Ford Otomotiv Sanayi A.S. (FROTO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Ford Otosan A.S. Conference Call and Live Webcast to present and discuss the first quarter 2024 financial results. At this time, I would like to turn the conference over to Ms. Gul Ertug, Chief Financial Officer; and Ms. Bahar Efeoglu Agar, Head of Investor Relations. Ms. Ertug, you may now proceed.

Thank you very much. Greetings to you all, and thanks for attending our call. Welcome to our 2024 first quarter financial earnings presentation. In this call, I will have my team with me, Bahar, Ãœnal, Duygu together. I will first start by giving the key highlights on the first quarter. We will follow on with Bahar on the details of the performance. We will touch on certain key achievements since our last meeting with you. We will go through the detailed financial results. And at the end, we will provide you with our guidance and open up the space for questions and answers. So if we proceed to the next page, please, Bahar. Thanks very much. So after an all-time record year in 2023 in Turkish automotive markets, coming to 2024, first quarter, we see in the industry that the domestic sales also increased around 24% growth in the first quarter. Within the industry, the increase, this growth is mainly coming from factors such as the base price increase in the special consumption tax exemption, which was applied to the disabled individuals. This supported demand. Also, we had the local elections. And before the local elections, there was a period for pull forward of the domestic demand in the pre-election period. Of course, we are seeing the tightening of the monetary policy with the new macroeconomic precautions taken. But the pre-election period, we have witnessed some demand increase and also, we can say that all of the OEMs operating in the market had improved vehicle availability. So the combined effect of all of these actions has turned the market into a demand-driven market rather than a supply-driven one. In this environment, if we look into Ford Otosan's performance, all domestic sales, unfortunately, decreased by 8%. And if you compare our market share with respect to the same period results of last year, in fact, it reduced to 7.9% from 10.5%. The key reason to this action was, in fact, launch of our Courier vehicles within our Craiova plants. You will remember from the last talks with you, unfortunately, we had suffered some launch-related issues and some launch deferrals at the end of the year. And within this quarter, the distribution of the vehicles from Craiova to export markets was okay. However, the pipeline ceiling within the Turkish domestic market was falling behind our expectations of our projection. That's why we had a market share drop on the LCV. But what I can say is as now we witnessed the results of April and the ongoing rate in May, we can -- we very happily see that the vehicle has made its way into the market, and it is being perceived in a quite positive way. So we are expecting to reverse this action. The bad news of market share that happened on LCV, we do not expect it to continue. So this was the issue with the extended ramp-up. Also in Ford trucks, we have witnessed lower year-over-year sales in the same period due to the increased vehicle availability and, I would say, fiercer pricing environment, much more competitive environment in the market. The MCV segment, this is our most healthy and most successful segment, our sales almost doubled in MCV. And for the MCV segment alone, our market share reached to 35%. Overall, commercial vehicle market share ended up being 22.5%, and we are maintaining the third position in the ranking within the market. Our renewed products, flagship products of transit and new custom are very healthy. They are perceived very well in the market. And also, the passenger vehicles, our sales on the passenger vehicles went up 60% year-over-year as a result of the better availability in our entire product lineup. If we look into the export market, in the export business, our total sales volume increased by 11%. And this is also sign that the demand for the especially newly launched vehicles of Custom and Courier, the demand is strong over there. If we look into the capacity utilization ratios, as the launches come into the picture, the pace of production has increased to the expected levels, the projected levels. And this shows its result in the capacity utilization rate increase, which is above 90% in our plants. The only exception is the EskiÅŸehir plant. And over here, in fact, for the Truck business, we were also undergoing an important regulatory change, the other advanced driving assist technologies related HCV launch. We had some deferral on that one. That's why you see the capacity utilization a little bit less than the other ones, but now the launch of our others units and the launch of our F-LINE is in place. So over on the HCV segment, the Truck segment, we have a very strong and healthy product line ready. As a result of all of these combined actions, If we look into our EBITDA and PBT per vehicle, we see around EUR 1,800 and EUR 1,700 respectively. I have to state that year 2023 was an exceptional year and in fact, in our earlier talks, we had highlighted to you that these exceptional results, we are projecting some level of normalization on this and we see that impact on the realization of the 1Q final financials. We said that there is a shift of the overall. product mix is moving in the direction of exports, where exports are a little bit less profitable than the domestic markets. Within the domestic market, there is better availability for all of the demands, and this is putting a pressure on the pricing ability. Also, as we see, the macroeconomic mitigation factors to combat inflation, we see that the financial expenses are increasing with the interest rate hikes. And also, even though these actions are moving along, Currently, there hasn't been a big drop yet in the inflation. That's why the labor and production processing-related costs are subject to high inflation still. And as you very well know, at the end of the year, we had moved into the inflation accounting, as we roll the impact of the inventory carrying into our financials, you see that the cost of goods sold related numbers are deteriorating, when we also include that impact. But overall, I should say that still, given these conditions, we have managed quite a healthy quarter. If we move to the next page, I would like to just very quickly touch on our position, our production position and presence in both Turkey and Romania. In this period, we continue to be the biggest auto producer in Turkey, and we have been the second-largest producer in Romania. The 3/4 of Turkey commercial vehicle production is conducted by us and Ford's commercial vehicles sold in Europe, this success is due to our plants. So having said this, I'd like to leave the floor to Bahar for further details in the results. Please, Bahar.

