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 2025 full year earnings results. At this time, I would like to turn the conference over to Ms. Gul Ertug Geriskovan, CFO; Ms. Bahar Efeoglu Agar, Head of IR; Mr. Unal Arslan, Corporate Finance Leader. Ms. Ertug Geriskovan, you may now proceed.

Thank you very much. Dear investor community, greetings to you all. Welcome to our webcast for the sharing of 2025 full year financials. As usual, in the flow of today, I'll kick us off with the key highlights and achievements that our company has concluded and then give the word to Bahar and Unal for their respective section details. So I like this page very much. It is a very good summary of what we have been able to conclude in 2025. We are really happy and proud to declare that we concluded a very successful 2025. The key thing is, in fact, we delivered on our all of the commitments with regards to our product launches and ramp-up regarding the capacity for both Ford and partner production. While doing so, we broke some important records in the achievements that I would like to highlight. First, let me start with the production. We attained highest level of production, exports and wholesale figures in our history. We hit the adjusted EBITDA margin of our guidance at the upper bookend. We achieved an overall capacity utilization reaching 75%. And in fact, later in the production also in our documents, you will see that especially for the Q4, we have had much better results, improving almost on all fronts. The capacity utilization at Q4 reached 80% level. Especially on the cash leverage, working capital front, the management of the cash, we were very successful. The free cash flow reached EUR 1.6 billion, and our net debt over adjusted EBITDA multiplier came down to 1.49x. Over here, I would really like to thank my team, the entire company and my team because this is really an exceptional result. While doing so, delivering on the fiscal, we also managed to reach the largest dividend payment in our history and also the largest dividend yield, 7.8% in the last 13 years. Now looking a little bit high level on the market performance. The details will follow through Bahar, but I want to touch a little bit on that one. For the domestic market, we experienced quite a strong industry, overall reaching 1.4 million units of registration and out of which passenger vehicle sales constituted a significant portion. In this environment, we achieved 117,000 retail sales. This has been the highest in the past decade. Overall, we ranked in the third position in the market with an overall market share of 8.3%. And you know our story, we are, in fact, the key player on the commercial vehicle. Our undisputed leadership position, we were able to keep it with a 28.6% market share. The export market performance was also very significant. We reached record sales of 603,000 units. And this is especially important because we managed this in a contracting and a fragmented market with respect to the commercial vehicles in Europe. But overall, this, I believe, is a very good summary of our performance. While doing that, let me also touch a little bit on the EV sales. In our earlier talks, you will remember, in fact, we have been discussing about the EV penetration in the markets that we operate. The result is 15.8%. However, it is obvious that the EV penetration is still progressing at the lower end. Overall, we achieved 8% adjusted EBITDA margin and EUR 1,821 of adjusted EBITDA per vehicle. And this concludes my summary page. Let me move on to the next one, Lugo, please. So another dashboard that we feel very proud of. We are holding the 83% of Turkey's overall commercial vehicle production and 87% of Turkey's commercial vehicle exports. Also within the operations we hold in Romania, the vehicles we produced in passenger car sales in Europe, it is amounting to 41%. And for the Ford Pro commercial vehicle section, 79% of the Ford Pro vehicles are coming out of our plants. So having given these highlights, let me now pass the ball on to Bahar so that we deep dive into our market performance and the details of it.

