Ulker Biskuvi Sanayi AS

IST:ULKER.E

Earnings Call Transcript 2019-Q2

[Operator]

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

I now hand over to your host, Ms. Beste Tasar, Investor Relations Director. Madam, please go ahead.

[Verda Tasar, executive]

Thank you, Ian. Good afternoon and welcome to Ülker Bisküvi Second Quarter 2019 Earnings Conference Call. We appreciate you joining us today to discuss our results and our full year outlook for 2019. On the call today, we have Cenker Uçan, CFO of Ülker Bisküvi. Following his remarks, we will open the call for your questions. Now I turn the call over to Cenker Uçan for his comments. Cenker?

[Cenker Uçan, executive]

Good afternoon, everyone, and thank you for your participation to discuss our second quarter financial results. So we are very pleased with our second quarter results and the momentum we are seeing behind our key initiatives. Our balanced plans and capability investments are enabling us to deliver accelerated sales growth and differentiated earnings performance. In particular, I would like to highlight that we left another successful quarter behind with an historically hot EBITDA margin. Within 2 years, we break our records in each quarter in all financial metrics, which shows tremendous momentum that we gained during this period. And in addition to that, we increased our market share, both in Turkey and in international operations.

In our anchor market, Turkey, we have solidified our leadership in confectionery market. And as 2019 economic outlook was foreseen as a tough year, we have selected to launch innovation in key areas. We have been very careful about price positioning, and we have overachieved our sales and profit targets. And when we look at the second half, the outlook is positive. In our international operations, we gained market share in all other -- in all regions. And our market share in Saudi reached the highest level in our history and new launches increasing shelf visibility, and the improved penetration made a positive contribution in Biscuit and Chocolate segment. Ramadan and Eid period made a positive contribution to our sales both in Turkey and MENA regions and especially in Turkey. MENA's like-for-like sales growth, 2019 Ramadan period was the best period compared to previous years. In Saudi, Godiva and McVitie's brands grew significantly on the back of promising new product launches. Our strong performance with a profitability focus remain unchanged as well, and we have completed another strong quarter of gross profit and EBITDA margin expansion in Turkey and in our international operations.

In second quarter, in Turkey, the improvement on EBITDA margin was around 180 basis points. And on the international operations, we increased our EBITDA margin by 220 basis points. On the balance sheet side, we keep our unique position in the market without carrying short FX position. Moreover, we improve our net debt-to-EBITDA ratio from 1.6 multiple to 1.25 multiple. Cash flow is our main priority. We have generated TRY 162 million that are free cash during this first half, and we kept ourselves full -- focused on cash generation in the coming periods again. Before starting our presentation, I will go over the macro figures and provide market insights, and then I will provide you with the details of financial results. Finally, I will make the closing comments, and then we will have Q&A. Let's take a look at macro indicators. Seasonal and calendar-adjusted retail sales volume with constant prices increased by 0.3% in May 2019 compared with the previous months. And as of May 2019, industry production index realized as 121. Adjusted industrial production remained flat, and the manufacture of food products decreased by 6% compared with some -- same month previous year. Consumer confidence index in Turkey realized as 57.6 in June 2019 and compared to previous months increased by 4%. And food inflation realized as 19.2% in June.

If we are moving to the market dynamics in Turkey, I am starting with total confectionery market. As you know that due to the downsizing activities in total confectionery market, there might -- there has been a shrinkage in the market in terms of volume, which is around 4.4%. And in value terms, the total confectionary market grow by 22.3%, and whereas Ülker-branded growth is around 26.3%.

