Ulker Biskuvi Sanayi AS
IST:ULKER.E
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Ulker Biskuvi Sanayi AS
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Good day, everyone, and welcome to Ulker's Third Quarter 2024 Earnings Conference Call on the 8th of November 2024. Please note that today's conference call is being recorded. [Operator Instructions]
I would now like to turn over to Ms. Beste Tasar, Head of Investor Relations. Please go ahead, ma'am.
Thank you, Mike. Hello, everybody. This is Beste from Ulker Biskuvi Investor Relations. Welcome to Ulker Biskuvi's Third Quarter's 2024 Operational and Financial Earnings Webcast. Here with me in the room, our CEO, Mete Buyurgan; and CFO, Fulya Banu. Now I leave the ground to our CEO, Mete bey, for the opening remarks and take over the presentation. Mete bey, please go ahead.
Thank you, Beste. Hello, everybody. Welcome to our investor meeting. Let me start with the quarterly update. First, and it was a -- as you can see that it was a very tough quarter as expected. You may remember from the prior investor meeting, I was telling the same that it's going to be a tough quarter, but we factored it in our AOP, in our budget as well. So we are in line with our budget targets and AOP accordingly. If we are going to come up specifically quarterly update, market share position of Ulker is strengthening almost in every market, especially in Turkey in chocolate category and some other -- cake category as well, we keep growing. In other markets, we are keeping our strong position in terms of market shares almost in every operating market.
In terms of NPD and innovation, we keep growing. Actually, this is one of the most important pillars of our growth in the last -- as you may remember, in the last 4, 5 years, actually, it is almost our biggest, strongest muscle, and we keep growing through our innovation capabilities. We are catching the trends. You may know that there is a crazy trend of Dubai chocolates in the market in many markets, not only in Turkey, but also in Middle East and North Africa and even in some Europe markets. We catch the trends, and we are getting the full benefit of this trend as the market leader of the markets -- respective markets for Ulker.
Rising labor costs and increased raw material expenses impacted our industry and also in other industries as well. Despite the challenging environment, we effectively navigate ourselves around this challenge by focusing on basically our strengths and our agile decision process and capabilities. So it's giving us a huge opportunity to fix the problems or to handle the problems ahead of us.
In terms of sustainability update, we are in a very good shape in sustainability efforts. As you may remember, in late June of this year, we had a bond rate based on -- which is linked with sustainability efforts for the first time. And as of now, we are working with agroforestry pilot projects, [ LASSO ] seed projects, but also we are working on carbonization as well, which is going to be a critical action for us for the next coming years for foreign trade of Ulker.
In terms of operational excellence, we are implementing operational excellence program in the last 10 years. And right now, we are getting the full benefit of that. I think we are one of the best -- we are one of the lowest G&A company actually in our industry so that we are having a very lean organization through our operational excellence efforts, but also in supply chain part, we keep increasing our capacities on top of the CapEx investments through operational excellence program. For example, only for chocolate business through operational program, we gained another 4,000 tonnes of capacity without any CapEx, through automation and the operational excellence program.
IoT is another top priority for us. Right now, in every line of Turkish factories, we are implementing -- we are getting the real-time data through IoT systems. Right now, we are working on the second stage -- for the second stage, how we are going to get the benefit of IoT to provide the machines, we'll be talking to each other and getting some decisions. It's going to be a great program again in the next coming 3 years.
And in terms of lost time accident rate, which is very important for us in terms of our employees' health and so on, we are having our great progress. And right now, we are in the lowest rate 4 years at Ulker.
If you look at the markets, Ulker markets, as you can see that Turkey is doing well -- keep doing well in terms of growth, top line and bottom line growth. Turkey export has been deteriorated basically because of the FX rates of Turkish lira, high value of Turkish lira versus other FX rates. This is a little bit diluting the progress. North Africa, you may remember, again, last year, there was a very sharp inflation increase, that's Turkey and Egypt. But today -- and last year, we were struggling in Egypt markets to -- in terms of growing fast. But this year, we recovered all the problems, but also we are having a very high rate of growth in Egypt and North Africa markets.