Thank you, Gul Hanim. Hello, everyone. Thank you all for joining us today. Now let me continue with the key developments in the domestic market. In 2025, the market performed beyond expectations, and it reached to an all-time high level of 1.4 million units with a growth of 10%. Besides, for the first time, passenger car sales exceeded the 1 million units level, and it makes up around 77% of the total market. This robust performance was mainly supported by intensifying price competition, macroeconomic uncertainties, pull forward demand ahead of increasing special consumption tax and also a better vehicle availability and the increase in special consumption tax based threshold for EVs, electric vehicles. Additionally, the wealth effect of the increase in both gold and silver prices have an impact on purchasing behavior. If you look at the segment breakdown, all segments contributed to the growth, except the heavy trucks. As a result, passenger cars, light and medium commercial vehicles increased by about 10%, while truck sales fell 3% year-on-year. Next slide, please. In this highly competitive environment, we have maintained our third place in the overall market with an 8.3% share. Our sales increased by 3% year-over-year and reached to 117,000 units, and this marks our highest sales figure in the last decade. I should say that the main reason for our limited growth compared to the market is largely driven by the passenger car segment, where our presence is relatively smaller. Also, we could not benefit from special consumption tax exemptions for disabled people as the scope of this regulation requires minimum 40% local production in passenger car. However, our light commercial vehicle sales were boosted with 24% year-over-year growth, thanks to stronger availability of our renewed courier model. On the other hand, we had a softer performance in the medium commercial vehicle segment compared to the market during this period, primarily due to peers' new model introductions and aggressive sales campaigns. In addition, we did not join the price wars in the truck market and also some peers offered favorable financing options. Therefore, our truck sales lagged behind the market. So this performance enabled us to maintain our undisputed leadership in the total commercial vehicle segment with almost 29% share. As a result, all in all, if you look at all in all, we achieved our retail sales guidance for '25. Now let me move on to the export performance. In this period, our main export markets experienced a mixed landscape. The commercial vehicle market, which is our focus area, contracted by 8.5%. The commercial demand stayed weak because of ongoing headwinds and low fleet investments. There was also a strong base year impact on this performance. In addition, structural challenges like high production costs and lack of charging infrastructure put pressure on the industry since the EV adoption is still slower than the initial expected levels. Regulatory uncertainties have also impacted European OEMs sales mix. On the other hand, passenger car demand was relatively stable. Registrations rose by 2%, and it's mainly driven by better vehicle availability, government incentives and improvement in consumer confidence. So in a declining market, Ford achieved strong results and maintained CV leadership for the 11th consecutive year with a record high market share of 17.2%. I should say that Ford Pro's value-added services and our renewed product portfolio, including EV variants were key drivers of this performance. So we are proud to share that 79% of the commercial vehicles and 41% of the passenger vehicle sales of Ford in Europe are produced by Ford Otosan. Considering that we are also responsible for the production of 1 ton commercial vehicles for Volkswagen, our contribution to the European automotive market is, in fact, even larger. So let me move to Since We Last Met part. I would like to wrap up my section with some good news from our side. After becoming the first automotive manufacturing 2 tier to join the World Economic Forum's Global Lighthouse network with our plant, in 2019, last month, we have been included in this prestigious network for a second time with our Yenikoy plant, which is the manufacturing hub of 1 ton commercial vehicles. At the same time, Ford Otosan has become one of the few companies worldwide to have 2 facilities included in this network and only 2 within the Ford universe. What makes our plant a factory of the future is its end-to-end digital, fully connected and data-driven infrastructure. So with this transformation, our effective operating time is maximized and the labor productivity increased by 44%. And also, we achieved 6% quality improvement. That's all from my side. Now I will hand it over to Unal bey to share our financial highlights with you. Thank you.