The total biscuit market was down by 3.8% in terms of volume. And in terms of volume, it has increased by 28%. However, our growth is more than the market growth, which is around 29% in terms of value. And for the total chocolate market, which has contracted by 4.9% in terms of volume, and it has been grown by 21.8% in value terms. And at Ülker, we did grow in chocolate business around 27%, which is also higher than the market growth. And the total cake market shrank by 13% in volume. And in terms of value, it has grown by 17.4% in June 2019. And at Ülker, we are operating in Turkey over 70 years, and we are leading the confectionery market company in Turkey. And now not only in Turkey, after our successful acquisitions in 2 years, we became the largest producer of the region, including Middle East, North Africa and Central Asia. In the last 3 years, we have invested around TRY 800 million for CapEx in order to increase our capacity and efficiencies, which enables us to decrease our fixed costs. After the finalization of IBC acquisition, number of facilities reached to 10 in 4 countries. And as of today, our capacity exceeded more than 1 million tons, which is the largest production capacity in the region. If we are moving to the second quarter consolidated performance highlights, we have recognized around TRY 1.8 billion revenue, which growth is around 38.7%. And our gross profit has grown by 55%, which is much higher than the revenue growth. And another big success is in terms of gross profit margin, which has improved by more than 300 basis points. And our EBITDA has grown around 59%. And our EBITDA margin has ended up with 17.5%, which is the highest EBITDA margin in our history, and we have improvement in EBITDA margin around 220 basis points compared to previous periods. As we have very healthy net debt ratio, which is around 1.25 multiple. And the last year's net debt-to-EBITDA ratio was around 1.6x. So as you might see that having a good balance sheet structure and generating free cash flow, it has enabled us to decrease our net debt-to-EBITDA ratio at healthy levels. And as I -- recall that the free cash flow generation is quite an important area for us, and we have generated around TRY 135 million free cash as of June 2019, whereas our cash flow was negative last year. So there is a big jump compared to previous year in free cash flow generation. Since I have covered the second quarter, I am moving to cumulative June 2019 figures, our total volume has increased by 3% in volume and our total revenues have grown by 38%. And our gross profit has increased by 47%. And in terms of gross profit margin, our cumulative gross profit margin has been realized as 27.8%, which is 180 basis points higher than previous months -- previous year. And our EBITDA margin -- cumulative EBITDA margin has realized around 17.2%, which is 160 basis points higher than last year. And in terms of net income, we have a positive net income, which is 38% higher than last year. In terms of net income margin, it is similar to previous year, which is around 13%. So our business in all regions are growing very rapidly. And if we are covering our total sales in terms of volume and value, so I am starting with second quarter results. So our consolidated confectionery volume increased by 1.6%. So this is mainly coming from positive contribution of Ramadan period, which was one of the best Ramadan period in our history in Turkey and also in Saudi. And in that respect, the biscuits volume has grown by 2.5%, which has a contribution around 40% to our revenue growth. And in chocolate business, our chocolate volume grown by 4.2%. And we have a growth rate around 40% same -- in chocolate sales. And for the cake volume, we have a decline in our cake business in terms of volume, which is mainly due to the -- making some price adjustments. However, we have a positive growth in cake sales, which is around 18% growth compared to previous periods. So I mean we have same -- similar growth rates in cumulative figures. So therefore, I am just highlighting our total figures. So the total volume increased by 3%, and we have a total revenue growth around 37% compared to previous cumulative figures. So we are continuing to focus our international operations. It is quite important segment for us because considering the FX rate fluctuations in Turkey, it is helping us to increase our revenue and profitability. So therefore, the share of international business is growing very rapidly. So in terms of revenue, the share of international operation was around 33%. However, in 2019, it has increased to 38%. And it has also a positive contribution to our profitability. Where the share of the international business was around 40% in 2018, it has moved to 46%. So as I told you, so this is quite important asset for us. It has enabled us to have a natural hedging mechanism in our balance sheet and enabling us sustainable profitability in our figures. So if we are starting with Turkey. We are very strong, #1 in total confectionery market in Turkey. Our market -- total market share is around 37%. And as you might remember from previous years, we have ambition to be #1 in biscuit category. And in 2019, we achieved this target. And currently, both in volume and in value terms, we are #1 in this category. And our market share has improved around 0.6 basis points. And currently, our market share in biscuit is around 40.7%. And in chocolate, we are very dominant. So our market share is nearly 3 to 4 -- 3.5x higher than #2. And we are able to increase our market share in chocolate as well. In 2018, our market share was around 38.7%. And now in 2019, our market share in chocolate is 40.5%. And our market share in cake is flat, in line with previous years. So on Page 14. So we have presented our pictures of our products. So on the left side, you are seeing the synergy products. Synergy products are quite important process for us. And after the establishment of Pladis, we have started to produce McVitie's and Godiva chocolates in Turkey and started to sell in Turkey and also to other export countries. So we -- it is our most important segment for us. The total contribution of synergy products was around TRY 146 million in terms of revenue. And as you might recall that the total contribution of this segment was more than TRY 300 million in 2018, and we are expecting to reach these levels in 2019 as well. And on the right side, these are the pictures that we have launched in 2019, which are helping us to increase our revenue and also helping us to gain our market share in Turkey in biscuit and in chocolate categories as well.

So for financial performance of Q2, our volume was flat compared to previous quarters. And we have a very strong revenue growth in second quarter. The revenue growth is around 27%. And another success is in gross profit. Our gross profit increased by 35%. And in terms of margin, we have improvement around 120 basis points. And in terms of EBITDA, we have reached the highest level in Turkey's profitability. We have improvement around 180 basis points compared to previous quarters, which we are seeing positive impacts of taking necessary actions in the previous quarter. On a cumulative basis, we have a volume growth around 1%. And the -- in terms of value, the cumulative revenue growth is around 28%. And our gross profit margin is 22%, which is around 90 basis points higher than last year. And our cumulative EBITDA margin is 15%, which is 110 basis points higher than previous year. And as you know that we are mainly -- mostly branded producers and sellers, so we have continued to focus our branded business. And currently, the share of the branded portfolio is around 93% in terms of value. So as you have noticed that, 2019 was very successful period for Turkey operations. So we believe that this momentum will continue in the second half of the year. So on Page 19, so we are seeing the milestones of our acquisitions. So we have completed all our acquisitions. And for Saudi, we have created huge synergies. And I mean the target was to create these facilities as a production hub for Middle East, North Africa and Central Asia. So we'll stick to this strategy and seeing positive impacts for our sustainable growth, gaining market share and having huge synergies in all regions.

