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

Ladies and gentlemen, welcome to Sabanci Holding First Quarter 2021 Consolidated Financial Results webcast. Thank you very much for standing by. [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 for the information or content discussed. With that, I now hand you over to Mr. Kerem Tezcan, the Investor Relations Director of Sabanci Holding. All yours, Mr. Tezcan.

Thank you, Rob. Hi, everyone. We had a solid start to the year with our remarkably strong operational performance across the board, owing to our resilience and noncyclical business model despite the market volatility and challenging pandemic conditions. Q1 is yet another quarter when we continue to reap the benefits of having complementary businesses. We successfully captured the recovering demand, both in local and global markets in which we operate, by even achieving an increase in volume, well above demand growth. We sharply improved our operating cash flow by a strong increase in EBITDA, coupled with strong working capital management, during accelerated revenue growth. In general, when growth accelerates, it temporarily increases the working capital levels and reduce cash with all the efforts that is being presented. Q1 non-bank ROE reached 18.5%, surpassing record high level of 17.1% achieved in 2020. We kept our balance sheet strong as our net debt-to-EBITDA improved further and reached 1.4x with a strong liquidity of TRY 10 billion. Once again, we had another upgrade from MSCI in our ESG rating. The two-notch increase, driven by successful execution across the board in all aspects of E,S&G in one of the widely used ESG ratings in less than a year is an early indication of our increasing focus on ESG in the coming years. As COVID-19 pandemic continues to be a major part of our lives, with ongoing lockdowns in our key markets, U.S., Europe and Turkey, we continue to keep our alert level at the highest degree to preserve the safety and well-being of our employees, their families, and our customers. We are carefully following health and economic developments, as our investments in digitization so far enables us to rapidly adapt ourselves to changing conditions both on the ground and abroad. Our Q1 performance is on track, and we are keeping our medium-term guidance unchanged. Let me share the overall conditions on the ground since March. As was the case in Q1, effects of pandemic continued to be marginal in our businesses amid nationwide lockdowns. We are still observing decent demand in domestic and export markets, and we are expecting even stronger momentum in the economy by increasing vaccine rollouts and favorable impact of seasonality in the next 2 quarters. Local demand is robust and sustaining the momentum. It has gained in the second half of the year. Demand in Asia Pacific is rock solid. Europe and U.S. has been accelerating through 2021. Let me run you through the details of our Q1 financial performance. Our combined top line EBITDA and consolidated net income performances were solid on increasing demand, better sales mix and well-managed financing. Combined revenue growth remained strong at 20%, as local and global demand was vibrant and continued to support all of our businesses, but specifically, industrials and building materials. We continue to benefit from our complementary businesses that played a vital role in balancing our financial performance in Q1. The relatively low rainfall in the first 3 months of the year lowered our hydro generation, yet this seasonal abnormality supported the cement demand, as solid pace in construction prevailed in the underlying periods. EBITDA performance in the first quarter was strong on solid operational leverage and eliminated impact of global inflationary pressures driven by demand recovery and ongoing challenges in the supply chain. Coupled with strong operational performance, we continued to benefit from lower financial expenses in Q1 on favorable cost of funding, which resulted in a massive 48% year-on-year growth in consolidated net income. Moving on to next slide. Despite ongoing challenges related to pandemic, we continue to improve our earnings quality significantly, as nonbank operational cash flow increased sharply by 1.6x year-on-year with solid working capital management contributing positively. This strong cash generation allowed us to maintain our solid debt profile. Our net debt to EBITDA improved further to 1.4x at the end of March. Our total nonbank combined liquidity, excluding financial services and tobacco business, stands at TRY 10 billion, while total funds at insurance companies is TRY 4 billion. On the next slide, the solid upward trend in our nonbank returns accelerated even further in Q1 and nonbank ROE reached 18.5%, even surpassing our record-high level achieved by the end of 2020. Without an exception, all of our segments have positively contributed to the improvement in ROE. None of the business segments was holding us down. We have ample liquidity at the holdco on top of liquidity and operating entities. FX position remains strong. Let's move on to combined revenue, EBITDA and consolidated net income drivers. Excluding the bank, combined revenue grew by 22% year-on-year, exceeding headline growth of 20%. Major contributors are industrials, retail and energy segments. Nonbank comparable EBITDA growth was 34% year-on-year in Q1, exceeding headline EBITDA growth of 30%, driven by almost all segments. Industrials was the largest contributor to the combined nonbank EBITDA growth on increasing demand, better sales mix and higher capacity utilization. Total comparable consolidated net income surged 48% in Q1 with strong operational performance and well-managed funding costs. Nonbank comparable net income growth was even stronger at 6% driven by industrials, building materials and energy segments. To deep dive into segments, let's start with energy. In Q1, energy segment performed well despite negative hydrology impact on generation business. Enerjisa Enerji recorded strong EBITDA performance with the contribution of both distribution and retail business. The distribution segment's EBITDA increased by 12% year-on-year in Q1, mainly due to financial income growth, together with efficiency and quality contributions. Double-digit growth in Regulated Asset Base on a year-on-year basis was sustained. The first quarters are seasonally low in terms of investments, and the company has revised its supply contracts in that period. Accordingly, the CapEx that is