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

Ladies and gentlemen, thank you for standing by. I am Gailey, 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 9 month 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. Hello all, dear investor community. Thanks for your time. Thanks for attending our 2024 Q3 financial results and earnings announcement call. So like just as we usually do, I will try to give the opening remarks pointing out the key highlights. Then I will also give the word to Bahar, our Investor Relations lead for the market-specific updates and the key important changes since we last met and also Ünal the details of the financials. Then we will provide you with an update on our guidance, and we will open up the floor for your questions and answers. So let's begin, Duygu. So overall, I can say that, in fact, quarter 3, it has been a successful quarter for us. You might remember in our Q2 discussions, we were mentioning about the several launches we were doing within our plant this year and some ramp-up issues. Due to that, we had some stockpile up issues, but thanks to the good run rate and good management of the operations over here. In fact, we have reached a steady state on our run rate. So overall, in fact, the results we have seen are in line with our expectations. And if you look into a little bit detail like looking into how we did in the domestic markets, we maintained our third position with 8.5% market share. In total, the commercial market, it's where our key strength is. We are keeping our #1 position with a 27% market share. On the light commercial vehicles and heavy commercial vehicles in the market for 9 months, in fact, the -- if we compare that with the same amounts for 2023, we see a reduction. But for the LCV, I can say that, that impact is coming from the Q1 results that we had already communicated to you. In fact, within the course of the -- essentially the Q3, the run rate has reached to strong levels. So going forward, usually in the automotive sector, Q4 is a stronger period over there, we do not expect an issue but we should also be mindful that in allocating our units to domestic and export markets or LCV units to NextGen, [ Korea ] being quite a successful market. There is significant export demand on that one. That's why when we have the allocation to support the export markets, some of the reduction in domestic volume was due to that. For the heavy commercial vehicles, I have to state that we are seeing a decrease in the demand. The demand is softening, both in domestic market and exports. So the story on the heavy commercial is different. On the LCV, we do not see an issue. But for HCV, there is export and domestic volume reduction. Then we come to the guidance section, you will see also our updates in regards to how we see the export markets over there. We see some level of softening. Overall, for domestic, the volumes contracted by 16%. And out of that, the revenues came down by 21%. Over here, I have to state that the cost pressures, in fact, we are seeing due to inflationary environment, even though there is the inflation combating measures, the -- I'm sure most of the companies dealing with the export operations you listen to, you are hearing the similar remarks. Unfortunately, over there, in the cost of goods sold, we are seeing some bad news. Plus there has been more availability in the market. That puts a strain on the pricing ability. That's why the revenues came down by 21%. On the export story, we are keeping track with our volume. The accelerated shipments, like I said at the start of my speech, the ramp-up and launch issues were resolved. Overall, we see a good trend. The volumes increased for 9 months total by 8% and the revenues increased by 5%. Overall, the total capacity utilization of our combined -- the entire consolidated plant view, we realized as 82%. In Turkey, this was 78%. Some of the low utilization is, in fact, due to the heavy commercial vehicles. Other than that, we are at our intended levels. And for the Romania, we have reached 88%. In this period, we have seen the dilution in the profitability as expected. We were speaking to you on our earlier talks that it should be expected to have some level of normalization. And over here, we are seeing the effect of it. Our EBITDA margin came to 8%, pretty much due to the overall domestic volumes being lower. And within the entire mix of our operation, the weight of the export units are increasing with cost pressures, availability and pricing pressures, the EBITDA level achieved as EUR 1,700. Overall, still, even though like when we compare it to the last year same results, maybe on the EBITDA generation and PBT, we see some bad news impact. But going forward, we do not take this as an issue because this has been the year for our important vehicle launches. They are coming home. And I -- looking into the -- some of the assessments before coming to the audio, I detected that maybe some of you have had worried, is this going to affect your further rounds. But for Q4, I have to tell you that the launch related, especially on the custom, the final piece of our launch is on track. We will be introducing our partner in Q4, and there is no issue around that one. But looking into 2025, we expect to see some level of softening in demand. We will talk about it in the later parts of our presentation. Now for the special section, section level details, I'm leaving the floor to Bahar. Bahar, please?