So I would like to start with our second largest market of Saudi. And first, we -- I would like to start with FMC, our first acquired entity in Saudi. We have volume growth around 2.4% in FMC, and the revenue growth is around 13.5%. And our EBITDA has improved around 20%. And currently, our EBITDA margin is around 15.6%. And another big success was in terms of market share, as Ülker only, our market share is 17.4%. And if we are adding our second brand, McVitie's, which is -- which has around 8.4% market share, the cumulative Ülker market share is around 26%, which is highest market share in our history in Saudi market. And our gap with #2 is increasing and getting much higher in Saudi. And for our second facility in Saudi, IBC, we have a flat volume growth and 2% growth in revenues. However, our EBITDA margin is 27%. This is mainly related with growth production activities that we have started to produce some products in FMC and some products in IBC. So I mean we have very successful period in IBC as well in 2019. We have prepared a very important slide for Saudi. This is clearly showing us our success of our strategy. Once we have entered in Saudi market, our EBITDA margin was around 13.6% in 2016. And after 3 years period, our consolidated profitability in Saudi market is more than 20%. And in terms of revenue growth, as you might see that we have doubled -- more than doubled growth in Saudi business. And this is clearly showing us the -- we have a very clear strategy in Saudi. And with the positive impact of synergy production -- synergy products in Saudi, our momentum will continue in 2019. So in Egypt, we have a flat volume growth and 5% revenue growth. However, our EBITDA has grown more than 10%. And currently, our EBITDA margin is more than 16%. And as you might remember that once we have acquired this facility in 2016, our EBITDA margin was single digits, 5% to 6%. And now currently, we are recognizing more than 15% EBITDA margin in Egypt. This is mainly driven with the Ülker brands and also starting production of McVitie's in the Egypt facility. And in terms of market share, we are continuing to gain market share in this category in Egypt. And currently, we are very close to #1. And our market share is around 17% in Egypt. For our import business, UI MENA, as you know that this company is owning the production and distribution rights of McVitie's in the region. And in terms of volume, we have a growth around 9%, and our revenues have grown 7%. And EBITDA -- currently, our EBITDA margin is more than 30%, which is 32.3%. I mean our business in MENA is continuing to grow in terms of profitability and in terms of top line. And our last facility is in Kazakhstan. As you might recall that we have committed you to be the year of the -- I mean this year will be the year of Kazakhstan facility. We have completed our CapEx in 2018. Now we are seeing positive impacts of our new machineries and facilities. We have a volume growth around 22%, and our revenues have grown by more than 38%. And very big success in EBITDA, and our EBITDA margin doubled compared to previous year. Currently, our EBITDA margin is around 14%. We believe that we are going to maintain this profitability in Hamle factory, and our revenue and EBITDA growth will continue in the second half.

So on Page 26. So we are seeing the trend of our market share in the regions. As I told you that we have gained market share in all regions, including Turkey. If we are starting with Egypt, we are able to increase our market share 2.2 percentage points compared to last year's. Currently our market share is around 17%. In Saudi, we continue to gain market share. And currently, we have reached to the highest level in Saudi, and our market share is around 26%. And in Kazakhstan, especially in chocolate side, we have gained around 2.2 percentage points in Kazakhstan as well. And currently, our market is around 12%. For the financial results so far, international operations, so we have volume growth around 5.8%, and the revenue growth is more than 60%. This is mainly driven by volume growth and also positive impact of FX in the region. And our gross profit margin has improved -- doubled and increased by 80%. Current gross profit margin is around 38%, and our EBITDA margin is close to 21%, and which has -- which we have a growth around more than 220 basis points in Q2 in international market. And for the cumulative figures of international markets, we have volume growth around 8%, and the total cumulative revenue growth is around 58%. And we have very healthy gross profit margin in international side. And the EBITDA margin is around 21%, which is 109 basis points higher than last year. So we are continuing to focus branded business in international businesses, and the share of the branded business is increasing. So in terms of volume, we have a flat share in 2018 and 2019. However, in terms of value, the share of the branded business has increased from 82% to 84%.