Thank you, Gul Hanim. Hello, everyone. Thank you all for joining us today. Let's take a look at how we and the domestic market performed in the first quarter after a record year. As a general view, a normalization is expected for the market in '24 after all-time high sales last year, also Gul mentioned briefly. And we also considered this correction while shaping our guidance, which we shared with our year-end financials. However, despite strong base year impact, in the first quarter, the market grew by 24% year-over-year. We believe that 3 main reasons support this performance: first of all, we have seen a pull-forward demand in the pre-election period due to a further tightening in the macroeconomic environment; other reasons can be counted as the improved battery vehicle availability in the market; and the last one is the [ disabled seasons ] and their [ royalties ], we are benefiting from the increase in the base prices for the special consumption tax exemption. And when we look segment by segment, we see strong growth in both Passengers and Medium Commercial Vehicle sales with a 33% and 63% increase, respectively. But we have seen around 25% and 13% decline in LCV and HCV sales, and we believe that the main reason behind this performance was the lower availability in those segments. On the other hand, in line with the assumptions, it seems that the correction in the market started with the 22% decrease in sales in April, and this trend may continue April onwards. So we will follow the development in the upcoming months closely. And let's see how Ford Otosan performed in this market environment. In this period, our domestic sales slightly decreased year-over-year and we maintained third position with almost 8% market share. On the other hand, our market share in total commercial vehicles declined year-over-year, and we attained around 23% share. Despite our strong sales in MCV segment with our flagship products, best-selling products like Transit and our all new Custom -- new-generation Custom, I should say that this performance was primarily driven by the lower availability in the HCV segment, in our HCV sales, due to the extended ramp-up period of our new Courier, but we expect better HCV sales in the coming months, which was already starting to recover in April. You can see it from the recently announced Automotive Distributers' Association's data as well. Additionally, although the competition has increased and the pricing ability has decreased in the market in this period our profitable focus in Passenger Cars and profitable growth strategy in commercial vehicles has continued. Let me also give some update on our main export markets. So when we look at the first quarter figures of ACEA, despite again strong base year in the European markets, 12% and 5% growth was recorded in Van and Passenger Vehicle markets, respectively. And according to the recent announced data, which announced today -- by today, the growth has accelerated in April in Passenger Vehicle segment. We can say that widening fleet demand, improved vehicle availability and aging vehicle part, this is really for both Van and PC segments, in Europe, it's also effective. They are also effective in this performance. In the same environment, Ford was able to sustain its leading position in the commercial vehicles market with the support of our products, our [ yield ] products actually. And proud to share that as of Q1, as Ford Otosan, we produced 73% of Ford's European CV sales and also from Passenger Vehicles contribution perspective, we continue to contribute Ford's performance with our best-selling Puma model, which is the smallest SUV in PC segment, and we were producing 38% of Ford's PC sales in Europe in this period. And within this year by gradually launching our zero-emission models, zero-emission volumes in Custom, Courier and Puma, we expect to support Ford's performance in also electric vehicle market as well. So before I hand over to Gul Hanim, once more, I would like to highlight our efficient, flexible, low-cost, high-quality production and engineering capability. And considering the current pace of electrification, with our fully integrated manufacturing centers, we should keep this in mind that we are able to produce ICE, plug-in hybrids and all-electric models on the same platform, and we do not have dedicated investments for electric vehicles. So thank you all for listening. Gul Hanim, the floor is yours. You may continue with the other parts.