Thank you, Gul Hanim. Hello, everyone. Thank you all for being with us today. Gul Hanim has already shared main highlights about the domestic market outlook, but let me also elaborate 9-month actual in detail. In this period, Turkish automotive market demonstrates a flat performance, which is reversing the growth trend in the first half, and the sales volume reached to a level of almost 900,000. In this market, passenger car sales accounted for 77% of total sales were surpassing last year's share. If we look at the segment breakdown, we can say that passenger cars and medium commercial vehicle sales saw an increase of 1% and 14%, respectively. On the contrary, light commercial vehicle and heavy truck sales experienced declines of 11% and 21%. This obviously indicates that the growth drivers from the first half were notably normalized in the third quarter, actually, along with the effects of tighter monetary policy and the stabilized demand. So if we look at cumulative basis, the key drivers of this performance can be accepted as the increased special consumption tax exemption limit for the disabled citizens, the second one is the robust local demand prior to the elections, and the other one is the impact of the general safety regulation, the GSR, especially in the first half, which triggered competitive pricing strategies, mainly from the Chinese brands. Also, as a last point, I should also -- I should say that the HCV sales was impacted with the new couriers extended ramp-up period and the end of life cycle of our peers' products -- other players' products. And in this competitive market conditions, at Ford Otosan, we were able to maintain our third position in the total industry with 8.5% market share. Our market share in the PC segment, where our strategic focus is on profitability rather than market share remains steady at around 3% level. However, in our core markets, I mean, the commercial vehicle segment, we continued our leadership with 27% market share. So we preserved our undisputed #1 position in medium commercial vehicles with a growing market share of 37%, thanks to our renewed cost and stronger availability in transit. On the other hand, we secured second place in our LCV and HCV segment as we could not successfully respond to the market demand, especially in first quarter and partially in second quarter. As a result, when we look at the full year, we consider that the demand will beat our expectations. So once again, we made upward revisions in both the industry and our retail sales guidance. Now let me continue with the export performance. I can start by saying that in this period, a similar trend with domestic market was seen in our main export markets, although the passenger cars and commercial vehicle market grew by 1% and 5%, respectively, Q3 results revealed notable declines across all segments. In other words, with the end of GSR regulation effect on European sales, the market weakened significantly in the third quarter with a 6% drop in PC and 8% decline in CV. So going forward, relatively big demand is expected for the rest of the year. In this market, Ford Motor Company showed an outstanding performance and maintained its leadership in the CV segment. And with the support of our flagship [indiscernible] products, by the end of September, Ford's market share rose to a record level of 15.3% from 14.2% year-end. This is also evident in our accelerated export sales in the third quarter. As a result, we contributed this success by producing 3/4 of Ford Pro commercial vehicle sales and more than 1/4 of the passenger vehicle sales in Europe. On the other hand, we had a weaker year-over-year truck performance also in international markets since we were not responding sufficiently pricing wars and impacting from the contracting market conditions. However, unfortunately, from October, we started to see the sign of slowdown in our [ order banks ] for the remainder of the year, which led us to adopt more cautious approach in our export guidance. As we were discussing the potential risk to our export guidance in our previous meetings, together with the results coming from European ACEA, we recognize that the previous export guidance is not achievable anymore. But of course, at the end of the presentation, Gul Hanim will provide an overview of our updated guidance. This is all from my side. Thank you for listening. Now I leave the floor to Ünal to explain our financial performance in the 9 months period.