Thank you, Bahar. Good afternoon, everyone. This is Unal Arslan, Corporate Finance Leader. Thank you for joining us today. I'll walk you through our full year 2025 financial results, which we released yesterday. We closed the year with results largely in line with our expectations from the third quarter and in several areas, performance even exceeded those expectations. We delivered an all-time high revenue of TRY 831 billion for full year, marking the highest annual turnover recorded to date in the Turkish industry for 2025, up until now, of course, the announced financials. supported by 779,000 vehicles sold, also an all-time high. Total revenue grew by 7% year-over-year, driven by a 10% increase in export revenues, fully aligned with the rise in export volumes and domestic revenue, on the other hand, declined 6%. And the main reasons of that are mix effect and competitive pricing, although domestic volumes were up by 6%. This strong top line performance translated into improved profitability as well. Full year EBITDA reached TRY 66.6 billion. That's up by 19% year-over-year. I will also talk about quarterly financials as well. But for full year, that's a good performance. And our EBITDA, excluding other items, increased 5% to TRY 58.9 billion. Despite inflationary cost pressures that we discussed throughout the year, competitive pricing in both domestic and export markets, particularly in heavy truck and an unfavorable industry mix, we achieved a very good level of EBITDA that's supported also by a favorable euro TL movement, especially in the fourth quarter. Our operating profit increased 12% to TRY 42.6 billion, reflecting disciplined cost control across the year. Operating expenses remained broadly flat despite higher production and sales. Higher net FX income from operations and tax credit utilization further supported our operating profitability, offsetting the modest pressure on gross profit. Moving to PBT and PAT, both declined 19% and 33%, respectively. While net interest expense improved by over TRY 6 billion year-over-year, this gain was more than offset by TRY 9 billion of increase in net FX losses. As a reminder, just a major part of this FX loss relates to cash flow hedge releases that I tried to explain in our previous calls as well on our euro-based investment loans, which are reclassified from equity to the income statement when repayments occur. Another key factor behind lower PBT is reduced monetary gain. While we generated TRY 15.9 billion of monetary gain due to our sizable monetary liability position, this is significantly lower than the TRY 29.7 billion recorded last year, reflecting lower inflation, which is 31% this year throughout the year, and it was 44% last year. Our IFRS tax totaled TRY 5.5 billion for this year compared with TRY 5.1 billion as of quarter 3. We had anticipated a positive impact from investment-related deferred tax incentives in quarter 4. And although this positive impact materialized, the tax authority's decision not to apply inflation adjustment in 2025 to legal books resulted in a sizable deferred tax expense that offset these benefits. That's why we don't have a major tax expense, but not a tax income as well in quarter 4. If we move to next page, that's where we see in the margin space where we see the quarter 4 performance better. Our full year EBITDA margin improved to 8%, which is an increase of 0.8 percentage points compared to previous year, but that's supported by strong quarter 4 performance, which is 2.8 percentage points higher than the same quarter of last year. Basically thanks to the higher sales volume, but most importantly, favorable Euro-TL movement, which I'll give more information in the coming slides. Operating margin rose 0.2 percentage points to 5.1%, again, with a significant contribution of quarter 4, while PBT margin declined 1.4 percentage points, which is 4.8% due to higher FX burden and lower monetary gain. On our PBT margin, our PBT margin is lower in quarter 4 compared to previous year's last quarter as well, but with a smaller gap of 0.3 percentage points. Net margins, on the other hand, decreased by slightly more than 2 percentage points, both for full year and quarter 4 because of the reasons I just explained in the previous slide. EBITDA per vehicle rose to EUR 1,821, which is a good performance compared to previous year's EUR 1,758. And looking at quarter 4, the improvement is much more significant. We don't see this improvement in PBT on the other hand, in