Thank you. Thanks very much, Bahar. I think Bahar made a very nice gesture. So there is -- on the screen now you are seeing results. We are collective, the entire Ford Otosan team is very proud of. So we have successfully completed our inaugural Eurobond issuance in Ford Otosan's history for the first time in April. We had issued our $500 million Eurobond targeting foreign investors with a 5-year maturity at 7.125% interest rate. This is a 5-year maturity, 144A Reg S Eurobonds. With this month on, we also -- I'd like to thank the team for their hard work. And I'd like to once more welcome all of our investors in this audio call. We see not only equity investors, but also debt capital markets investors. Thanks again to them. We were rated by Fitch Ratings as BB+ and by S&P with BB-. Within this journey, we have organized road show meetings in London, New York and Boston, with the participation of over 75 institutional investors and at the end of this road show, we received demand exceeding $1.5 billion. And we were able to achieve the lowest interest rate observed in the Turkish bond issuance arena since January 2022. So this success, we believe, is a significant demonstration for the confidence the global investors showed in us. We would like to, once again, thanks to the investment community for the trust and support. And I believe with our performance, which is now further -- we will look into the further details of the financial status through Ãœnal's presentation and with our guidance, we will keep up the projected view in order to continue this journey in a successful way. So thanks again, and I think now I pass it over to Ãœnal.

Thanks, Gul. Hello, everyone. Welcome again. This is Ãœnal Arslan, Corporate Finance Leader. I'll talk about some financial highlights and some key metrics in our first quarter financials. Looking at our revenues, Gul and Bahar already discussed about our volume evolution versus our previous year quarter 1 results. But looking at here, while our domestic sales volume decreased by 8%, our domestic revenues sale remains flat and that's compared to first quarter of 2023. That's because of mostly ongoing pricing discipline that we have been talking in our previous quarters as well and favorable product mix. But looking at export revenues, revenues are up by 12% year-over-year, whereas volumes in parallel increased by 11%, mainly that's supported with the renewed models of Custom, our brand-new product, Custom at Courier. As a result, our total revenues increased by 9% year-over-year to TRY 124 billion due to 8% year-over-year increase in volumes despite, of course, lower Heavy Commercial Vehicle sales units that we discussed previously. In this period, the share of our export revenues in total revenues increased to 79% compared to previous year's first quarter. That is in terms of revenue favorable. But in terms of profitability, the margins, unfavorable mix for us. And overall, looking at our profitability, EBITDA, operating profit and PBT, as we discussed in our last couple of calls, quarter 3, quarter 4 of previous year, our profitability margins normalized in quarter 1 of this year. That's in line with our expectations, as I said, and the main reasons for that normalization is, first of all, the strong base year impact, as we all know, 2023 first quarter and second quarter, partially third quarter was really, really extraordinary in the Turkish domestic market; lower pricing ability in the domestic sales due to the intensive competition in the pre-election period; increased share of export revenues, as I just mentioned, that's the mix issue in total; and extended ramp-up in our new vehicles, especially in the Courier and the introduction to the Turkish domestic market. On the other hand, last thing that I can say here is our net income, on the other hand, increased versus prior year. That's mostly because of the inflation adjustment monetary gain figure. If we move to next page. What we see in our margins, that's parallel to what I have told in the previous page, our operating margin, EBITDA and EBITDA margins decreased around 1.5 to 2 percentage points and that's mostly -- we see that as a normalization. Looking at our historical margins, that's not -- our current first quarter margins are still really solid and strong. Looking at our per unit EBITDAs and PBTs, we have EUR 1,815 and EUR 1,728 for EBITDA and PBT, which are still, I can say, strong in terms of per vehicle products. And in terms of cost, in the next page, what we see is in this period, especially in the first quarter of this year, labor and production costs continue to increase due to high inflation and exchange rate, let me say, volatility. Raw material costs also increased in that period. Inflation has increased, but looking at the last, say, several months, it's kind of stabilized and because of the monetary tightening policies, we expect it to go down in the coming months. And in that period, we increased our production volume by 5% versus previous quarters. In the next page, we see the model breakdown of our sales volume. We already discussed, Gul and Bahar gave detailed information about that. But what we see here is in terms of PC, we are selling -- we sold higher volumes compared to previous quarter, but LCV, mostly because of our new model Transit Courier introduction to the Turkish domestic market, we are behind our targets. But looking at March and ongoing months, we can say that the production and introduction to the market normalized, and we expect it to be higher in the coming quarters. And in terms of balance sheet and cash flow, we have a really solid balance sheet. That's in line, very parallel to our previous year's balance sheet figures. In terms of cash flow, we have a healthy cash flow position. We can say net cash from operating activities is higher than our capital spending, which delivers positive free cash flow to us. And more detail in the next page, debt profile and financial ratios. I already talked about cash and net financial debt. But looking at our financial ratios, all our ratios are healthy compared to previous year, but especially looking at net debt over EBITDA, which is stipulated by some of our long-term investment loans as a cap of 3.5x, it's 1.1 in the first quarter of 2024, very much aligned with previous year, even below previous year. So as Ford Otosan, I can say that we have a very solid financial profile with low levels of indebtedness and a strong cash generation capability. And as I said, our positive operating cash flow and positive free cash flow shows our financial patterns. So from here, I think we have the last page of our presentation, which is the guidance, and I leave the floor to Gul.