Now I'm moving to balance sheet figures. So as I told you that our net debt-to-EBITDA margin has improved very successfully, it was 1.64x in 2018. And currently, as of 2019, our net debt-to-EBITDA ratio is 1.25x. And we have -- our net working capital days is comparatively similar to 2018. And another big jump is in free cash flow where we had a negative cash flow in 2018, which is around TRY 230 million. However, in 2019, we have created around TRY 169 million free cash in 2019, and we will continue to increase this level of free cash flow. And as -- on Page 33, we have here our net FX position. As you know that in 2017, using some cross-currency swaps, we have converted our net FX exposure into Turkish lira. And currently, as of June 2019, we are long in U.S. dollar and short in euro. And the total net balance sheet impact is positive, which is around TRY 140 million. We are long in net FX exposure. And currently, this is helping us to have a very healthy balance sheet and not negatively affecting from the FX fluctuations in Turkey. So in terms of guidance, as you might remember from our May conference call, we used to announce net sales guidance for cumulative figures around TRY 7.4 million. And with the very successful results in Q2, we are revising our yearly guidance and we are announcing a net sales around TRY 7.55 million as yearly figures. And we are also expecting an improvement in EBITDA margin, which was 16%, and now we are revising it as a 16.5% as cumulative figures.

So now I would like to open the call for questions.

[Operator]

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

[Ece Baysal, analyst]

I have 3 questions, if I may. The first one is about the -- your export performance from Turkey. We have seen a substantial increase in pricing and volumes from Turkey in the second quarter, specifically. Will this trend continue? Or is it just temporary increase, like 30% increase, we have seen in volumes? That's my first question. Secondly, you'd have delivered above-market growth in biscuits and chocolate segment in the second quarter. However, despite this Ramadan effect, we have seen flattish -- almost flattish growth in your volumes due to market demand, probably. But for the rest of the year, how much volume growth -- or should we expect some volume growth going forward, particularly in the chocolate segment in Turkey? And my third question will be on your new investment in G.New, the retail arm of that Godiva business? So in that business, do you plan any more cash injections? And could you please provide some information regarding your view on that operation, some details maybe on the operation? And going after this cash injection, how will be your stake ownership in the entity? Could you also provide that information as well?

[Cenker Uçan, executive]

Okay. Thank you. So if we are starting with your first question about export performance. So as you notice that in -- compared to 2018, in the third quarter, so we are seeing -- and we are not expecting any huge growth rates in terms of value because as you remember that the base impact was quite high in Q3 2018. So therefore -- I mean we have prepared our guidance based on these dynamics. So therefore, we are expecting some 1% to 2% volume growth in the international side. But the 2019 Q3 and Q4, FX rate is quite important for us in order to give healthy responses to you. So therefore, it is related mainly with the position of U.S. dollar and euro. And for chocolate side for Turkey, so you mentioned about the growth rate. So it is related with dynamics, so we are continuing to grow in all categories. So you might think that the volume growth around 1% to 2% in Q3 and Q4 would be fair, but it is also related with the current dynamics and market dynamics. So therefore, please take our yearly guidance for your models going forward.

And in terms of G.New, so as you know that -- I mean we had a very successful deal in Godiva Belgium because Godiva Belgium has sold its Japan and Korea operations. So as Ülker, we are also 19% of this Godiva Belgium investment. So therefore, we are positively waiting positive returns from these sales going forward.

So for the Godiva New York business. So first, we should consider the sale of Godiva Japan operations and capital increase of G.New together while evaluating this capital increase decision. Because if Godiva were one entity, Godiva New York and Godiva Belgium, the company may have chosen to use the cash for investing in the new model first and then distribute the remaining parts as dividend to its shareholders. So due to the new cafe opening investment in New York -- Godiva New York, there is a need to have capital increase. So therefore, we have decided to allocate some part of our potential dividend income to capital increase in Godiva New York business. And currently, we believe that the potential dividend income will be much higher than our capital allocation. And regarding to your question about the shareholding, so it's going to be similar levels because our main parent, Yildiz Holding, is also supporting this business. And they're going to also attending this capital increase considering their shareholding structure. So therefore, Ülker management and also our Board believes this business very strongly, and we are going to have another successful business as we had in Godiva Belgium.

[Ece Baysal, analyst]

Just to follow up. One would be, when would you expect this dividend payment by the Godiva to Ülker? When would be the time line for that?

[Cenker Uçan, executive]

I mean the progress is still ongoing because it is related with the Belgium regulation. So I mean they are trying to speed up the process. So once we have a clear guidance on that, we are going to announce to you and also to the public. But for sure, there will be dividend income. And for sure, this dividend income would be much higher than our capital contribution. And the timing is actually not clear.

[Operator]

Our next question is from Harry Whelpton from Vergent Asset Management.

[Harry Whelpton;Vergent Asset Management, analyst]

It looks like your operating cash flow has significantly benefited from the reduction in FX loss from investing activities. Is that -- is this basically coming from the gains in the time deposits? Or is there another -- something else at play that we should be aware of?