Thank you, Bahar. Hello, everyone. I'll continue with financials very briefly. This quarter is what I can say in a very short summary is very stable compared to first half of this year. Our revenues in total decreased by only 2% to TRY 404 billion versus same period of previous year, whereas our total volume increased by 3% that Gul Hanim and Bahar already explained. Main driver of total revenue reduction is, as we discussed at the beginning of the presentation, domestic sales performance plus mix of the vehicles that has been sold. And we have lower sales in trucks, for trucks in heavy commercial vehicles, I mean, in both domestic and international markets, which has very high per vehicle revenue compared to other vehicles. And also in the export business, although we have higher sales volume, total transit sales in export business, this is the expensive vehicle line in the export section. That's lower as well. So that's the main driver of the different directions in wholesales volume increase versus revenue decrease. Our EBITDA also decreased from [ TRY 6.8 billion to TRY 32.3 billion ] and EBITDA, excluding other items, decreased from TRY 52.4 billion to TRY 31.2 billion. Main reasons behind these decreases are lower domestic sales where we have the highest profitability impact we had last year. That's partially because of the extended ramp-up period of new models, especially at the beginning of this year that we discussed in our previous call as well and partially increased competitive environment, increase in export share in our overall business and also a continuation of strong Turkish lira versus euro throughout the first 9 months of this year that I will also emphasize in the coming slides as well and lower for truck sales in domestic and international markets, which had a very significant profit margin last year. In parallel to EBITDA, operating profit also decreased year-over-year by 57% to TRY 22.9 billion. The reason of higher decrease in operating profit is basically this year, we couldn't enjoy as much good news coming from exchange movement as we had seen in first 3 quarters of last year. During first 9 months of last year, average euro rate appreciated by 46%, whereas this appreciation was around 17% this year and 8% of that is in third quarter of 2024. And because significant part of our business is export, euro appreciation helps us in terms of export profits and profitability, which did last year, but not as much this year. Then we come to the PBT and PAT, decreases versus same period of last year are lower, comparably lower. We continue to have monetary gain in PBT because of our high monetary liability position in the balance sheet. And in terms of PAT, we continue our investments subject to incentives, which derives a good level of deferred tax income. And also, if you remember that last year, we also had an earthquake tax impact. This year, we don't have that one. That was a one-off item last year. In the next page, looking at our margins, normalization of the margins, which was our expectation last year and also we discussed in our previous call of first half financials was realized. And our third quarter margins kind of stabilized around first half levels, current levels. Just a reminder, I mean, that expectation was mainly over an expectation of increased availability in the market and hence an increased competition in the domestic market, along with continuation of new model launches and also exchange movements impacted that as well. Our 9 months EBITDA margin is 8%. Operating margin is 5.7% and PBT margin is 6.7%. All are very close to this year's first half margins, even PBT margin is a little bit higher. So this shows us that in the third quarter, we are kind of stabilized in terms of profitability. And our EBITDA per vehicle became to be EUR 1,744 per vehicle, which was EUR 2,648 last year. In the next page, we see that our production volume is 3% higher than the first 9 months of last year and higher by 7% quarter-over-quarter, which is good for us. And cost of production in terms of raw materials is a little bit higher than last year. In the previous slides, I mentioned about Euro/TL movement, which we see here that 46% last year increase in the first 9 months and 17% this year. Unfortunately, that has a big deterioration impact on our export profitability when we look at year-over-year financials. And interest rates, on the other hand, continue to be higher, and that shows that cost of acquisition and cost of holding vehicles increased significantly versus previous year. These pages are some kind of detailed and already discussed pages, but we already talked about those. I will not go deep into those slides. I can very shortly say that in terms of profitability, domestic market sales where we have higher profitability are lower by 16%. And in this slide, in terms of our debt profile, our net financial debt increased to TRY 99.2 billion from TRY 82.2 billion compared to 2023 year-end, by the way. We continue our investments for our new models, and this is basically the main reason of increase in debt. And net financial debt over EBITDA ratio is 2.45x. This is kind of well below our threshold of official threshold of 3.5x, which was last year-end 1.19x. And our financial ratios in the midsection, including our current ratio, liquidity ratio, current assets over total assets and so on the other ratios, they are very similar to the previous year and also first half of this year, and we can say healthy only the one that we discussed the leverage ratio, net debt over EBITDA, and that's our focus -- under our focus. So now I give word to our CFO, Gul Hanim, to give more information about our guidance for the rest of the year. Thank you.