Thank you very much, Ãœnal. So we are approaching the end. On the guidance, in fact, we kept our guidance as it is. We didn't show a change over here. Even though in the first quarter, especially on LCV, we were coming from behind, now that we see the strong interest in the vehicle and the ramp-up related issues are resolved, the pipeline fill up from Craiova to Turkey has been done. We believe with the successful -- with the healthy structure of the products, we will attain what we were targeting. So we kept it as it is. Even though we are, yes, we are seeing that there is a monetary tightening. And since the election period, in fact, some level of like softening in the demand in Turkey. Regarding the Ford trucks issue, we have seen also some fierce competition and some level of slowing in export markets. But over there, since we have the others vehicles ready and the F-LINE ready, the new markets in the export growth, export expansion plans are on plan. Due to all of these combined effects, we have kept it as it is. And also for this year, we have to notify that we are planning to launch gradually the zero-emission models in Custom, Courier, Puma within our product lines within the course of the year. And they will also support our international sales and contribute to Ford's success, especially Ford Pro's success in Europe. This is the reason why we didn't change anything. Of course, we will keep on following very closely. And if we see any need, if you see any change in the dynamics, we have the -- we are following closely to make the necessary adjustments. But currently, we feel confident that these are achievable. And in line with that, our investments, we are keeping them on track. And as things stand currently, we do not see any need to change or delay our shared CapEx guidance. So I think with that, we are coming to the end of our presentation. And we can open up the discussion for your questions and comments.

The first question is from the line of Bystrova, Evgeniya from Barclays.

Congrats on the results, and congrats on your recent bond issuance. I have a related question. Do you foresee any financing needs in the future? Do you plan to maybe come back to the market recently, in the short term? Or how do you plan to finance your CapEx?

I believe you -- maybe you were one of the people who listened in to our presentation at the time of road show. In fact, over there, we made a statement, and I will say that we are still keeping on track with that. Yes, we are planning to come back because if you have seen that presentation, you will remember that within Ford Motor Company and Ford Otosan's strategic move, especially with the electrification journey and growth journey of Ford Otosan, together with Craiova-related actions, in fact, we will be -- currently, we are in a heavy CapEx period and it will continue for some time. The operating cash flow, the cash flow from the business is healthy. However, since the Eurobond area is a very good diversified source of funds and a place where we want to utilize, we will be coming back.

The next question is from the line of Demirtas, Cemal with Ata Invest.

Congratulations for good results and very highly congratulating your success in the Eurobond issue. I guess, it's at good rates.

Thank you.

I think it's a good success, I guess. My question is about the domestic market side. Your guidance is around 800,000 to 900,000 levels of total vehicle markets, which implies that during the following 8 months, the average will be less than 70%, 75%, [ 70,000 ] levels. We haven't seen the signals yet, but do you see any -- in April, we see, but we see that in May, it's a little bit stronger. I would like to hear some color on that from your side. And you have been cautious in the past, but this year, it looks more cautious when I look your past performance. So when do you think we will see the indications if we are not receiving it now? That's my question. And related to that, the profitability now with inflation accounting, around 8.1%, 8.4% EBITDA margin. What might be with the current, the balancing in the domestic? And what might be the sustainable EBITDA margin for you? I'm asking that, too. And the last one is about currency. We know that the currency is not a big factor maybe in terms of the margin side. But if the current TL or Euro/TL levels sustain, stable at current levels or little TL depreciation, do you expect further deterioration ration in the margins in the second half of the year? What's your perspective for that?