this period because of the reasons, again, I already explained. If we move to next page, our next page presents the reconciliation of adjusted EBITDA and adjusted EBITDA, excluding other items. Our goal is to enhance transparency of adjustment items. I would like to thank you for incorporating adjusted EBITDA into consensus this quarter, again, like last quarter, and we encourage continued use of this metric. And importantly, other operating income and expenses such as financial income from credit sales, expenses from credit sales and FX results on trade receivables and payables are integral to our operating performance, and we believe should be considered when evaluating profit performance. Looking at the page, operating profit of TRY 42.6 billion, adding back the depreciation, amortization and the embedded lease effects results in adjusted EBITDA of TRY 66.6 billion, which is a very high number for this year. Regarding embedded leases, just an information from previous calls again, these relate primarily to new 1 ton vehicle investments in Turkey and Puma investments in Craiova, Romania recognized under other receivables due from related parties on the balance sheet. These assets totaled almost TRY 26 billion in 2025 and the embedded lease amount added back to EBITDA, here, you can see it is TRY 6.8 billion, functionally equivalent to depreciation and amortization. In the next page, we present the EBITDA bridge versus last year. What we see is our EBITDA increased by TRY 10.7 billion in real terms. Gross profit improvement, excluding depreciation, amortization and embedded leases contributed TRY 3.7 billion, while operating expenses increased modestly by TRY 0.9 billion, and the largest positive contribution is coming from exchange impacts driven by export operations, as I also mentioned in the previous slides. Switching to the next slide. Here, we see the basic driver of the quarter 4 performance in the macroeconomic indicators. That's 37% Euro TL appreciation compared with 13% in the prior year that supports our export profitability significantly and lower inflation, on the other hand, reduced our monetary gains weighing on PBT. However, both interest rates and inflation are trending downwards, which should ease cost pressures and support domestic pricing conditions in the coming periods. If we move to next page, domestic sales grew 6%, as I explained in the beginning of the financial section, that's supported by Courier and 1 ton segment. Our export sales grew 10%, led by a 39% increase in 1 ton exports, particularly from partner sales. And with all those, our exports accounted for 83% of our total volume. In the next slide, we summarize the income statement for almost every element of which I already talked about in the previous slides. As you can see, starting this period, we are presenting additional detail for clarity. I can specifically mention on this slide again that our fourth quarter performance was exceptionally strong. Gross profit, EBIT, operating profit and operating income before financing were all over 20% higher than quarter 4 of last year. In the next slide, we see that our year-end cash and cash equivalents more than doubled to TRY 64 billion again in real terms. Other balance sheet items basically do not show any major change to discuss here, but you can see more details in the footnotes of the financials that we published. On the next page, though, free cash flow, we see that reached TRY 80 billion, supported by TRY 105 billion net cash from operations, up 139% year-over-year. In that, we see the working capital contribution of TRY 33 billion in cash compared with negative TRY13 billion last year, driven by very disciplined execution across the year. Efficient CapEx management and calendarization further supported this strong cash performance. If we look at the next page, where we see our financial indicators, our net financial debt decreased 25% from TRY 133 billion to TRY 99 billion, resulting in a significant covenant improvement from 2.38x to 1.49x. This happened despite a nominal TRY 27.2 billion of dividend payment, with an index equivalent of TRY 28.6 billion. On the other hand, net financial debt to equity improved from 88% to 63.6%, while return on equity declined to 21.7%, primarily due to higher equity and lower net income. Our net FX position, on the other hand, remains slightly long, and that's within our desired range. With that, I will now hand the call back to Ms. Gul Ertug for our 2026 guidance. Thanks.