Thank you very much, Ünal. So looking into the Turkish automotive market performance, in fact, we moved one notch up, I would say, for the overall expectation of the industry, [ 1,100k to 1,200k ]. And within that, looking into our performance, especially the rates we have reached in Q3. And like I said at the start, usually, Q4 is a very successful period in the auto industry. We expect our retail sales volume in Turkey to go up to 105,000 to 115,000. On the export trend, though, we made a downward adjustment. The earlier guidance was in between the range of 560,000 to 610,000. We moved it to 530,000 to 580,000. The reasons being the ones that Bahar explained when she was speaking to the export markets. Looking to the indications we received through ACEA and also looking into the [ order banks ] and the stock levels of our partner, Ford, in the environment, we see some softening in the demand. And like we had advised you at the times of the -- starting from the chip crisis, we have been very carefully planning our production scheme, master production schedule together with Ford. We are optimizing for ourselves as well as optimizing for them. So seeing the result over there, it signals that the 530,000 to 580,000 region will be more reasonable. And this is mostly -- the changes are mostly coming from the Turkey operations, the commercial vehicle piece. As we introduce our partner in the [ Vanton ] region, I can once more reiterate that the plans are on track, and the launch will happen this year. On the earlier discussions, I had given this as a word of caution. I had made this explanation since we had seen in our other launches, some okay to buy delays or some ramp-up issues, I had said that if we -- other than that, we don't see an issue. That was the guidance or explanation that I had provided in the earlier talks. Over here, for the partner-related data, I'm reaffirming what I had said. But in the general scheme, we are seeing some softening in the demand. For this round, we are not just providing the 2025 guidance yet. But this demand softening impact on the export, we see that, that will also come our way in the 2025. However, since the arrangements for the partner is in place, even though on the normal setting, we will see some softening versus this year since we will have a step function of the partner introduction next year. Overall, when we go into that guidance, we will not look that. In fact, we will be showing our -- the effect of all this capacity and vehicle investments you will be seeing on our guidance. For the CapEx on the fixed assets, we have made a downward revision in our overall spending from EUR 900 million to EUR 1 billion. That was the bandwidth. Now we see that value being in between the range for EUR 700 million to EUR 800 million. This, in fact, this shouldn't be interpreted as some of the things are not being done. In fact, there are 2 pieces going into this. Then several of the launches within the year, they deferred or the okay to buy was not given in time. Similar to that pattern, some of the payments of the invoices were coming in a little bit late. So some part of this change is calendarization impact. You can expect that whatever was not done over here, it will have a flow over effect into the following year. And some of it, in fact, given in this heavy cost pressure environment, some of it is, in fact, real savings, like we did -- we carried out the action, but especially seeing these cost pressures, and due to our business model, in fact, out of these cost pressures, our partner Ford got affected more severely than us because we have a cost-plus markup mechanism in our export prices. That's why some of it is real savings and some of it is calendarization impact flowing into 2025. But the plans, what we have declared in terms of both electrification and product launches plus capacity, they are progressing. They are on track. That would be pretty much the information I would like to share on this page. I think this concludes our presentation. We can open up the floor for your questions now.

The first question is from the line of Parisi Lorenzo with JPMorgan.

I just have one question regarding leverage and the trajectory. So given the increasing leverage over the course of the year, are you able to comment on when do you expect net leverage to peak, whether it is fourth quarter or sometime in 2025? And roughly, what level do you expect that to peak?

Like I should answer that question as we are -- in fact, we are very dynamically keeping track of our actions in paying attention to our metrics over here. You can expect that 2025 will also continue to be a heavy CapEx because of the electrification journey and the capacities we are doing. So 2025 overall spending -- CapEx spending will be somewhat similar to what we have seen for this year. We -- in fact, we do not manage ourselves in looking into an overall value -- face value of a debt level. This is the peak time. We do not do that because everything is dynamic over here, our EBITDA generation capacity, the payment terms for the actual CapEx actions. You might even question, what are you doing with your dividends? So looking into all of these actions, in fact, we are keeping a careful eye on our net debt over EBITDA ratios. We are carefully tracking that. And in doing so, of course, we also execute the official dividend policy that we have declared to you. This means we -- there is -- at a minimum, we always try to distribute the 50% of the distributable section. However, at times of heavy CapEx and at times of unfavorable economic conditions, I wouldn't say that like this is an area, like a crisis, like a turmoil period, but we all know the fact that currently, the export operators are having some disadvantage operating in Turkey given the inflation curves and the exchange curves that Ünal has explained. That's why we are all taking these things into account in our decision-making and dynamically managing it. At times, wherever possible, if there is a way to defer the CapEx spending or it's like invoice collection, we are also looking into that. In that regard, I wouldn't give you an overall debt ceiling figure. I wouldn't do that. But I would say that we are very carefully tracking the net debt over EBITDA ratios and honoring our covenant needs. That's our strategy.

So just one follow-up. I think you have a target of keeping net leverage at or below 3.5x. And given the market dynamics that you highlighted, especially on the export markets, do you expect over the next couple of quarters or 3 quarters to gradually approach this level or more or less to remain at current level of 2x, 2.5x on net leverage?

We are targeting to remain at these levels like in certain instances, and you would imagine there are some factors going affecting this, even from quarter-to-quarter, this number could change. So there could be areas where we could be exceeding this. And you rightly put it, Ünal also mentioned it. In fact, in our hard constraints, let's say, this value is 3.5x. However, since now we are also -- we have diversified our portfolio of funds. We also have access to the debt capital markets, paying attention to the needs of that area, you could assume we do not have an intention to stay around those levels if we exceed that. So like the hard constraint levels, we are targeting to keep away from them. Maybe that will be a shorter answer.

