Haci Ömer Sabanci Holding A.S. (SAHOL) Earnings Call Transcript & Summary

Welcome to Sabanci Holding Fourth Quarter 2020 Consolidated Financial Results Webcast. Thank you very much for standing by everyone. There will be a Q&A session following the presentation by Mr. Oran. [Operator Instructions] Before we start the presentation, we would like to inform you that the information that will be shared today is based on the actual results and company judgment. Sabanci Holding does not accept any liability on the information or content discussed. I will now hand you over to Mr. Baris Oran, CFO of Sabanci Holding. All yours, Mr. Oran.

Thank you. Good afternoon. Our 2020 operational performance was strong across the board, owing to resilient and noncyclical businesses model despite extremely challenging and volatile conditions, especially in the markets, demand and supply chain. We kept our balance sheet strong with roughly TRY 90 billion of liquidity and further improved operating cash flows and debt profile of the group. This solid performance has led to a record high nonbank ROE of 17% in 2020. As COVID-19 pandemic continues to be a major part of our lives, we continue to keep an alert level at the highest degree to preserve the safety and well-being of our employees, their families and our customers. We are cautiously following health and economic developments to rapidly adjust ourselves to potential changes in conditions, both on the ground and abroad. Let me share the overall conditions in the first 2 months of the year. Effects of the pandemic started to ease and impact on our business is less. We are expecting stronger momentum in the economy with the increasing vaccine rollouts despite major normalization efforts. The solid momentum in Q4 and early indication in the first couple of months, is leading to an expansion in the economy in Q1 in Turkey. The recovery of the U.S. and European Union markets has also started and Asia Pacific markets are solidly back. As far as the cash flow and earnings quality, our earnings quality improved further in 2020 despite challenging operating environment, bringing nonbank operating cash flow to TRY 11 billion, a massive 3x growth compared to 2015. The solid cash generation allowed us to improve our debt profile. Our net debt-to-EBITDA declined further to 1.5x by the end of 2020 compared to 1.8 by the end of September. Our combined nonbank sales increased about 20% and improved especially in local markets -- demand in the local market, and profitability of the exports has led to a growth in our nonbank EBITDA of 21%. Our nonbank bottom line growth reached an impressive 48% as lower financial expenses and long FX position add to our EBITDA growth. In Q4, domestic demand was vibrant and continued to be supportive for our locally exposed businesses. Momentum in international markets fared better than Q3 and we have benefited from an overall operational diversification. Yet international economy was still uneven due to regional differences because of the pandemic. Asia Pacific is still heading the economic recovery from a global perspective from what we can see from our businesses. Operational performance of the final quarter was strong, as strong as Q3 when economic activity was at its highest level. Nonbank combined revenue growth has remained strong at about 23%, leading to a double-digit headline revenue expansion. Coupled with strong operating performance, we continue to benefit from lower financial expenses in Q4, which resulted in 29% net income growth. The solid upward trend in our nonbank returns in the first 9 months of the year has accelerated even further in Q4 and nonbank's ROE reached 17%, the highest level since 2014. Sabanci Holding stand-alone net cash position remains at TRY 1.1 billion, which is almost fully exposed to -- composed of hard currencies. Our total nonbank combined liquidity, excluding financial services and tobacco is standing around TRY 9 billion, while the funds at our insurance companies are about TRY 4.3 billion. We remain resilient against effects of volatility, and we have a long position of $155 million at the consolidated level.

