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

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the Ford Otosan AS conference call and live webcast to present and discuss the first quarter 2026 earnings results. At this time, I would like to turn the conference over to Mrs. 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. Good afternoon, everyone, and thank you for joining us for our first quarter 2026 results call. Today, I will start with a brief overview of the quarter, highlights essentially from the domestic and export performance. Then my team will provide further details in their subsequent markets and financial section. Then we will touch on a key strategic development for our company since we last met. And finally, 2026 guidance before we open it up for the questions. So here now on the first page, I'd like to say that despite a very challenging macro environment and intensified competition, Ford Otosan maintained resilient export volumes and sustained leadership in commercial vehicles in Turkiye, while profitability was significantly pressured by vehicle mix, including higher EV penetration in exports that also was a factor for the export part of the business. Sticky inflation and costs associated with that inflation. Also later in the month of -- end of February, early March, we had an emerging Middle East conflict. And when all of those things came on top of each other, we witnessed a widening gap between euro TL appreciation and inflation. Unfortunately, these were challenging for us. But in terms of broad physicals, the first quarter was again a period where we were able to fulfill our key product program launches and production-related objectives. Due to the more challenging operating environment, weaker domestic demand, it led to margin compression in the quarter, unfortunately. Overall, I'd like to say exports remained resilient, broadly flat year-on-year supported by the new product ramp-up on the partner new derivatives and Puma Gen-E with a strong positioning within Ford Europe. Domestic performance was weaker with 18% decline in unit sales, reflecting softer demand and a very intensified competition. From a market positioning perspective, we maintained our commercial vehicle leadership, while the ranking in the overall market was -- we came in #5, highlighting the divergence between the passenger car and CV dynamics in Turkiye. Given that focus, our vehicle, our nameplate, which used to be a volume seller for us is going away as earlier announced in Ford's passenger vehicle portfolio and our preference of profitability over share, we believe it is understandable that we didn't choose to engage in fierce price competition to buy market share. Looking into our balance sheet, our balance sheet remains strong and disciplined. The cash generation, free cash flow was very successful. Later, Unal will talk more about that one. The net debt over EBITDA is at 1.5x, broadly stable versus year-end. The EV penetration in our overall production increased to 19.1%, which is strategically a positive, but also it has a near-term margin implication as expected and as we were talking about this with you in our earlier gatherings. Overall, our capacity utilization improved to 73%, Romania weighing in more in this aspect. And overall, we are seeing a mix and macro-driven margin compression, even though they are mostly external, we are taking tactical and strategic measures against them, which I will mention later in the presentation. But for now, let me leave the word to Bahar so that she can give further details on the market developments. Thank you. Bahar, stage is yours.