In Central Asia, there is a program by the government like Turkey in order to reduce the inflation rate. And right now, the consumption in the market, especially in our stronghold market in Kazakhstan, the demand is declining. So we are a little bit struggling with the slowing demand in the market. But in the last 1 -- and in the last 2 months, we started to recover again, our profitability, due to demand increase. But I would like to mention that we never ever lose any market share in the market. So after like almost more than 7 years, very high rate of growth, right now, we are a bit slowing down in Central Asia, basically because of Kazakhstan. But I think we are going to recover it in this quarter and the first quarter of next year because the consumption has started to increase again.
In Middle East, we are having almost 2% revenue growth, while 3.3% EBITDA de-growth. The basic problem is over there, as you are all aware, the war between Israel and Iran and Palestine actually. It is impacting entire region. So the trade is a little bit struggling in terms of foreign trade, especially foreign trade part, export, import issues are struggling. So this is basically related with the war in the region, but also Central Asia as well, Russia and Ukraine war is also impacting the high pace of growth rate as we were facing with the previous years. But right now, I think we are focusing on more on Middle East and following up the developments, following of -- up the news very closely. So we are trying to find out some alternative ways. But in Saudi, in United Emirates, though they are the stronghold markets, we keep growing all those markets as well in a healthy way.
The geographic revenue, domestic sales has been reached to 71% and international sales is 29%. This is basically the enormous massive efforts and the growth of Turkey domestic business, which is -- which was growing very fast in the last 2.5 years. So this is an impact of strong Turkey business. If we look at the revenue by division, 71% is coming from Turkey, Middle East is 11%, North Africa is 3%, Central Asia is 3%, and exports -- export constitutes 12% of our overall sales of TRY 58 billion as of year-to-date sales of '24.
Looking for the global market shares in Turkey, as I mentioned, we keep growing -- we are protecting our market leadership position as a very strong leader in snacking market. But I would like to mention that we have reached to highest ever market share in chocolate category, which is a good sign and which is showing us to have -- still we are having a great room to grow in chocolate category despite the worldwide cocoa prices. In Middle East, we keep our, again, leadership position in biscuits. North Africa, again, we keep our strong market leadership. And in Central Asia, we keep our number second position in chocolate market, especially in Kazakhstan. So as I mentioned, we are not sacrificing from our market share positions in the competition.
And another strong muscle of Ulker is, as I mentioned, the new product launch, innovation. As you see that domestic sales, almost 13% of our growth -- of our sales is coming from NPDs innovation, which is already a great benchmark for even the global benchmarks versus global benchmarks. And international, the ratio of innovation in the top line is 7%, while it is overall 11% in the total overall income. So Fulya, I think you will go ahead with the financials.
Mete bey, thank you. So in an environment of very challenging quarter with macroeconomic difficulties and increased weakness in consumer purchasing power, we remain strong and focused on what we can do best and how we can create value for our consumers, customers, employees and all the stakeholders we serve. When we take a look at Q3 numbers, there is a slight decrease in volume by 3% versus prior year, mainly due to decrease in consumer purchasing power, especially in domestic segment of the business.
Total revenue, despite all these challenges, we were able to increase our revenue by 2%, reaching to TRY 18.2 billion and gross profit reaches to TRY 4.9 billion, and we ended up with 27.1%, a 9% decrease versus prior year. Lower FX that impacted our export sales value and higher raw material prices, mainly driven by cocoa impacted our gross profit margin, and we ended up at 27.1% in Q3.
EBITDA reached to 15.9%, approximately 4% to 5% lower than what we delivered last year in Q3 2023 with all these drivers taken into consideration, we ended up with at this EBITDA margin number.
Net income ended up at TRY 470 million. We were able to come up with a positive net income lower than versus prior year quarter. A couple of reasons for that is definitely the impact of the lower operating profit that impacted net income. And another reason is higher FX losses due to FX increase versus quarter 2, mainly driven by euro versus a higher euro increase than U.S. dollar. That is driven by our open position in our P&L.
And there has been a significantly lower gain on -- related to inflation numbers versus prior year. Versus prior year, the inflation number was around 25%, whereas this quarter it is around 8%. It impacted our monetary gain and loss on our Q3 numbers, and we ended up with a much lower monetary gain due to the inflation rate decreases versus 2 quarters.
Let me take a look on the snacking sales volume and sales value. You see that sales volume was down by 2.7% versus prior year and revenue was up 1.7%. And you can see the split among segments. However, I'd like to mention that we were able to increase our volume and our value versus quarter 2. When we take the sector segment -- snacking sector growth into consideration, we were able to increase our sales volume and sales value higher than our snacking sector growth versus quarter 2.