Let us go into details. Our total comparable combined revenues were up by 15% year-on-year. In terms of combined revenue breakdown, excluding the bank, comparable combined revenues grew by 23%. Major contributors are energy, retail and industrial segments. Nonbank combined EBITDA growth was 30%, driven by energy, retail and building material segments on a comparable basis. Industrial segments contributed substantially to EBITDA growth on relatively better mobility in Q4, following a weak performance in the first 9 months of the year. Total comparable consolidated net income registered 29% growth in Q4, with the contribution of strong operational performance and well-managed financing activities. Nonbank net income increased by 15%, driven by building materials, industrials, and retail segments. To deep dive into segment's performance, let's start with energy. In Q4 '20, energy segment delivered robust performance despite COVID-19 crisis. Enerjisa Enerji's EBITDA performance remained solid, driven by continuing strength in the retail business in Q4. Meanwhile, the distribution segment's financial income growth was soft in Q4 due to lower nominal return rate compared to last year, given the decreasing WACC as well as lower growth in regulated asset base. Change in the fair value of financial assets, driven by differences in interpretation of the methodology on treatment of the scrap sales and connection fees with the regulator and due to nonrecurring expenses related to previous years. The latter is mostly related to tax correction, which is disclosed with the fourth regulatory period announcements. Therefore, the company's Q4 performance has impacted with these retrospective adjustments related to previous periods. The parameters of the new regulatory periods is also announced. The new regulatory framework is overall supportive for growth in physical network, encouraging increase in service level through improved quality mechanisms and rewarding, corporate governance and transparency. The increase in initial CapEx allowance provides predictability and higher initial CapEx will be one of the key drivers of the future growth. Looking at generation segment's performance. Electricity demand continued to recover and increased by 4.6% year-on-year in Q4. Energy generation's revenues were up by 53% year-on-year, driven by higher volumes, especially in natural gas plants on increasing spark spreads, positive impact of FX-linked renewable sales prices and power purchasing agreement in lignite plants and higher trading volume. Generation's 20% year-on-year EBITDA growth supported by higher spark spreads and higher volume growth. EBITDA margin affected from change in sales mix. Net income increased by 69%, owing to increasing EBITDA contribution despite higher net financial expense. Generation also managed to reduce its net debt to EUR 493 million or 1.6x net debt-to-EBITDA as of the end of December. It's worth mentioning that Enerjisa generation is planning to distribute its first dividends from 2020 earnings. Going forward, hydrology, natural gas tariff, electricity demands and spot prices will be the main factors to watch for Enerjisa generation. We will be tracking inflation and interest rate trends for Enerjisa Enerji. Financial services segment had another quarter with robust top line growth, with technical profit and strong ROE. On the nonlife business, premium production increased by 27% in Q4, driven by strong performance in motor and nonmotor businesses. On the life and pension business, total protection premiums were in line with the same period of last year as pandemic-led slowdown in credit-linked products is compensated by noncredit-linked life protection, underpinning diverse business model. Increase in fund management income on higher pension volume and increase in net earned premiums on life protection made up 75% of technical income growth. On the nonlife side, despite the improvement in net earned premiums and higher underwriting results in Q4, thanks to lockdowns and low claim frequency, lower financial income contribution to EBITDA has decreased by 13% compared to the same period last year. Both businesses has a sizable float and expanded their assets under management to sustain solid profitability going forward. Moving on to building materials. Based on the sector data, Turkish domestic cement demand was up by 23% year-on-year by the end of November. As recovery continued in the local market in the final quarter of the year as well, our domestic sales volume increased by 13% in Q4. Moreover, export volume growth reached 7% year-on-year despite last year's high base, bringing the total sales volume growth to 11% for Q4. The recovery in total sales volume and higher export prices on TL depreciation has led to 39% year-on-year increase in the top line. Higher profitability in exports and white cement, driven by price increases, led to a 5 percentage points year-on-year EBITDA margin improvement in Q4, offsetting higher petro-coke prices. Lower financing expenses driven by refinancing activities back in Q2, add on to strong operational performance. And in results, bottom line significantly improved. On retail segment, revenues increased by 39% year-on-year despite the weekend lockdowns started back in November, while shift towards bulk shopping behaviors supported food retail's top line growth, new normal of home office and home schooling fostered the discretionary buying and contributed to electronic retail's top line performance. The major change in customers' behavior towards online shopping due to lockdowns triggered the significant growth in e-commerce sales. Throughout 2020, e-commerce sales of our retail companies quadrupled year-on-year and e-commerce sales share in their combined revenues tripled compared to a year ago and reached 9%. We also have a limited impact of elevated operating expenses, solid top line growth translated into impressive improvement in operating profitability as IFRS-adjusted EBITDA more than doubled compared to last year. Bottom line benefited from effective financing management as both companies enjoyed lower interest rates despite marginal increase in their debt levels. For industrials, demand recovery driven by solid volume growth in both tire and tire reinforcement businesses, together with sustained pricing discipline in Brisa translated into 27% year-on-year top line growth on a comparable basis. Yet weak demand in aviation sector continued to drag composites business down while higher volume in capacity utilization supported Kordsa's EBITDA growth in the quarter. With improvement in contribution margins and effective OpEx management, Brisa also managed to deliver strong EBITDA growth. As a result, segment's operating profitability increased by 50% year-on-year on a comparable basis. Industrial segment's net income surged by 121% year-on-year on a comparable basis, with the pass-through impact of strong EBITDA. On banking, despite the challenging environment, along with rising funding costs, Akbank successfully managed to preserve solid core operating performance during the quarter, with a continued balanced asset and liability management without changing risk metrics. Growth, proactive securities positioning, low maturity mismatch as well as CPI linkers, which work as hedge, were supportive factors for core operating performance. Thanks to proactive and prudent IFRS 9 implementation, cost of credit has been improving since it has peaked in Q2. This improvement is a harbinger for gradual normalization in cost of -- for 2021. Its robust capital remains a source of strength, with significant buffers remains as a major source of strength and supportive for growth in 2021. Akbank's financial strength and operational resilience remained intact in 2020 and its positioning will enable the bank to leverage its strength while carrying priorities for improving profitability this year. I will now leave the floor to Baris for further comments and closing remarks. Baris?