Thank you very much, Unal. Thanks for the detailed explanation. So now comes the time for what we are expecting for 2026. Let me start with our industry -- Turkey industry projections. We concluded this year with 1.4 million units. When we look into the next year, also starting from a high base plus order banks, data collected through dealers, we expect a flattish to slightly lower industry. With that, we have constructed our budget and plan. Looking into the retail sales, the domestic market registrations, we expect a range of 90,000 to 100,000 units sales in Turkey. While saying this, I must give you an important information so that you can contrast it with the 2025. This year, especially on the passenger vehicle sales, we will mostly not have Focus -- Ford Focus units available for sales because Ford Motor Company is discontinuing its production. And thinking that it was a sizable element in our passenger vehicle segment, we should deduct this in the overall numbers for the registration. From a volume perspective, we can say that maybe it is a negative reaction, but from a profitability view, we have to note that this impact on the mix of the product sales is going to have a positive impact on our overall profitability. For the export market, again, looking into the environment, currently, you can say that we somewhat constructed a conservative plan. But I would say this is not conservative. I would say this is a balanced plan. Currently, in the export market, there are not key signs that will tell us that there will be a significant improvement in the demand in the rise of the industry. But having said that, we also know that the industry, especially on the commercial vehicle was going through a contracting cycle. It could come out of that one. However, added on top of that, we also know that there are very important regulatory changes, sustainability-related change and some regulatory environment, it is still in the ambiguous and uncertain level. Once those clarifications are in place and especially regarding the emission level and carbon dioxide-related level, the fleet targets, if there is an easing, a relaxation on those targets, you could expect that the constraint on the ICE sales could be uplifted. So there could be an upside potential. But currently, this is not known. That's why I'm looking into the environment in the fragmented European markets, each and every market has its own story. For the case of Germany, yes, we are hearing that there will be more spending -- government spending. There could be some boost on the GDP. Further sales could support that. But for the time being, because of this regulatory environment and the penalties, the compliance penalties pushed on the OEMs by the fleet regulation, it brings a constraint. That's why in our final planning, we thought that the demand will be on the flattish side. However, for our case, when I started my speech, I said that we delivered very well on our commitments. The key success story was for our establishing this huge capacity for our Ford Motor Company as the key partner and also the Volkswagen unit. We have delivered on that commitment. Within the year 2026, especially in the first half, there will be some more waves and bundles that we will be delivering on. So which means this is going to be an enabler for some units where we were not able to satisfy the customers this year. Next year, we will have the ability to do so. So there could be some slight step function up. But other than that, we do not -- at least as the data suggests, we do not see a big demand increase in the export markets just yet. With this thinking, with these considerations, we have constructed our projections for Turkey and Romania. The Turkey levels in the bracket of 390,000 to 420,000 is showing that the finalization of the ramp-up I have just mentioned. On the Romania level, we see a somewhat more flat view in between 190,000 to 210,000 bracket. Overall, the wholesale volume, we projected to reach a bracket of 670,000 to 730,000. And within this, the revenue growth, we still expect high single-digit revenue growth with adjusted EBITDA margin levels of 7% to 8% levels. For the projections, fixed CapEx projections, the CapEx investments, this year, we have completed the year with EUR 410 million of investments. I had mentioned in the earlier talks that some of this had calendarization impact, but some of it also looking into the regulatory environment and the demand movements together with our key partner, Ford Motor Company, we are looking into our product plans and CapEx spending in a very coordinated way and in a very cautious way such that we make the right spending, right investments at the right level. That's why for some of those product-related investments, we will not hurry. We will take our time and seeing the regulatory environment and the final changes, then we will kick into them. For the general investments, if you look into the breakdown of the CapEx, you see that the general investments we foresee for 2026 is slightly less than 2025. The reason being while we are creating the capacity and the product launches, in fact, the necessary maintenance and the renewal actions have been already put in place. You can think that our products and plants are kind of as new. That's why moving into this cycle in this year, we do not have to make huge spending over there. But for the product-related investments, like the reasons I explained just a while ago, we will be taking a careful view. And also, I have to tell you that the key investment cycle we had started back in 2019, always in our key story of Ford Otosan, we were saying that between 2019 to 2025, Ford Otosan has the intention to electrify in different multi-energy versions, electrify its product portfolio fully. We have completed -- we have almost completed that. That's why since we are reaching the end of the cycle, we will not be having that big investment. But as you all know, automotive business is a cyclical business, depending on the segment of the vehicle, depending on the life cycle. As the life cycle progresses, you should always expect the new products, new freshening and the next cycle investments. So having said this, I think this concludes our presentation for today. Let's open the stage up for your questions.