Let me take a look at the domestic and international breakdown in terms of revenue, gross profit, and EBITDA. You can see that in domestic market, our revenue increased by 4%, gross profit decreased by 7%, and EBITDA margin reaching to 16.1% and decreasing 14% versus prior year. And international markets where we are hit, in fact, our volume increased versus prior quarter. However, due to the lower FX impact, we were hit by revenue and ended up by 3% decline versus prior quarter. Gross profit declined by 13% and EBITDA 35%, much lower than our domestic business.
However, this quarter was extremely challenging. But on a year-to-date basis, our numbers look quite good. So volume increases by 5%. EBITDA margin reaching to 30%, 0.5% higher than what we delivered last year in the first 9 months of the year. And EBITDA margin reaching to 18.7%, which is very close to what we think that we are going to end up the year on a full year basis. And net income at 4.4% and net debt EBITDA below 1.5. This is a calculation from the face of the balance sheet for covenant purposes. It's slightly lower. So again, on a year-to-date basis, our numbers look good with a strong balance sheet that supports our numbers.
International operations EBITDA percentage development. So you see the North Africa and Middle East pretty much in line with full year 2023, delivering 14.3% EBITDA margin in North Africa and 20.2% in Middle East. Central Asia, as our CEO mentioned, due to some macroeconomic challenges, our EBITDA decreased to 13.7%, but as also mentioned by our CEO, our market share did not change in Central Asia.
So we'll continue to sustain a very strong balance sheet this quarter again. In terms of covenant calculations, we ended up 1.33 EBITDA -- net debt EBITDA, which is a very healthy number, and in line with our capital strategies that we have set. And in terms of open positions, 68% of the net position is closed via derivative instruments. And as of September 2024, $407 million of the open position is hedged via derivative instruments. And as you all know, we have completed a very successful Eurobond transaction in July 2024, first such in the list loan of Eurobond -- Eurobond of Ulker history, with 7 years and a very favorable yield among the peers that were out in the market at that time.
In terms of working capital, a slight deterioration versus prior years, but we keep our strong focus, and we continue our strong emphasis on working capital. So this may be a temporary phasing, and we expect it to come up to very strong numbers in Q4 2024 as well.
So in terms of outlook, we revised our fiscal year's outlook. This decision has been made in light of current economic conditions, lower FX assumption and unparalleled inflation numbers and FX assumptions and the demand shrinkage in Turkiye market. So we think that we are going to end up the year with TRY 80 billion in terms of net sales, and we are going to deliver 18.2% EBITDA margins by year end. So thank you.
Thank you all for listening our third quarter results. We are ready to hear questions.
Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. [Operator Instructions] We'll start with Ms. Evgeniya Bystrova from Barclays.
Yes. I have a couple of questions. So my first one is on your increased raw material cost. You mentioned that this is partially a cocoa effect. Could you please provide any outlook on the cost going forward, maybe fourth quarter and also into 2025? And also, I was wondering, I thought that you were using some hedges to -- against some raw material price increases. So could you please explain how the hedges work?
You are right, especially, most of the impact is coming through cocoa increase. And we were on a -- in a good shape actually in terms of increase versus our price increases. But again, you may remember from the prior investor meeting, we were expecting a very slow quarter 3 in terms of demand. So what we did is, we had a slightly late price increases on chocolate products on purpose in order to not to deteriorate the demand more -- much worse actually. So right now, in October, we have fixed our prices. And as of November and December, we are not expecting any of the failures versus our raw material cost.
Regarding the second part of your question about hedging, yes, we are always having hedge. On cocoa, we are almost 90% covered for 2025, for next year. So we are -- we can say we are almost covered actually. Wheat is almost covered for this year, but also we are covered for 20% for the next coming quarters. Sugars, there's no sugars covers possibility in Turkey, but we are following up the prices very closely. So we are not expecting a very high price increase on sugars. So for the fat oils, palm oil especially, we are almost covered like 75% for next year's. And for nuts, we are 95% covered for next year again. So I must say, excluding sugars, we are almost covered in all basic main raw materials for Ulker.
But that -- in terms of your hedges, so that only includes volumes or is there a price hedge as well?
Actually both price and volume hedge are both available.
Next question comes from Cemal Demirtas from Ata.