Thank you. We have literally experienced 2 halves or you can say 4 seasons in 2020. In Q2, we delivered solid results despite the global GDP contraction, thanks to our noncyclical and resilient business mix. Our operating performance has improved sharply in the second half of the year, thanks to our business model, which has successfully captured the rebooting of the economies all over the world, especially locally. As we have mentioned in the beginning of the call, we have shown a solid performance in an unprecedented year in 2020, thanks to our business mix which has limited exposure to COVID or lockdown-related industries such as travel, leisure or eat-out. We have not only strengthened our balance sheet by keeping our liquidity strong to stay resilient against demand volatility, but also we have stretched ourselves to improve our cost productivity further, sustain higher earnings quality and in return further reduced our debt load. As promised, we have reviewed our midterm targets by the end of 2020 November by stressing 3 pillars of our strategy. Let me briefly remind you what those are. We will increase our growth through renewables, material technologies and digital; we will continue to keep our high performance through right capital allocation; and we will maintain our strong long-term focus on sustainability. Our midterm guidance for 2021 to 2025 period which fully overlaps with the major players of our strategy are, as you would recall, we will grow faster, both in terms of revenue and EBITDA by improving our profitability. We are targeting to increase share of our -- share of the new economy and FX revenues in the group's combined revenue by keeping robust balance sheet and high liquidity and unchanged debt profile. We will update our dividends, parallel to increasing ROE, and we are targeting at least one notch upgrade, if not more, in MSCI ESG Index. And finally, we will keep our alert level at the highest degree to adjust our business against potential effects of pandemic. This ends our presentation today. Now I would like to turn it over to the operator. We'll be happy to answer any questions you may have.

[Operator Instructions] I believe we have a question from Hanzade Kilickiran from JPMorgan.

I have a question on your short-term guidance for 2021. Is it possible to share it for the nonbank from a top line growth perspective and the profitability given the expected recovery in -- on the platform sectors in 2020? And can you share an expected dividend inflow? I mean your expectations for the dividend inflow given the BRSA is now allowing banks to pay some sort of dividends up to like 10% this year.

As far as the short-term guidance on the nonbank side on top line and profitability, we do not provide long-term guidance -- short-term guidance on the top line and the profitability. But I can tell you from what we see, we see a robust years across all segments today. And I don't have any reason to -- for that to change anytime soon, unless we have a global macro shock that we cannot foresee right now. So we will continue to grow, both on the top line side and the operating profitability side throughout the year on the nonbank side. On the dividend inflow, this has been a very remarkable year for us. This is the first year we are getting dividends from energy generation business. It's a milestone for our organization. And also, there has been a number of dividend announcements from our companies. And there has been some nonpublic information that I cannot share with you. But I can tell you that the dividend inflow that we will get from our companies is increasing massively would be much, much higher from the year before. On top of that, we are also -- we will also discuss it with our Board, and we will take it to our general assembly as far as our dividend proposal is concerned. Then it will be in line with our guidance. As we said in our guidance that we would like to continue paying sustainable dividends at a growing pace in line with our resources as well as the profitability of the enterprise. As you will recall, last year, in the middle of the pandemic, we did not cut our dividend. We kept it resilient and sustainable, and we will continue to pay dividends. I believe this is our 20th year of consecutive dividend payments that we have in our group, and there is no reason to turn it down at this moment. So looking into 2021, solid growth, both on profitability and EBITDA. And we anticipate the dividend inflow to increase massively. I'm talking about beyond solid, massively increasing dividend inflow. And in line with our guidance, we would expect that some of that dividend to be shared with our shareholders. But that's subject to Board approval and general assembly approval and includes some nonpublic information that I cannot dive into today.

What is driving this massive increase in dividend flow? Is it the Enerjisa driving it? Because I think Enerjisa announced the dividend.

It is our energy businesses. The fact that...

But the distribution business, right, not the generation business?

Both of the businesses. Both in distribution and generation businesses. Our insurance businesses -- go ahead. Go ahead.

I think you mentioned during the presentation that generation business will be ready to pay dividends by 2022.

No. We will pay dividends in 2021 from 2020 earnings. So that's a first-time dividend payment after many years of sizable operating turnaround and efficiency measures. We are glad to see that energy generation we'll be able to pay dividends and share the value creation with its shareholders. So that will be on top of the dividend flow we get from our other listed enterprises. And we are quite happy the fact that BRSA has lifted the limitations on banks dividend distribution. But all of these are subject to general assembly approval.

[Operator Instructions]