realized in the first quarter is lower than the average planned CapEx for the rest of the year, which is in line with plans. Even though Q1 CapEx is relative low, it has more than doubled on a year-on-year basis, with an increase in CapEx allowance in the fourth regulatory period. CapEx is expected to reach allowed CapEx levels in 2021. On the retail side of the business, higher liberalized and regulated gross profits and decline in doubtful provisions fueled EBITDA growth in Q1. Therefore, net income increased by 53% year-on-year thanks to strong operating performance and decline in funding cost compared to the same period last year. Looking at generation's performance, electricity demand remained strong in Q1 by increasing 4.2% year-on-year as strong base impact kicked in by March. In March, electricity demand increased by 12% year-over-year. And last year's low base was even more visible in April, with electricity demand surged further by 27% year-on-year, and we expect the strong momentum to prevail in June as well. Energy generation's revenue was up by 25% year-on-year, driven by higher generated energy volume growth on increasing spark spreads in national gas plants, power purchasing agreement in lignite plants and higher trading volume. Positive impact of FX-linked renewable sales price partially compensated the effect of low hydro generation. Despite positive contribution of higher spark spreads and strong volume in natural gas plants, favorable lignite gross profitability and positive impact of weak TL on FX-denominated fee and tariff in renewables. Generation's EBITDA dropped by 7% year-on-year due to negative impact of declining hydro generation on lower inflow in Q1. Net income declined 15% due to EBITDA weakness and a bit higher financial expenses. It is worth mentioning that Enerjisa Generation managed to reduce its net debt at the end of March despite its first dividend payments. Industrial segment's top line grew by 36%, thanks to higher volumes and better sales mix in both tire and tire reinforcement businesses despite ongoing sluggish demand in global aviation. Both industrial companies continued to outpace their respective markets in terms of volume growth in Q1. The segment's EBITDA jumped by 84% year-on-year with a 6 percentage point improvement in EBITDA margin. Higher volumes, better sales mix and improvement in capacity utilization were the major drivers of EBITDA growth in tire reinforcement business. In tire business, strong EBITDA performance achieved by higher volumes, mostly driven by faster pace in exports and effective cost management. Negative impact of higher raw material prices was reduced by future contracts. In addition to strong operational performance pass-through. lower funding costs further supported segment's tripling bottom line. Moving on to building materials. According to Turkish Cement Manufacturers' Association data, domestic demand accelerated in the first 2 months of the year and reached 36% year-on-year. Segment's revenue growth jumped 57% compared to the same period of last year on strong growth in domestic volumes and the positive contribution of weak TL on exports. Our share in Turkish export market improved and reached 21.5% in Q1. In addition to strong top line performance, better energy margin and favorable sales mix led to tripling EBITDA, bringing EBITDA margin improvement to more than 9 percentage points year-over-year. Segment's net income significantly improved in Q1 compared to the same period last year thanks to sharp margin expansion and lower funding costs. On retail, despite slower traffic and closures of shopping malls, where we have significant presence of both food, super and hypermarkets and technology retail stores, segment's combined revenues increased by 26% year-on-year, driven by improvement in basket size in food retail and ongoing positive impact of new normal in electronics retail as home office and homeschooling fostered discretionary buying. The major change in customers' behavior towards online shopping due to pandemic-related lockdowns triggered a significant growth in e-commerce sales. In Q1, e-commerce sales of our retail companies more than doubled, and the share of e-commerce sales in their combined revenues increased by more than 3 percentage points, exceeding 8%. Solid top line growth and relatively limited impact from elevated operating expenses translating into impressive improvement in operating profitability as IFRS-adjusted EBITDA more than tripled compared to last year. Bottom line benefited from effective financing management as both companies enjoyed lower interest rates and the food retail company positively affected from the capital injection in November 2020. Financial services segment had another impressive quarter with robust top line growth, high technical profits and strong ROE. Non-life premium production increased by 28% year-over-year, driven by motor segment. In life business, 24% premium growth was driven by credit-linked and stand-alone life protection. In life business, technical income has increased 73% year-on-year, driven by growth in life protection volumes and assets under management in pension business. In the non-life business, sharp increase in motor and non-motor claims stemming from flood in Izmir and some big fire claims adversely affected technical profits resulting in higher combined ratio of 108% compared to 98% a year ago. Segment's bottom line improvement was led by life business on the back of strong growth in all major businesses and higher financial income. On banking, despite the challenging environment, along with rising funding costs as well as ongoing uncertainties regarding the pandemic, Akbank's positioning enabled the bank to leverage its strength while carrying priorities for improving profitability. Growth, proactive securities positioning, low maturity mismatch as well as robust across the board fee income growth were supportive factors for core operating performance. Thanks to the proactive and prudent IFRS 9 implementation in previous periods, net cost of credit has been improving since it peaked quarterly in the second quarter of last year. The fortress balance sheet built with robust total capital of 18.5% without forbearances, strong foreign currency liquidity and low leverage of around 8x underline the inherent benefits of the bank's diversified business model and remains a significant source of strength. I would now leave the floor to Baris for further comments and last closing remarks as a Group CFO. Baris?