My first question is related to the guidance. You have TRY 80 billion revenue guidance and, I guess, it's in inflation accounting base, I understand. And I would like to understand your maybe the assumptions, because according to my numbers, if you have TRY 80 billion at the purchasing power of 2024 and then you need to go down by 13% year-over-year in fourth quarter. I would like to understand in more details about that side. Especially in the fourth quarter you mentioned that it's going to come from domestic side, but I would like to understand more detail and is my calculation is fitting with your assumptions? That's my first question. And related to the -- again the gross margin side is -- again could you further elevate this specific to this quarter? This is my second question.
And the third one is just a comment about the presentation announcements. I believe when you announced results last night, I believe you should have shared this presentation at the same time so that we can have a better analysis of the company when the markets open. Otherwise, during today, that might be big fluctuations in any case, but I just recommend that. And one other recommendation is about other income expense items, investment items. Maybe it's not a requirement in the quarters, but in full year, it's a requirement. And in the past, you have been sharing the quarterly which was very helpful for us to understand the dynamics, because as this quarter, we see high expenses on the other items. That's -- these are 2 recommendations I have in order to understand this company better and for the transparency purposes, but it's just comments side. The first 2 questions may be helpful if you can answer about -- especially about the guidance and ongoing factors on the gross margin erosion.
Cemal, thank you for the questions and comments. Let me start with the last one -- the third one regarding your comment about sharing the presentation in prior. Your point taken. We're going to try to share the presentations for the next quarters more prior to the meeting. For your first question, yes, this is all based on the inflation accounting. Regarding your second question, 13% decrease and I -- we didn't understand very well what is your question on this, but in terms of gross margin erosion, first of all, actually, about the guidance, the biggest impact is coming from the FX rates due to export business. As you know, Turkish lira is very valued, is highly valued versus FX rates. Cemal bey, so if it's deteriorating top line numbers as all -- many Turkish companies actually, so this is one of the biggest drivers of the decline in guidance in terms of top line.
In terms of gross margin erosion, gross margin erosion is -- we are having the highest gross margins ever for many quarters. This is very normal actually because there is a new program by the government which is trying to reduce the inflation, which obviously impacted consumption of course, as expected, as I mentioned. So we factored all of them, as I mentioned even in the beginning of the presentation, in our budget and AOP. So we are -- even we are far better than our budget targets for the Q3, but as I mentioned we did not increase the price on purpose for the last quarter, but we did this right now and you are going to see significant gross margin increase at least -- at least I mean better gross margin increase for the fourth quarter.
Mete bey, regarding that 13%, I find that number based on your full year numbers, all inflation adjusted numbers. So when I put the TRY 80 billion with the assumption of year-end inflation of 44% just roughly, I come up with 13% year-over-year decline in real terms in fourth quarter. So I would like to know is it going to be volume-driven or is that number, because we already finished the first 9 months, we're already fourth quarter in our hand, so I would like to understand the dynamic. When I put that number, I come up with 13% real decline, and what portion of that should be related to the volume and what should be -- what portion of it should be related to prices and FX? So maybe I don't know if it's clear now.
Exactly. We are going to get back to you in details actually after the meeting, Cemal bey, but just for your information, for the -- at the end of the year's, at the end of the fourth quarter, as year-to-date, we keep growing and we are going to have almost 2%, 3% growth versus last year. So overall we keep growing actually, but we are going to get back to you with more details at this.
There's one other question which Fulya will reply to you.
Cemal bey, so this is, as you have also said, this is not a mandated disclosure. Therefore, due to the limited scope, we did not share it on our -- as a disclosure. However, our other income and expenses, mainly interest expense and FX process. So there is no surprises or there is nothing unknown there. And in Q4 we will have the full disclosure by the end of Q4 as well.
Because in the past we got used to your higher standard. So that's why I just want to highlight. It will be very appreciated.
Our next question comes from [indiscernible] from [ Bearings ].
I have a few questions. The first one is if you could just talk about why the international business is so weak. I guess exports out of Turkey is weak and then EBITDA for the international business is down 30%. And then specifically you talk about Kazakhstan being quite weak. The economy is quite strong in Kazakhstan from what we understand. So why is consumption weak in Kazakhstan? And then my question on guidance has already been answered. In terms of the outlook you gave in the second quarter results, you said you were expecting third quarter to be strong on the back of back to school and we're seeing the opposite. So maybe if you could just talk a little bit more about what happened. And then finally on the hedging, I think you said 68% of the open FX position is hedged. During the new issue, I think you were talking about hedging up to 80%. So if you could just explain if you still plan on doing the additional hedges.