Thank you, Gul Hanim. Welcome all. Thank you for joining us today. Let me proceed with the key highlights in the domestic market. After hitting an all-time high level of 1.4 million units in '25, the market contracted by 4% in the first quarter of this year. It was, in fact, up 2% in the first 2 months, but demand softened in March as macro expectations and the geopolitical outlook worsened. Also this year, Ramadan falling in February and March had an impact on demand. It's important to mention that availability and competition in the market increased a lot during this period, which made pricing tougher. If you look at the segment breakdown, volumes declined across segments. However, the light commercial vehicle segment outperformed with a 13% year-over-year increase and its share in total market exceeded 11%, as we can also see this shift on this slide. This was supported by improved vehicle availability and demand shift from passenger to LCV segment because passenger cars prices moved above TRY 2 million, and this makes harder to access financing. In this challenging market environment, our retail sales declined by 20% and reached to almost 19,000 units level. As a result, our market share was 6.9%, and we are ranked #5. This result mainly reflected weaker passenger car sales after discontinuation of our focus model, as also Gul Hanim mentioned a bit. However, excluding focus volumes, we see a slight decrease of 3% versus 39%. In the MCV segment, new model introductions, intensified competition and delays, especially delays in public procurement amid weaker macroeconomic expectations weighed on both market and our volumes. However, the availability of lower tax 4X2 pickup options supported the demand in this segment. As Ford Otosan, the absence of the 4X2 variant in our Ranger lineup has constrained our ability to capture this demand. Despite these factors, we continue to lead the total commercial vehicle segment with a 24.4% market share. Now turning to the export performance. In this period, the European Union automotive market showed a mild pickup with both passenger and commercial vehicle markets recording year-over-year growth, although dynamics were up by country and segment. Passenger car volumes increased by 4% year-over-year, supported by a later quarter acceleration and revised tax incentives across key European markets. However, on the commercial vehicle side, growth of almost 3% was largely driven by a rebound from a weak base with the heavy commercial vehicle segment expanding by 10%, following a sharp contraction over the past 2 years. In contrast, the [indiscernible] segment, our core focus area, saw only a limited increase of around 1% which was mainly driven by limited fleet renewals and deterioration in expectations of small business owners and e-commerce customers. As a reminder, that market was down by 9% year-over-year in full year '25. Against this backdrop and fragmented market conditions, Ford maintained its undisputed leadership in the European commercial vehicle market with a 16.2% market share. As Ford Otosan, we continue to be the main contributor to this performance by producing around 80% of Ford's commercial vehicle sales in Europe. We are also proud to produce 16% of Ford's global vehicle sales during this period. As I mentioned in the previous slide, we see mixed performance across our main export markets. Especially in the one segment, the registrations in the U.K., Germany and Italy declined by 4%, 9% and 2%, respectively. On this slide, the pie chart shows that these 3 markets together make up around half of our export units, which constrained our performance. That's all from my side. Now I will hand it over to Gul Hanim to share recent developments with you. Gul Hanim, you're on mute.

Sorry, I was on mute speaking to myself. So I hope you can hear me right now. So now getting back to a little bit of strategy. We talked about the challenging environment. And like in March, we announced our intentions for the acquisition of 100% of Kocfinans, subject to approvals through BDDK, the banking authority and the Competition Board. We see this development as a very important strategic asset and the value creation step because looking into the domestic market, in fact, our competitors set operating in different segments in domestic market had such an arm, such a financing arm that we didn't have. Now walking into this structural value creation step, we would like to enable deeper control over the customer value chain. Not just the end customer, but also the dealer body we are serving them through, stronger positioning in financing-driven demand, expansion into used vehicle financing and several other tailored products and a more integrated ecosystem model. We see this as a very strategic asset, and you should interpret this as a vertical integration that will enhance our existing auto business synergies regarding the margin, volume, customer lifetime value leverage as well as creating inorganic growth and creating additional financial benefit to our company. So with that, I will leave it here. Maybe just a word of caution so that you can model, you can interpret it correctly. The acquisition-related financing doesn't show up in our capital spending. And we are careful on this one. I will just leave it here because this -- although the SPA, the share purchase agreement is in place, we are very careful with the process until the necessary authorization is in place, we will be leaving the information sharing at this level, but we are really looking into this strategic action as a very important enabler while we are operating in this challenging environment. So let me leave the word to Unal so that we look in further detail for the financials.