The next question is from the line of [ Campos Gustavo with Jefferies ].

Just 2 on my side. On your CapEx-heavy 2025 year, how are you planning to fund this CapEx? What kind of -- more specifically, what kind of avenues of debt funding are you considering at the moment? That's my first question.

Thank you very much. Like I advised, since we diversified our portfolio with like the -- we already had several syndication lines from the supranational. We have the Eurobond. And this diversified portfolio brought us both a better cost advantage and enhanced borrowing capability, we will be continuing over them. At this point in time, I'm not in a position to tell what timing, what to do. But since now we are in these forums, we will be continuing to utilize them. But from a -- like if you ask, are you going to tap into the Eurobond market once again, the answer would be yes. But from a standpoint, what would the timing be, that will be coming from our -- especially once we do the 2025 budget, the overall needs and the timing is subject to a further like planning on our end. But the current portfolio we have, we are happy with this, and we want to continue to tap into those resources.

Yes. Great. Second question would be on -- and apologies if you covered this before, I might have missed it. The medium commercial vehicle, I see like it has materially outperformed in terms of like sales units, both domestically and in exports, material outperformance of medium commercial vehicles relative to light commercial vehicles and passenger cars. So if you could please elaborate on like what's driving this outperformance, that would be great.

Yes. Yes. Let me try to take the first part and Bahar, if you would like to add anything more, just please jump in. In fact, the medium commercial vehicle area is like our -- that's our key bread winners. That's a very successful vehicle. It has been so for like a legacy and the [ Vanton ] custom together with this Ford Motor Company alliance with Volkswagen, we will be introducing the partner units. It's both from a hardware perspective and software perspective, the operations in Europe through Ford Pro, it's a success story. That's what we are proud of. For the LCV, I wouldn't discount our next-generation courier. That is also a very successful vehicle. The time it took to complete the ramp-up period gave us a trouble. Currently, it came a little bit late. And when it came, I will proudly say that there was a little bit of a fight over who gets what. And the European markets also liked it. We liked it. It's a successful vehicle. So at the first quarter, some of the allocations and the distribution of the units out of the Craiova plant, they reached the export markets earlier. And later on, the overall allocation perspective, when we share the units between us and Ford, Turkey market versus export markets, over there, a little bit more of it than maybe originally we intended, let's say, or we wanted a little bit more of it went to the export area. That's why you are seeing the reflection in the numbers in that manner. But overall, the reaction we get from the markets also for the courier, it's quite a successful vehicle. And currently, I'm not in a position to give the numbers just yet. But when we concluded our planned shutdown period in our Craiova plant, we also did several enhancements to our operations, not just for Courier and also Puma. Overall, going forward in Q4, hopefully, we will be seeing larger run rates. So I hope they will reflect itself into Q4. But as a guidance or as a full commitment, I'm finding it a little bit early to say it just now. You will see that when we come up for the 2025. In general, Ford Pro for the medium commercial vehicles, it is successful because now Ford has a strategy in the key profitable units of Ford are also coming from the commercial vehicles. And in Europe, Bahar provided the details. It's quite successful. It's not just coming from the vehicle itself, but also the idea behind providing the service to the professionals using the vehicle. this uptime logic, keeping the vehicle always up and running. If there is an issue, if there is a problem, solving it, making it connected and providing some value-added services through the vehicle over a really healthy network is differentiating it from the others. And usually, I usually receive a question regarding how do you combat the Chinese. The Chinese are everywhere. We saw on the listing in Turkish domestic market, especially on the passenger, there are a lot of Chinese units. Once they showed up, there were some tariff walls. Now they are being kept away both in Europe and like after some time also in Turkey, they were kept away. But they can do something else to combat it. Then it comes, how do you defend yourself is the question. And the key answer, the key strength, let me put it that way. The key strength Ford Pro is betting on is this, the vehicle itself is of high quality. If we check the quality versus some other Ford plants and some other Ford nameplates, our vehicles, both in the LCV, the courier and MCV, they are the transit custom, they are much more quality vehicles. So the cost of warranty, those things are better when compared to others. And if there is a problem with all this Ford Pro network, they are really providing good experience to the customers. That's why the loyalty level is much enhanced, and it is creating the stickiness that we want in the value proposition. So we are -- like I would say, we are proud to say this, and we will try to keep our units in this way.