Okay. Starting with international businesses, as we discussed in the -- during the presentation, for MENA, Israel, Iran, and Palestine war is quite of course a big impact on the businesses, not only for us, but also for others, competitors and other industries as well. So this is #1 reason. Second is, as you mentioned, high value of Turkish Lira is deteriorating the competitive structures or also country-wise. But in terms of volume, we are not in a -- we are even here -- we are in good position actually. So you can easily understand that while volumes performance is doing very well, we are having some trouble due to the -- top line due to the FX rates basically.
The second question, Kazakhstan, of course Kazakhstan is really a great economy right now. But as I mentioned, the inflation rates is trying to be decreased actually by the government, and -- because that government is also -- once used to support the consumers in an aggressive way for the next -- for the last years, actually, few years. So right now, this is normal that the support is coming less. So right now, the consumption is declining. This is one of the biggest reasons.
And last but not the least, in terms of erosional margins and so on, cocoa prices of course is increased very sharply. The only thing which we didn't factor in the last quarter that we could -- we didn't estimate that we could sell more and more chocolaty products in our portfolio. So it is iterating our gross margin in a negative way since we didn't increase the third price increase or we postponed the third price increase on purpose because of the supporting the consumption and demand. So those are the 3 basic points actually. And the last question was about hedge I think.
Yes. Our hedge policy is to have 60% to 80% range hedges. So that's our policy, as I have also shared. Definitely reaching the 80% is preferred. However, in an environment where Turkish lira keeps appreciating against other foreign currencies, I think 68% is quite healthy in terms of having a very healthy balance sheet. But depending on the conditions, we keep assessing everything very closely. And depending on the changes, we'll continue to execute more and more hedges.
Just a follow-up. So the Turkish lira is appreciating in real terms. I think this is the best time to increase the hedging. So I would suggest that if you're going to increase it, it should be now when the currency is doing well or it is relatively stable.
Okay. Thank you for your recommendation. We are assessing from all perspectives, definitely.
Next question comes from Mr. Gustavo Campos from Jefferies.
Firstly, if you could -- could you please provide a rough breakdown of your sales volumes, if possible? Like just year-to-date, I'm trying to understand like what percentage of it was like international, what percentage of it was domestic. It would be very helpful to understand, if possible, please.
Yes, sure. So our -- as we have shared in terms of total volume, so our international business makes up around 20% to 30% of our total sales. And yes, 27% of our total sales is international business and the remaining is domestic business. Let me take a look at in Q3 numbers, our domestic business shrink by around 6%, whereas our international business grew by around 8% to 9%. So that's the breakdown. I mean if you need any further breakdown, we can definitely get back to you. But overall, that's the breakdown, 27% international business share. And I have also shared the Q3 growth and decline numbers for domestic and international businesses.
So just to confirm, 37% of total volumes that were international, and that's for like year-to-date and the rest is domestic?
27%. Year-to-date, 27%.
So moving on, I was very curious to understand better your receivables from related parties. I believe we've seen like a material outflow in this quarter. I'm trying to understand what's driving these outflows, if you expect any reversal? And how do you see the trajectory of your receivables days? Like is this like kind of like peak and then you may see like some improvement and some decline in the coming quarters? How should we approach it? That's my second question.
Sure. So increase in trade receivables, yes, it impacted cash flow with turnover days rising to from 68 to 74. However, this impact, we expect it to be seasonal and temporary. The cash conversion cycle is expected to be normalized in Q4 2024. We take all the actions to be implemented to make sure that accelerate receivables collection and optimize payables management. And the relative -- another comment is the relative increase is mainly driven by the increase in receivables from our distribution companies. The increase is, as I have shared, seasonal and temporary, and already some of the receivables have already been collected after the Q3 close. There is no change or extension in our sales or collection terms. So we expect it to be normalized in Q4.
So just to confirm, you expect some normalization and reversal in these receivables in the fourth quarter, right, as this is seasonal?
Correct.
And then I guess my last question here or like second to last question is your EBITDA margin. So dropped to 16% attributed to increases in raw material prices, which you gave some detail on cocoa, I guess, inflationary pressures in Turkey as well. Is 16% more of like a realistic approach on like how we should see EBITDA margins moving forward? Or do you expect them to deteriorate or potentially recover into next year? Yes.