Thank you, Gul Hanim. Good afternoon, everyone. This is Unal Arslan, Corporate Finance Leader. Thank you for joining us today. I'll take you through our first quarter 2026 financial results, which we released yesterday, as all you know, and provide some context on the key drivers and near-term considerations. Starting with the revenue, we delivered TRY 192 billion, a 9% decline versus the index prior year base. Exports accounted for 84% of our revenue and volumes were broadly stable quarter-on-quarter. The roughly 5% decline in export revenue in TL terms was driven primarily by the gap between domestic inflation and the euro TL move, as Gul Hanim already mentioned in the beginning. Year-on-year, the TL depreciated by 25% against the euro versus 31% consumer price index. This differential is the central factor behind the pressure on our export revenue, and I'll talk about this on kind of a lot today. Domestic revenue was down by 22%. About 18% of that decrease was volume related, and the remainder reflects tighter pricing headroom versus inflation due to lower exchange rate pass-through and increased competitive intensity and unfavorable mix, unfortunately. Looking at the gross profit, our gross profit was TRY 13.3 billion, down by 27% year-on-year. As highlighted on the slide, the key driver was the relatively limited euro appreciation versus the Turkish lira during the quarter this time, which is only 1% against a 10% inflation in the same period. For context, euro appreciation in the first quarter of last year was 11%, again, along with a 10% inflation. This divergence between FX and inflation continues to weigh on competitiveness in the domestic market, increasing the relative attractiveness of imports and limiting pricing flexibility. Our operating profit declined 51% to TRY 4.9 billion, reflecting the more pronounced impact of the exchange environment. Despite an 8% reduction in operating expenses, our net FX gain from operations, which is primarily linked to the export business, decreased by almost 90%, and that was a meaningful headwind in the quarter 1 of this year. Our adjusted EBITDA was TRY 11.7 billion. That's also down by 28% versus quarter 1 of 2025. The decline mirrors the movement in gross profit and is less pronounced than the reduction in operating profit, mainly due to higher depreciation and amortization in 2026. At the bottom line, PBT and PAT declined by 34% and 35%, respectively, the impact was more contained than net operating profit, supported by lower net interest expense and the higher monetary gain versus the first quarter of 2025. IFRS tax expense totaled TRY 2.5 billion, approximately TRY 1 billion lower year-on-year. The deferred tax charge primarily reflects, as I tried to explain in our previous webcast as well widening temporary differences between local statutory accounts and IFRS, especially following the removal of inflation adjustment from local books. If we look at the margins on the next page, consistent with the profitability trends I just discussed, our margins were down by approximately 1.7 percentage points versus the prior year quarter. The primary drivers were the unfavorable FX inflation dynamics and the weaker profitability in the domestic market. Also on a per vehicle basis, EBITDA and PBT in euro terms declined in line with the overall profitability performance I tried to explain. On the next page, in fact, we have covered the reconciliation to adjusted EBITDA in our prior webcast, so I'll keep this section very brief. The main reconciling items continue to be the embedded lease impact and other operating income and expenses. Next slide summarizes the year-on-year EBITDA bridge. Our EBITDA decreased by, as I mentioned in the first slide, TRY 4.6 billion, and we delivered operating expense savings through the actions we put in place. However, the 2 dominant headwinds that I mentioned were the FX environment and the contraction in the domestic profitability. If we move to next page, in fact, this slide brings together the macroeconomic variables that have been most influential on our results. From quarter 1 of 2025, as we can see here to this quarter, consumer pricing index increased by 31%, while the euro appreciated by 25% against the Turkish lira. For like-for-like comparison under inflation accounting, we index our financials, including revenue and profit, of course, by the 31% CPI. Given that more than 80% of our revenue is generated from exports and is effectively euro linked, the FX inflation gap can translate into an underlying 5% to 6% pressure on Turkish lira outcomes, all else equal. Within the quarter, the divergence was even more pronounced. The euro appreciated by only 1%, while CPI rose by 10%. CPI was also 10% in the same quarter last year, but the euro appreciated by 11%, a materially more supportive level. Over the long term, though, we would typically expect currency depreciation to broadly track inflation. However, Q1 was meaningfully below that relationship. As a result, the FX inflation mix remains a critical determinant of export profitability, and we continue to monitor developments closely. Following quarter end, the euro appreciated by more than 3% in a single month and by more than 4% to date. So that seems favorable to us, but we will look at how sustainable that movement is. Recent geopolitical developments are adding complexity to the outlook for inflation and interest rates. That said, we have been operating in a challenging macro environment for some time, not only this year. And we believe our performance and financial discipline demonstrates that we are managing the conditions effectively with disciplined execution, especially tight cost control, active working capital management and a clear focus on liquidity while staying agile as global and local conditions evolve. Switching to the next slide. In fact, we have already discussed volumes, Bahar Hanim already mentioned, and this slide summarizes the key movements. Domestic sales were down 18%, primarily reflecting the withdrawal of focus from our passenger car portfolio and export volumes were flat, supported by the strong performance of Puma. Overall, exports represented 87% of total volume, up from 85% in quarter 1 of last year. In the next slide, we have covered the key income statement drivers. So I'll now turn to the balance sheet and cash flow, where our financial discipline is most visible. In this slide, in the balance sheet slide, we see that we maintained a resilient balance sheet and strong liquidity. Financial debt is lower year-on-year even after a meaningful dividend payment in the first quarter this time. Again, for context, last year, the first dividend we paid was in the second quarter and at a lower level. The next page is new for this webcast and reflects our commitment to transparency with additional detail on performance drivers. Leverage remained stable at 1.55x net debt to adjusted EBITDA. Despite the pressure on profitability, as I mentioned, the adverse macro and geopolitical backdrop and the relatively high dividend outflow, we kept leverage at a prudent level. Working capital discipline is an area where we have made tangible progress, and we are sustaining that approach as we can see in first quarter financials. Inventories are somewhat elevated, partly due to seasonality and certain one-off effects we are managing closely, even so our working capital requirement as a percentage of sales remains around 5.5%. On cash flow on the next page, we see that our operating cash generation was lower year-on-year, and we completed the dividend payment. Nonetheless, we ended the quarter with a solid cash position and a healthy net debt profile, as I mentioned. Looking at the financial indicators, our return on equity and return on invested capital are modestly lower, reflecting the profitability dynamics we discussed. Importantly, our working capital management remains disciplined, and we delivered a further 1-day improvement in the cash conversion cycle, as you can see here. We also continue to manage our net FX position tightly in line with our targeted risk appetite. With that, I will hand the call back to Mrs. Gul Ertug to walk you through our 2026 guidance. Thank you for your time. Gul Hanim you are on mute.