Thank you. Global business environment and demand is rapidly improving as global economy is rebooting post COVID. Local economy is not yet in post COVID phase, but we expect further improvement in Q2 and Q3. Sabanci Group has maintained remarkably well performance throughout the pandemic. We have a record high nonbank ROE more than doubled in 5 years from 8.4% to 18.5%, improving every year without exception. Our leverage levels are record low, which will be less than half of what it used to be 5 years ago from 3.7x to 1.4x net debt to EBITDA at the end of first quarter. As I conclude my term here, the group has several results with record nonbank, high ROE and lowest leverage ever with a rock-solid balance sheet. Operator, this concludes our presentation today, and we can take questions.

[Operator Instructions].

Thank you, Operator. We have 2 written questions at the moment. The first question comes from [ Baris Ince ] from [ Garanti ]. 2 questions. Given the recent rights issue in Teknosa, is there any other underlying company that needs capital injection? The second question, does the holding consider an IPO or SPO of any assets in the near future?

Let me take that, if I may. The rights issue in Teknosa is going as planned, and we will continue to monitor the balance sheet of our companies to see if there are any further capital needs. As of today, there has not been any approval of further capital need of our underlying companies. Having said that, you have seen our balance sheet rock solid. We have record low leverage. And as far as the IPO or SPO are concerned, we have limited non-listed companies as we have listed or increased the float of our companies during the last 5 years. And as of today, we have -- we are looking into further opportunities to list our enterprises, but we haven't come to the conclusion yet with our partners to take any further comments regarding this.

Thank you, Baris. We have another question from [ Raimondo Eggink ]. Congratulations for excellent financial results. I'd like to ask about the retail segment, why it is loss-making and what are its prospects for the future?

If you compartmentalize retail into 2 buckets: food, retail and technology retail, technology retail had record profitability last year and is profitable at the end of the first quarter. So we can take that aside. Our food retail company is very highly levered much higher than its competitors, and this leverage is creating the loss as of the first quarter. We are looking for operational improvements in food retail to compensate for the financial expenses and to get -- go back into profitability. Furthermore, we are exploring potential asset sales in the real estate side to further strengthen the balance sheet of the food retail company.

All right, gentlemen, do we have anymore written questions?

No written questions at this moment.

No. All right. Should we wait a few minutes and just see if anyone wants to submit one, and then we will come to you for the conclusion.

Okay, let's wait for a couple of minutes. Thank you.

[Operator Instructions] All right. Speakers, do we have any written questions at this stage? Any coming through to you?

No, we don't have any written questions. We can conclude our presentation.

All right. Perfect. If you could conclude, that would be great.

Thank you. I would like to thank all participants for their interest in Sabanci Holding. We will continue to deliver solid results through the rest of the year. As you have seen our performance throughout the last 5 years, record high nonbank ROE and lowest debt-to-EBITDA levels reached in the first quarter of 2021. Thanks again, and you have a great day.

Thank you, gentlemen. Thank you, ladies and gentlemen, and this concludes today's webcast call. Thank you for your participation. You may disconnect now.