I think you're asking for next year, right, versus next year? This year versus next year?
Yes. So we've seen a 16% -- a drop to 16%. Do you expect a recovery? Or like should we see like 16% as kind of like the new normal given these cost pressures?
Yes, yes. Actually, we are confident on that because we keep our -- getting our pricing actions actually. But also, we are running a saving program as well on all commodities and some reengineering some products and so on. So we are confident on that to cover the cost increase versus our actions. So I think we are going to be in line with -- we are confident on next coming year's numbers actually.
All right. Okay. And then…
In fact, excuse me, in fact, we are targeting more EBITDA actually versus this quarter. We are aiming like 18% minimum for next year actually. We are -- I mean, this year -- this quarter numbers are quite low. We are -- we know that. But as I mentioned several times, it was on purpose, not to lose more and more volume. So right now, we got the actions, and we are not going to sacrifice from minimum 18% EBITDA level.
Okay. Perfect. No, that's very helpful color. I appreciate it. And lastly, I guess, what is -- could you please remind me what your net leverage target range is at the moment, like looking at the next few quarters?
So we are at 1.33 right now. So we do not share explicitly a net debt EBITDA target. However, what I can tell you that we are -- we want to sustain a very healthy net debt-EBITDA ratio. So we have to have a very strong balance sheet, and it is one of our capital strategy priorities, one of the top 3 pillars of our capital strategy. So having a very healthy -- sustaining a healthy net debt EBITDA margin is a high priority.
Next question comes from Erica Ive from MetLife Investment Management.
I've got 3 actually. The first one is on exports. I can see basically that within international, they are really a big part of -- if I'm correct, right, of revenue basically. And actually, as part of the group, they are 12%. Now they declined revenues from Turkey exports, 12%, and EBITDA declined 28%. And I wonder whether this is due to the fact that costs are domestic and therefore, subject to inflation. And then when you generate revenues abroad that are back to hard currencies, then with the -- when you translate them in Turkey, obviously, revenues didn't expand as much as costs? Or do you see a general slowdown in consumer purchasing power? And if so, in which countries?
Of course, there are slowing downs in many export markets in Europe, in U.S. as well in our category. So we keep having exports in those countries. But also MENA, as I mentioned again several times about because of the war, there is a consumption decline slowdown at least in those markets. So this is a fact for us. Second, why the EBITDA margin is declining more than the other business units? Because in some of the Europe countries and in U.S. especially, we are having some yearly agreements with big retailers. And as you know, cocoa prices are increasing. So we are not able to change the prices on time because of the contracts. Right now, at the year-end, we are having the right to fix, change our prices. So it's going to help us to gain our margins again based on the new cocoa prices. So this is one of those factors.
Second, in some of the export markets again, our international competitors, which I don't want to mention their names, but they are very aggressive on cocoa, on chocolate prices. Even they are not increasing the prices, but also they're decreasing the prices actually in order to gain market share. So we don't let that to keep -- in order to keep our market share. So we are having a high competition with them in some of the few export markets. So it is also deteriorating or diluting the margins for this quarter. I think it's going to be the same process for the end of the year. But at the end of the year, at the beginning of the new year, the prices will increase for sure for -- at least for our side, based on the contracts, but we are expecting our competitors, international chocolate competitors will increase their prices as well.
But how can you be so confident that that strategy will work? You mentioned that there are competitive pressures and your competitors are increasing prices. So aren't you worried that higher prices may affect volumes?
Of course, it will be impacted. It may impact the volumes. But as you know, we are -- one of our biggest strength is our diversified portfolio. So we are not having only chocolate products. We are having -- we are a very big strong sweet biscuit company, savory cracker company, cake company. So we are very strong on managing category-wise our portfolio. So even though we are going to have some decline in cocoa chocolate products, we are going to recover it from the other categories as well because this is what we did in the past years actually in all the crisis. So there is a shift among our categories, not only among our categories, but also from dessert category, from other petit beurre products, from petit beurres, there is a big shift from them to our snacking products, which is also making us more confident.
But last but not least, mix channel management is also a tool for us. And lastly, most important part, NPD as we are having a strongest muscle, as you may see in the presentation, almost 13% of our sales is coming from NPDs, innovations, new product developments. We are having very strong plans next year in terms of innovation as we had in this year as well. So that's why we are confident based on our experiences actually.