[Cenker Uçan, executive]

Actually, what is your question? I mean I didn't get to -- I mean...

[Harry Whelpton;Vergent Asset Management, analyst]

Basically, what's the reason for the reduction in losses from the investing activity? Because that seems to drive like a lot of the operating cash flow gain.

[Cenker Uçan, executive]

I mean in cash flow side -- I mean as you see that we -- can you give me the number because I cannot get your figures? So I mean, what was your question?

[Harry Whelpton;Vergent Asset Management, analyst]

Okay. So if you look at...

[Cenker Uçan, executive]

Because as you know that -- we have -- actually, we have a FX-denominated items in our balance sheet. And also, we have a huge amount of cash. Of course, due to the devaluation of this FX, we are seeing positive impacts to our cash flow. So I mean, if you're mentioning about the numbers and the lines because currently, I cannot address your question without getting the numbers. So therefore...

[Harry Whelpton;Vergent Asset Management, analyst]

Yes. It's a loss of TRY 426 million versus a loss of TRY 866 million in the prior year, yes, in millions.

[Cenker Uçan, executive]

Okay. So sorry, I didn't get your question.

[Harry Whelpton;Vergent Asset Management, analyst]

Okay. Maybe I'll move on, and I can send this by e-mail.

[Cenker Uçan, executive]

No, it's okay. So I will ask you -- okay, so you are saying that it is mainly driven with this effects. So I mean as you have said that, we are reducing some of our debt, but we have also FX impacts. So therefore, it is seeing that there is a reduction in this financial operations. So I will give you more details so -- in one-to-one because if you have a more broader question about the strategy, I am trying to reply.

[Harry Whelpton;Vergent Asset Management, analyst]

Sure. Sure. Okay. So just my next question is regarding the receivables balance. Can you just give us an update on that? Because I think the expectation was that it would come down quite a lot throughout the year, but it seems to have been quite stable.

[Cenker Uçan, executive]

Yes. I mean as you know that we have a Ramadan period. So therefore, I mean, considering peak Ramadan period, we have a sales. And please bear in mind, 38% of our receivables are all -- sales are coming from international operations. So therefore, considering also this FX devaluation, our receivables are also increasing inherently.

So now we are monitoring our receivables -- I mean our net working capital very carefully, and we are trying to reduce our net working capital days in the second half of 2019. And we believe that the receivable amounts will be continuing to decline in the second half as well. So we are expecting to create more cash for a yearly basis.

[Harry Whelpton;Vergent Asset Management, analyst]

Okay. And just my last question relates to Egypt and to the biscuits market. And if you could just provide some like color on the competitive landscape. And I think we've seen Edita potentially entering into that segment. And whether -- how much we're going to see that today?

[Cenker Uçan, executive]

I mean Edita is mainly operating in croissant and also cake side, and we are in biscuit side. So as far as we hear that they are also aiming to enter into the biscuit side, so we would -- we appreciate about that so -- because we are seeing competitiveness. And as we committed previously, we have a very strong brand in Egypt, Ülker and McVitie's. And with the new launches, we are continuing to invest in Egypt and not only from marketing perspective, currently, we are also considering to invest in terms of CapEx in order to expand our capacity in the region. I mean there is not an issue in Egypt side in terms of competition.

[Ali Al-Nasser, analyst]

This is Harry's colleague, Ali. I just have a question on G.New just to follow up on the previous question. Can you just confirm the amount that you've committed to this venture? And whether you would need to collect the dividend from the Godiva sale in order to fund the capital increase of the new venture? Or are these 2 things separate in your mind?

[Cenker Uçan, executive]

I mean these 2 things are separate. I mean for the capital allocation, we have a ceiling around USD 60 million, which is also announced to the public. So that is going to be the maximum at the close. And for the G.New site, as I told you, I mean, for sure, we are getting dividend. And for sure, this dividend income would be much higher than this level, but the timing here is not clear.

[Ali Al-Nasser, analyst]

And what do you plan on doing with the difference, so the difference between the dividend and what you're funding into the new venture?

[Cenker Uçan, executive]

I mean as I told you -- I mean inherently, we are talking about one entity. I mean although they are separate entities, Godiva Belgium and New York, but it is controlled and managed one team and they are only having one brand. So therefore, due to this structure, we should consider these 2 entities as a one entity.

So therefore, due to the timing, there is a need of the cash for the other business of Godiva. So therefore, rather than allocating some funds for this CapEx investment, they are keeping the money in the pocket. So therefore, we are attending to the capital increase. And with the money that they have kept is going to be allocated to the shareholders. So therefore, this is a timing matter.