Thank you. Thanks very much. Thanks for the congratulations. Let me take your questions in an order. First, you started with the Turkish domestic industry. In fact, the first 3-month view of the industry, if we look at it at a run rate like year-adjusted run rate perspective, in fact, it was strong. And for the rest of the year, thinking of our current vehicle success and the vehicle take-up in the market, the dealer showroom interest and the success of the vehicles, we are really thinking that our vehicles will catch up even if we had that LCV-related problem over that, we think it will catch up. However, you also said you approached this in a little bit conservative way. The reason for that conservatism was last year, in the last quarter, we had some launch-related issues. And once they were resolved, we very well see in the first Q that even if the launch actions were done, the filling of the pipeline took some time. And on the earlier discussions, in fact, I had informed you that we are very, very careful. We have big scrutiny on our launch of the vehicles. We call it okay to buy or from our perspective, it's okay to sell. We are very careful to make it in a coordinated and very sure manner. That's why. And since this year, we will also be going through several launches, we wanted to keep it conservative. This is something internal. From the external environment, because of the macroeconomic conditions and the monetary tightening policy, the policy and precautions taken against inflation, we still think that there is a possibility for the softening and slowing down of the market. However, at least from our perspective, with successful vehicles, we aren't seeing that. In fact, it is giving us some hope. That's why. That is the reason why we are not changing anything. We will keep on following up with the market. Currently, things stand okay. You asked about our sustainable margin. Within these conditions, of course, the availability being high, the competition being high in the market and there is, let me say, more fierce environment for the pricing actions, our EBITDA, the way we report it, we also told you that the impact of the mix of the export is increasing. And as like we have Puma vehicles, the mix of the Passenger Vehicle's changing, those are bringing some normalization into this rate. That's why we could say that the sustainable level of margin will be around high single digits. This is the guidance we are providing. I'm not breaking it down into further details giving like Passenger this much, electric this much, ICE this much because this is how we are managing our books. That's why you can think that the sustainable margin level will be at high single digits. And sorry, what was your last question about one more thing?

About the currency side, Turkish lira remains strong. Should we expect a deterioration in the second half of the year related to both domestic and international side?

Right. Right. In fact, like as we look into carefully how the management of the finance management is looking into the environment, we see that there is a really serious work towards combating inflation. That's why the highly valued -- let's say, highly valued Turkish lira is -- we expect that to continue, which, in turn, in fact, this is not a very good signal for exporters because it is meaning that the inflation hasn't come down a lot, so the cost base is still going up. But when you translate it into a euro value, it is going to be more expensive in euro terms. That is giving us a headwind. However, please note that especially on the export business, our business model is a cost-plus methodology, you can interpret it as like a take-or-pay. We have investment recovery guarantees and for the vehicles we sell, of course, we try to maintain the cost by utilizing our strong muscles on efficiency and innovation. We force the costs down against this macroeconomic environment. We do our best and that is why, in fact, Ford Motor Company is taking us as a strategic partner. We are hand-in-hand for the strategic growth of both of the countries. So in this environment, we are protected, thanks to our business model. That is not hurting us in terms of our recoveries. But of course, this is not a blank check. We are very well aware that if the economic environment is not helping our cost status, we have to do additional efficiencies, which is coming through our nimbleness, our investment efficiencies to bring down the costs. So far, we think we are doing a healthy business, we are not hurting Ford's business because you think it's also the delivery, the quality, the supplier availability, the effect of Turkey is not just, okay, here is a contract manufacturer's site. There are other things we are including in this business. Also, we need to mention that we have important involvement in the engineering, R&D, development of the certain vehicle and platform derivatives as well as the investment side of it. In fact, this was the reason why Ford also wanted us to utilize our abilities in the Craiova plant. That's how it's managed. This is a win-win business case for both of the parties. So in short, I can say that thanks to our business model, we can -- we are protected against that. But for long-term competitiveness, of course, we are taking some strategic action to make sure that this competitive position is protected.

The next question is from the line of Kilickiran, Hanzade with JPMorgan.

I have 2 questions. The first one is about Romania. You previously highlighted that Romania will no longer dilute your export margins when export contracts are renewed to include the investment recovery. When do you expect this to be effective? I mean, could this be also a reason of slightly positive normalization in the margins in the first quarter? And second, can you also provide your total EV sales in your mix?