The first question is from the line of Uz, Aytunc with AK Invest.

I have one question only. So basically, you expect year-on-year flattish sales volume. So then how do you plan to grow your net sales by high single digits in real terms? So do you expect some improvement on pricing? Or is this about the inflation accounting impact on your export sales revenue?

Thank you very much. In fact, it's a combination of several things. Let me again highlight the final wave, final bundle delivery for our partner volumes. So that will give us some increased production and export opportunity because we will be serving a new set of customers where we couldn't serve because we were missing the derivatives. So that will support us. Going into the environment, of course, in these calculations, the movement of the euro, the movement of the inflation, that will have a play in the game. This year, for domestic markets, we expect still the price competition to be in there, the availability, the price competition to be there. But inflation combating measures will also be in place. Even though January inflation came up higher than earlier consensus, there is the commitment from the economy management to bring it down. So in the projections, we have taken a cautious view. It will be coming down at a smaller pace, but still it will be coming in, plus the product mix that we have been witnessing over here with the inclusion of our -- the 1 ton, 2 ton improvements in the trucks, that will all -- as a combined effect, it will support our final position. I hope this answers your question.

The next question is from the line of [indiscernible] with Yapi Kredi Yatirim.

I have 2 questions. As we know that in December, Ford Motor Company signed a partnership agreement for light commercial vehicles. So how do you position yourself within this collaboration? Should we assume a capacity expansion just like in the Volkswagen agreement? And my second question is related to CapEx. So in your guidance, you shared that project-related investment will be EUR 200 million to EUR 300 million. So is there any way you share details of this project-related investment, because as far as I know that this highly affects the embedded lease.

Thanks very much. Let me start with your first question. You were mentioning about the December time frame, Ford Motor Company releases about their partnership, new partnerships that they are looking into, especially for the one issue released on the 12th of December, it was about the Renault partnership on the passenger vehicle. In fact, for now quite a long period of time, also seeing in our ranking in the passenger vehicle market, we can argue that the passenger vehicle success and how it cracks the code in the market for Ford Motor Company has been not so successful. Looking into future, Ford made an important decision that both from the affordability and competitiveness side, for utilizing the Renault platform, but having a top hat, which makes the look and feel and drive of the vehicle as a Ford vehicle, this is going to be the most important step to take in order to have the PV section as viable. Maybe you followed Ford's discussions earlier, but after Ford has divided itself into 3 segments, the Pro, Blue and Model e, they were also looking into a European strategy, what to do over there. And it's like having the viability of the passenger vehicle was also on the table. But looking into their analysis, just like our case, how we operate in Turkey, in order to have the best product portfolio, both for the company OEM and its dealer body to have the best dealer traffic, the benefits out of the services, the spare parts revenue, all that cycle in order to have your success in the commercial vehicle, 4 things you still need to exist in the passenger vehicle segment also. Otherwise, if you take out of that section, you will be leaving that space to the competitors, which is something they are trying to avoid. But looking into that, they wanted to have a partnership with Renault. And currently, that was just the declaration that they will be utilizing the platform for 2 EV vehicles most probably small-scale vehicles, but the rest of the declaration was not out. I mentioned that this year, there will not be any Focus. We will not be selling any Focus. So one could argue maybe that platform will be looking into Focus like vehicles or smaller like earlier Fiesta. Currently, that is unknown. However, this was a viability action that Ford Motor Company had taken. I believe you are asking that question with a view, how does this affect you? Does that have an impact on your production? I would say, no, it doesn't because the vehicle lines, the vehicle segments we exist and our plans, our relationship, our partnership is intact. Over here, this partnership might look similar to a Volkswagen MEB platform relationship. And going forward, we will be hearing more from Ford Motor Company regarding the partnerships because they see that as a successful way forward, especially once the early level electrification, especially in U.S., didn't reveal what they were wishing to have. And this brings us to the second declaration they made on the 15th of December. So over there, Ford is making kind of a correction at that time, but moving into a healthier space in this area. And these actions will not be having any impact on our product line. If only I could say they might have a positive impact because with the existence of a possibly entire platform on Renault, more competitive, more appealing vehicles coming into Turkey would support our domestic market, passenger vehicle performance. So all in all, we see that as both a financial -- prudent financial perspective as a good action. And also once that happens, currently, we do not know what vehicles will be on the picture, but most probably, they will be explained more in this year, and they will be coming to the market in 2028. Once it comes, it should be having a positive impact on our market performance. For your second question, you were asking about the product-related investments. In fact, we do not give breakdown on that one, but I can tell you that most of them are regulatory related. In my speech, I mentioned a little bit. Now that Mr. Trump, in fact, he had influential effect on U.S., some of the sustainability-related targets are now being taken back. Also in Europe, the ICE vehicle ban-related timing has been postponed. That's why I said there is kind of an uncertainty and ambiguity in the environment. But having said this, the Euro 7 readiness and passenger safety related, the global safety-related regulations are in the pipeline, and they are very important actions for OEMs to fulfill. So in the remainder part of our cycle plan, we will be doing -- we will be concluding these investments so that our product portfolio is perfectly compliant within the regulatory environment. So I think that's the detail I can give for that product-related investment.

So I have one more question actually. So do you share your thoughts on maybe Europe issue because lots of talks with you and the Turkish government. So I want to know what you're thinking about this issue and also the potential impact for Ford Otosan.