And then one other question is it what you are seeing in Turkey? I think you mentioned during the presentation that you can see a deterioration in the consumer backdrop. Yes, so far, it has actually held quite well. Can you see this deterioration starting to materialize next year even more?
Actually, the biggest priority, not for the government only, but also for all the companies, the biggest priority, top priority is to decline the inflation rates. So the only thing is based on the -- regarding the inflation, interest rates are so high. So consumers are not eligible to get credits actually from the banks at the moment, so individual credits for consumption. So this is creating an impact. But we are one of the most luckiest category actually versus other durable goods, automotive, textiles, fashion categories. I don't think that it's going to be worse than this quarter. But of course, it's going to be a tough -- next half year is going to be tough for sure. But as I mentioned, we are having lots of precaution and we are having lots of strategies in order to deal with the slowdown in the market. But I would like to say, in October, we were having a very strong month. And also, we had a very good start for November as well. And for the Christmas, New Year approaching, for December, I think we will be doing good actually as well.
Then I have a final question on the leverage. I mean, the 1.3x, I'm a bit puzzled about this level because I was expecting it higher given that this level was, if I remember correctly, it was the same level last quarter, whilst this quarter, EBITDA declined 20%. So I just wonder how it's possible that there is the same leverage that was highlighted last quarter?
In prior quarter, our leverage was 1.19. And this quarter, we ended up at 1.33. So as I have shared, we do not disclose any number in terms of net debt EBITDA, but we will continue to sustain our net debt EBITDA priority. So I think by year-end, we will again have a very strong net debt EBITDA number.
Yes. Sorry, my mistake. Yes, it went up a little bit.
Slightly, yes.
Our next question comes from Mr. Mehmet Musdagi from BNP Paribas Asset Management.
Could you hear me well?
Yes. Please go ahead.
My question would be about the leverage levels. But do you have a plan to deleverage next -- in the next quarters, will we see like a nominal decrease in the net debt EBITDA? And the second -- my second question is about the FX losses on the income statement, which have increased substantially compared to last year, but we haven't seen any major moves in the currency. So what's the reason behind this negative result on the FX losses? That's all from me.
Thank you for your 2 questions. I think in terms of leverage, I have already answered it, but let me summarize it again. So we ended up at 1.33. It was 1.9 in the prior quarter. In the first quarter, it was around 1.5-ish. So I can assure you that we will end up with a very healthy net debt EBITDA number this year as well. So it's one of our high priority in order to have a very strong balance sheet, and we need to sustain our strong balance sheet position this year and next year and over the coming years as well. Related to FX losses, our -- we have a 68% closed position, but we already -- we have an open position as well. Versus quarter 2, there is an increase in euro by 8%, around 8%, whereas this increase in terms of U.S. dollar is around 4%. When we take a look at our open position in terms of euros and U.S. dollar and having euros high -- slightly higher than U.S. dollar, we were hit by 8% increase in FX euro rate, which created this FX loss mainly versus quarter 2.
So it's performing better in this quarter, that loss will be lower. Could we say that for the next quarter?
It depends on the FX rate, and it depends on our open position. So we will definitely try -- continue to reduce our open position. But again, in terms of -- if there will be not a huge fluctuation in terms of FX rates in Q4, as of today, there is no big change. We are on 8th of November, no big change versus quarter 3.
Yes, no big change.
Yes. And if by the end of Q4, there will be no big change, this loss will be minimum or close to 0. And if there will be a decrease, it will be an income. But anyway, I mean, you do the math and the calculation.
Next question comes from Hanzade Kilickiran from JPMorgan.
I just want to clarify the international margins. I know there have been many questions about this so far, but I think there is some sort of misunderstanding here. I mean is it -- I mean, is this weak margins because of the mix change as per country? Because when I look at your presentation based on country EBITDA, I can't see significant changes. I mean the biggest change seems to be in Central Asia, but that makes up only 3% of your EBITDA. So can we assume that Turkish exports are causing these weak margins in the international markets?