[Ali Al-Nasser, analyst]

No. No, I understand that. So what you're suggesting, just so I can confirm, is that you, as Ülker, might use your own balance sheet to fund the new venture and there might be a timing difference between that and when you receive the dividend from the sale of the Godiva Asian units, is that right?

[Cenker Uçan, executive]

I mean -- yes. So I mean we will see the -- it is also related with market conditions, so maybe we might reduce our net debt level. I mean we will see how much net debt-to-EBITDA ratio we will have. And maybe we are going to allocate for our CapEx and also for some portions. And maybe we are going to distribute to our shareholders for -- I mean once we get this dividend, it is going to be decided by our Board. Now it is quite early stage in order to evaluate this question.

[Ali Al-Nasser, analyst]

Okay. Last one, just on this is what can you tell us about this new venture? I mean what -- just obviously, because we're investors in the confectionary and snacks business and now we're investors in a retail company. And so what can you tell your shareholders about this new retail venture?

[Cenker Uçan, executive]

Yes. It is not new for us because we were also invested for our -- another retail business in Godiva Belgium. So therefore, that's why our participation is going to be very limited. So it's going to about 20%. So we are not going to consolidate these ventures. So what we are thinking is, as we did a very great job in Godiva Belgium site because now the business has improved very successfully and with the very successful sale of these Japan operations, we are going to be enjoying a very positive contribution for the sale of this asset. And our Board is believing this New York business as well because now they are changing their model. They are reshaping their stores, and they are opening new stores in the cafe format. So therefore, they are going to expand the business first in New York and in the other countries in and around the world. So we believe that we are going to have positive impact for our financial statements.

[Ali Al-Nasser, analyst]

And just to confirm, you said $60 million is the total commitment that you're making towards this venture?

[Cenker Uçan, executive]

Yes. Yes, the ceiling is $60 million. Yes.

[Ali Al-Nasser, analyst]

The ceiling is $60 million? Okay.

[Cenker Uçan, executive]

Yes.

[Operator]

Our next question comes from Christopher White from Somerset Capital.

[Christopher White, analyst]

To start on Godiva U.S. Could you confirm if this -- if the terms of your investment have now been finalized or are still under discussion? And if the latter, when you expect the terms to be finalized? And when they are finalized, can you confirm that you will release full and clear information to the market about how much you're investing, how much yield this is investing, what your ownership stakes will be, what the implied valuation of the enterprise is and so on? Because at the moment, there is not a lot of information for us to go on. And then on the dividend from the sale of Godiva Japan, what is it that has to be decided by the regulator before that dividend can be paid? Can you give us some more detail on that? And is there any possibility that the dividend might not be paid? Or is it 100% sure that it will be paid, and it's simply a matter of timing? So I'll start with those, and then I have one more on the business itself.

[Cenker Uçan, executive]

Okay. So let's start from your last question. So it is 100% valid that, that will be dividend payment. So I mean I have no deep information about the Belgium regulation. But as you know that, that should be a fiscal year period. So I mean we are in 2019, and this business has been sold in 2019. So I mean, in terms of regulatory perspective, I don't know if it is possible to distribute this income in 2019. So therefore, from our perspective, 100% we are going to get this dividend based on our shareholding structure. So once it's going to be clear, we are going to announce how much we are going to get as an income.

For your first question about the participation of Godiva New York, I mean it's -- as you have noticed that in our public announcement, we are mentioning that we are going to attend this capital increase for Godiva New York business for their CapEx needs for their new business model. And we have kept as a ceiling is at USD 60 million. So on the other hand, Yildiz is going to also attend this capital increase. So now, as of today, there has not been any different change compared to June 2019. And once we have completed all these capital increases to this business together with Yildiz, we are going to announce our new shareholding in Godiva New York business. But I can also clearly say that our shareholding will be similar as we did in 2018. I mean it is currently 12%. We have -- our shareholding is around 12%. I mean this will be at the same level. So we are not going to consolidate this Godiva New York business. So it is going to be accounted under equity pickup.

So therefore -- I mean our investments, our support will continue to Godiva business because as I've told you, we should consider these 2 entities as one entity. As one entity, this is Godiva. Okay. Some of these assets have been sold. And now they are not keeping any funds for their CapEx need. So that's why we make this fund, and we are going to compensate much, much higher this capital increase. So I mean -- this is, I mean, quite clear from our perspective. So I mean it might be complicated to you, but I mean we are going to be transparent as we did before. Once we have a clear picture in our figures, we are going to make announcement and we are going to inform you at the time.

[Christopher White, analyst]

Okay. Great. And then -- and just on the business, could you explain a bit more what caused the contraction in net margin? Were there some losses on your derivatives positions as a result of the strengthening of the lira in the quarter? And could you comment on why you run a long U.S. dollar but short euro position on the balance sheet? Why don't you just run a completely neutral -- currency-neutral balance sheet?

