser, analyst]

Okay. [indiscernible] because I think that's probably not right way of allocating capital.

[Operator]

We have no further questions. Mr. Cenker Uçan, back to you for the conclusion.

[Cenker Uçan, executive]

Thank you very much for joining the call. Actually, I am very pleased with our strong start of the year. And share this success with our shareholders and partners.

So to recap, we remain confident in our strategy and in our ability to deliver our financial commitments for 2020. And we will look forward to update everyone in our upcoming second quarter results. I wish you a good day. Thank you.

[Operator]

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