Of course, yes, Turkish lira valuation is deteriorating the competitive edge of Turkey as a country. But our strategy, we are not an export company actually, export-based company. What we are doing is brand building. We are having our own facilities, our own factories. So we are acting like local players in every respect to market. So as you may see that our export ratio is a very little proportion of our overall sales. So the impact to our sales, to our profitability is limited. But of course, inflation and FX rates weak correlation caused margin dilution, which most of the companies in Turkey are suffering because the inflation is high, FX rate is -- where there is no increase in FX rates. So of course, it is deteriorating the competitive edge of the companies. But it's going to be fixed within the next coming months, I'm sure. But I mean when we are going to decrease the inflation. So I think we are not going to have any problem with that. But as I mentioned again, we are not an export-based company. We are a brand-building company.
And also, as I mentioned previously, what we had is chocolate products, because of the cocoa increase, we are -- with some of the global retailers, we are having some agreements for the end of the year or till the end of this year. So we couldn't increase the price on some of the retailers in the export market, which is going to give us an opportunity to increase the prices in January. So we are going to fix our profitability accordingly.
And so this is not a structurally low margin, right? I mean what would be the normalized margin in the international markets because this 15%, 16% margin is the lowest of the 10 years?
Yes. Actually, it should be like 14% to 16% EBITDA margins, as you mentioned. It's not a -- it's kind of structural thing because, as I mentioned, this is a weak correlation between inflation versus FX. But as I mentioned, while -- once inflation ratio is going to decrease like 20%, 25%, I think there won't be any problem in terms of margins for the export items.
Okay. And can I please make a clarification about your previous insight on the prices? Are you now fully reflecting the cost contract price increases to your selling prices? I mean, or do you need further price increases to stabilize our margins in Turkey?
We have already successfully implemented our price increases still to this quarter. And this quarter, as I mentioned, we were on purpose a bit late in order to support the demand, but we did it. So we are in line with our budget targets right now. We don't -- we are not late. So we are able to increase our prices. Only few countries in our portfolio, in our operational markets, as I mentioned again, some of our international competitors are having very aggressive prices on chocolates. So in order to keep competing with them, we didn't increase the prices on purpose again.
But when you say we are in line with budget, do you mean that you are in line with your cost contract, because you already signed the contract, so you have the cost increase already for the next 1 year?
I mean in the internal budget, our AOP, annual operating policies. So we are in line with our internal budget actually, what we effected in the beginning of the year.
And this reflects your cost contracts, right? I mean, because you signed -- already you secured 90% of cocoa, palm oil. So you know your cost in currency perspective.
In terms of cost structure, we had slight increase versus our internal budget, which we prepared in the beginning of the year, especially because…
So you need to go for price increase then?
Yes, we need to have some -- we did -- most of them, we did it. We are -- we need to have a slight price increase in some of the products only, not on the full portfolio, only for few product categories or SKUs actually.
Final couple of questions, one text and then one follow-up from [indiscernible] from Bearings. So the text question is from Mr. [ Mehmet Erkan ] individual investor. There was a relatively high euro to USD parity in the third quarter. How does it affect margins? If so, to what extent?
It was high, but it is still lower than the inflation increase. So it does not impact our margins significantly.
Our final question is from -- a follow-up question from Ms. [indiscernible] from Bearings.
Could you sort of differentiate -- just talk about the price increases in the local market versus the international market? From what I understand in the local market, you've done some price increases and you still need to do more. Could you like quantify percentage of price increase there? And then international, what is the strategy there?
All our structure is always -- our pricing strategy is always starting from the consumer price. So we are always looking for the competitive edge because market share is quite an important aspect for us. But also, we are having a great, very agile cost structure tools actually. So we are trying to have a bridge in terms of strategy of pricing. We keep following up both items actually for competitive prices and also how we are going to be -- have affordable product prices for the consumers and also our cost structure as well.
But regarding your question, price increase is not a tool, only tool for us because we are -- as I mentioned, we are having lots of categories, diversified categories. So channel mix, product mix is another important strategic tool for us to manage our profitability.
You are talking about price increases, I think, at the beginning of next year that there's a segment that you were not able to increase prices because you are in contract. Is this for the international business or which part of the business?
This is for international business, for export businesses, basically export, not an international even. This is because basically from Europe and U.S. markets, some retailers. But as I mentioned, we are going to make the price increases at the first day of the next year actually. This is based on the contract.
This is all we have time for today. I'll be passing the line back to the Ulker management and IR team for the concluding remarks.
Dear all, thank you for joining our call.
Okay. Thank you very much. I believe the hosts have left a little bit too early. Thank you very much for joining the call. This concludes today's conference call. We'll now be closing all the lines. Thank you.