[Cenker Uçan, executive]

I mean as you know, that we had this syndication in 2017. And I mean we have 2 syndications, and all these 2 syndication have 2 tranches in U.S. dollar and euro. So I mean we had a very favorable conditions for this syndication.

So on the balance sheet side, so we have placed our money started -- I mean took place this money with the same proportion, but also it is related with the euro to U.S. dollar parity. At that time, the parity was 1.17, and now it's 1.11. So if we are not making this split, we are going to maybe recognize different losses. So in terms of derivatives, if you are comparing with first quarter, so of course, it is going to change because the fair value of the derivative is changing. So therefore, I mean we are managing this very properly. So in the second quarter, we have recognized TRY 40 million FX loss, which is related due to the euro-U.S. dollar parity because it was 1.13 or around 1.14, and now it is 1.11. Now in the third quarter, if this euro to U.S. dollar level would be 1.11, so we are going to recognize as a fixed income.

[Christopher White, analyst]

Okay. So it's not to do with the strengthening of the lira, it's to do with the movements in the U.S. dollar-euro rate?

[Cenker Uçan, executive]

No. No. Exactly. Exactly.

[Christopher White, analyst]

And do you have any exposure to movements in the lira as far as FX losses or gains are concerned? Or is that completely hedged?

[Cenker Uçan, executive]

It is completely hedged.

[Christopher White, analyst]

Okay. So I guess my final question on this is why do you keep this long dollar, short euro balance sheet position, which obviously just causes a bit of volatility to the bottom line. Why don't you just buy derivatives or some other routes, just take that to a neutral position? And that would mean that your earnings would be a little bit less volatile.

[Cenker Uçan, executive]

Actually, I mean as I told you, this has been started in 2017. So based on our placement rates, we have changed our structure in U.S. dollar and euros. So I think that we did a great job because, as I told you, euro to U.S.... [Technical Difficulty]

[Verda Tasar, executive]

Chris, are you on the line?

[Christopher White, analyst]

I am, yes.

[Verda Tasar, executive]

Okay. Sorry, the line was down. So all the answers were clear? Do you have any other questions?

[Christopher White, analyst]

I don't have any other questions. No, that's fine.

[Operator]

Our next question is from Cemal Demirtas from Ata Invest.

[Cemal Demirtas, analyst]

Congratulations for good results. My question is again related to Godiva Belgium. You mentioned that it's -- please let me know if I'm wrong. You mentioned that Godiva Japan and South Korea constitutes 90% of Godiva Belgium. Is it correct, first?

[Cenker Uçan, executive]

Maybe. It might be. Yes, it's going to be around 85% to 90% of total Godiva Belgium, yes.

[Cemal Demirtas, analyst]

Okay. So in your financials, when I look into the details, I see that your Godiva Belgium is valued at TRY 1.6 billion. And in the previous quarter, it was TRY 1.2 billion. It's the number for your share, around 19% share. So I come up with around TRY 8.3 million -- billion value for Godiva Belgium overall. And if we just make that calculation, you will -- from Godiva Japan sales, you should have at least around $1.2 billion, $1.3 billion. Is it the correct calculation? Does it make sense? Because I would like to understand if you compare with USD 90 million for G.New, the outflow versus the potential income from the cash flow. You mentioned that it's far above, but I'm trying to come up with some calculation how much better compared to that number. So I'm trying to make that calculation just based on your numbers, and I see that you made some increase -- revaluation of that asset. What was that revaluation in Godiva Belgium was based? Was it based on the sales of Godiva Japan?

[Cenker Uçan, executive]

Cemal, so I mean, this study has been -- I mean in terms of valuation has been performed by the Godiva Belgium team. So therefore, they have considered all these dynamics. I mean they have considered the sale of this Godiva Japan operation. So regarding to your question that you mentioned, the numbers, we can say that we are roughly close your calculations.

[Cemal Demirtas, analyst]

Okay. And a follow-up question about the Pladis, you are -- which are -- you're a part of Pladis. You have the Turkey and MENA operations. Do you have any view about the overall picture in other regions if not directly in your business, but at least from the Ülker perspective, how the integration in that front is going on?

[Cenker Uçan, executive]

I mean Pladis is doing well, especially in U.K. So I mean McVitie's brand is a very strong brand in U.K. They are #1. I mean they are committed to their strategy, and they are going to achieve their ambition in the coming years. So therefore, I mean as Ülker, we are a very big portion of Pladis. So I mean -- and the integration between our region and also other regions are doing well because as you might see that we have started to produce some McVitie's and Godiva products in Turkey. And now we have started to export to U.K., to Europe and also other Pladis regions. So I mean the Pladis at a consolidated level is doing well.

[Operator]

Our next question is from Hanzade Kilickiran from JPMorgan.