Sorry, second time I was on mute. So I hope you can hear me on this time. Unal, thanks very much for the comprehensive analysis. Like you explained, especially the updated macro assumptions, particularly the inflation dynamics and the FX behavior. And later towards the end of the quarter, what we saw in the oil price impact, we looked into our guidance, and we wanted to touch on a single area to revise our outlook. Currently, even if the Middle East conflict is continuing, currently in the order banks, we do not see a very, very pronounced change yet. However, we are looking into our analysis and sensitivity analysis. Due to the mostly the euro behavior, FX behavior and the cost behavior, in fact, we have now updated our revenue growth to be flat versus the previous high single-digit guidance. Having said this though, because of the discipline we continue to deploy and the projections we foresee for the rest of the year, the EBITDA margin guidance, it still remains at 7% to 8%, indicating gradual normalization throughout the year. For the rest of the line item elements, the retail sales in Turkiye, the export wholesales, the export production and overall, our investment levels are pretty much contact. As I explained just a few minutes ago, there is -- we will be having the acquisition of the Kocfinans, but the action -- the payment regarding that one is not appearing as a capital investment. So that -- I believe that concludes our overall view for the year. Having said this, I think now it is a good time to get into the question-and-answer session. Thank you very much.

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

I have 2 questions related to your margin performance. You have kept your margin guidance unchanged despite Q1 is tracking below your guidance, and you seem to be more concerned about the general outlook in the sector. So what will be the main driver of the expansion in the remainder of the year versus Q1 so that you can meet your -- I mean, guidance? And second, I would like to gather your opinion on aluminum challenges where European peers have started to feel the impact. So where do you secure your aluminum? I mean, do you expect any disruption in supply? And could this lead to lower EV production because I think EV cars have higher aluminum content compared to ICE?