[Hanzade Kilickiran, analyst]

Cenker, I have a question on your business on your margins. You said that you guided -- you are guiding 16.5% EBITDA margin for the full year. When we do our calculation, we project a second half margin of around 15.78%. This is quite low versus your current 17% margin levels. So do you see any sort of weakness in the second half? Or there is a chance for you to continue to outperform your guidance?

[Cenker Uçan, executive]

I got your question, Hanzade. And so I mean as you know that until June 2019, we had achieved very successful results. However, as you remember that in Q3 and Q4, we have very strong FX rates in 2018. So therefore, considering this trend going forward, so which we have a very strong base in 2018, so therefore, there might be declining in our growth rate compared to 2018. So therefore, in terms of financial performance, we are not expecting any weakness. But as you know that, currently, our 38% of revenues and 46% of revenues comes from our international operations, which is related with the structure of FX. So therefore, considering the going-forward market outlook in U.S. dollar and also other FX rates, so therefore, there might be that kind of picture. So therefore, our performance is related with the structure of FX. So that's why we had announced around TRY 7.55 billion revenue growth based on these our FX assumptions. So if these FX would be much higher, of course, there is a need of revision of our guidance.

[Hanzade Kilickiran, analyst]

I can understand the revenue guidance on -- from a currency perspective. But first, what is your year-end currency estimates on your guidance? And second, if the currency is going to stay like this, you have a certain margin advantage in Turkey as well because you did very significant price increases in the last -- I mean in the last part of last year and so far this year as well. So you are gaining a significant benefit in Turkey.

[Cenker Uçan, executive]

Yes. Actually, you are right, but you are missing some points. So therefore, due to the competition, maybe there might be need of the further investment, I mean, in terms of marketing and also other [ deploying ] to competition. So therefore, it is not going to work as a simple touch. So therefore, our guidance is based on these assumptions. So therefore, TRY 7.55 billion revenue is also a very ambitious target. So we are going to have 26 point -- 26% growth in revenue and 32% growth in EBITDA. So -- but of course, we are going to achieve these levels going forward but being prudent and conservative. And considering the uncertainties in the market, we have decided to give this guidance because international operations are much profitable than Turkey. And if this effect is going to be -- I mean, for sure, it's going to be lower than last year. So therefore, in terms of profitability, there might be similar profitability in 2018. I'm not saying that it is going to decline. It is going to be similar profitability as compared to 2018.

[Hanzade Kilickiran, analyst]

Yes, I guess, a similar one for the second half. And my final question is again on Godiva. You mentioned that your -- I mean did you pay already the $60 million? I mean is there any chance that this decision can be changed? Or it's a firm decision to participate in the rights issue of Godiva?

[Cenker Uçan, executive]

I mean currently, we are not expecting any change of the decision. So it has been decided by the Board to attend this capital increase at these levels.

[Hanzade Kilickiran, analyst]

Okay. But this 12% stake, the $60 million gives us a very high CapEx for a retail business, nearly $0.5 billion. So I mean what are they going to do with this $0.5 billion? I mean I understand it's a retail business, but this is a CapEx very close to a manufacturing company.

[Cenker Uçan, executive]

I mean they have also manufacturing company in New York, as you know that. I mean there might be some CapEx for the factory, but the main portion will be allocated for the new stores openings. Because, as you know that in retail business, cash flow is quite important. So I mean they're going to opening new stores in a very strong number. So therefore, due to these cash needs for the new cafe openings, so I mean it has been decided to allocate this. As I told you, this is the ceiling. This is not -- it doesn't mean that we are going to allocate USD 60 million, but this is the ceiling.

[Operator]

Our final question comes from Harry Whelpton from Vergent Asset Management.

[Harry Whelpton;Vergent Asset Management, analyst]

Yes. Sorry, I just wanted a bit of clarification. Just on the question related to the FX swap and the rationale for holding the U.S. dollar and euro. Is that because you need to hold that amount to be able to pay off the principal expiration of the swap?

[Cenker Uçan, executive]

I mean -- actually, I didn't understand your question. What I am saying is that we have these loans in 2017. And I mean this structure is -- I mean we have around 2 years period. I mean this is our net FX exposure. So therefore, while we are placing our money, we are getting much higher interest rates for U.S. dollars compared to euros. And also, I mean we are getting more interest rates for U.S. dollars. And in addition to that, this position -- I mean being short in euros help us a lot considering the change of the euro to U.S. dollar parity.

[Operator]

We have no further questions. Dear speakers, back to you for the conclusion.

[Cenker Uçan, executive]

Okay. I would like to thank everyone. So I mean we very much enjoyed it. And obviously, we look forward to updating everyone on our upcoming quarter results. Wish you a good day.

[Verda Tasar, executive]

Thank you.

[Operator]

This concludes today's conference call. Thank you all for your participation. You may now disconnect.