Hanzade Hanim, thanks very much for your 2 questions. Let me start with the first one. You were questioning if the current Q1 level of margin is like adjusted EBITDA is 6.9%, how do you make up for it? And later in the year, how do you expect it to improve? For that one, in fact, in the presentation, I mentioned the strategic part of our combating strategies, but there is also tactical part of our combating strategies, especially with regards to the cost management. The financial management, balance sheet management, the income statement management, we try to accomplish prudently. That also is together with Ford Motor Company's involvement also, we are working on a full-blown and very comprehensive cost affect study affecting, in fact, you could say, all parts of the income statement. And we have important high confidence weighted road map that we expect to materialize during the rest of the year. In general, as a cyclical comment, we can say that in the auto business, the fourth quarter is -- from a volumetric perspective, it's the strongest quarter. And usually, the first quarter starts with a slow action. As Bahar explained, also this year, there was the Ramadan effect, several other onetime actions falling into this quarter. We believe we have plans in place to make it much better normalized over the course of the year. We do not just base this on the macro. I should highlight that one because so far, what we have seen, especially from the economics management, there is -- we are seeing in the first 3 months, unfortunately, the inflation realization was much larger than what we were forecasting while we were doing the budget. Also, the -- we were expecting a little bit more normalization between the gap of euro appreciation and inflation movements. This didn't realize. But we are hearing the plans from Mehmet Simsek, the explanations from Central Bank. And we understand that with a moderate scenario of Middle East impact everybody hoping for, we think the Central Bank reserves, FX reserves will be enough to maintain the current operation that they are pursuing, which means for an exporter, this unfavorable area will continue a little bit more. But as a prudent company, we are putting in more cost reduction measures. Some of them come in place as resourcing actions, which were initiated in the earlier year and some of them come in as further automation where it makes more sense. So we are approaching this in a holistic manner. Also later in the year, there will be from our Turkiye-related business areas, the national sales business area for Turkiye and for trucks operations, they will -- they have their plans to have a better mix management. With the -- currently, of course, I cannot give a certain date for the closing of the Kocfinans acquisition. But at least internally, we are working our plans towards 1st of July closing. For the second half, if that materializes, if we can make it happen, also the synergies, the synergy effect -- increased synergy effect coming from Kocfinans will support us, boost us. And with the combined effect of all of these actions, we target -- we think we will be keeping our EBITDA margin at its original intended target levels. So I hope this explains your first question. Your second question was about aluminum, right?

Yes.

In fact, I believe this aluminum issue was a little bit more heightened for the North America case. There were 2 important suppliers where they suffered from a significant fire issue. But thanks to our supply chain, thanks to our structure, we weren't affected by this. Through our strong supply chain management also in conjunction with Ford, we are keeping a very careful eye on our supply base. Currently, what is being signaled to us is there is no direct commodity-related problem. No aluminum, no -- nothing else. You might recall on an earlier call, we were talking about the Nexperia chip crisis, but it is taken under control. And from an availability, material availability perspective, we do not see an issue. However, because of this Hormuz conflict, the oil prices going up and several other price-related actions coming into the picture, we are more cautious around the cost side of the supply chain. As we stand today in our supply chain forums and in our risk forums, there is not an identified aluminum or steel-related risk, which is in our consideration right now.

Gul Hanim, so you don't supply and/or your suppliers doesn't supply aluminum from the MENA region, right?

As far as I know, no, like I wouldn't know the entire region, the supplier location supplier by supplier. But as a holistic plan, and we are very careful on the risk analysis, especially after this Middle East conflict came up, but we do not have a commodity-related risk, which considers currently. In fact, that is another reason why you see that the volumetric guidance we provided in our guidance is just staying where it is.

Okay. Because aluminum prices have been already inflated significantly with the reduction of over 2 million supply. And I think BMW has already seen some issue in Europe. So that's the reason I really wonder if this is going to have a general impact in production for the overall auto sector because I think that's a key element in production, right? But I...

I can give you some overall commodity basket related information because in the auto business, like many of those things are like you explained, they are very important. The aluminum, the helium that goes into the production of the chips, those -- there are certain commodities that are now under radar very carefully tracked. But there are also some other commodities, which maybe unintuitively in this period, which came in with a better price level. So when you manage it as a combined basket, we had some headwinds on some, but they were partially offset with some others. That's why I'm saying from a material, like commodity material availability perspective, currently, we don't see an issue. But overall, the cost of it, the overall world related, the Middle East-related crisis, of course, it's going to affect everybody. The cost we are careful of. But from availability and from production continuity perspective, we do not have a big red flag to call out.

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