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

Ladies and gentlemen, welcome to the Sabanci Holding Second Quarter 2021 Consolidated Financial Results Conference Call and Webcast. [Operator Instructions] Once again, before 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. This event will be recorded and published in an audiovisual, video and written text form on the Sabanci Holding Investor Relations website for interested parties. So please be aware that when you take to the floor, you give explicit consent to Sabanci Holding to process your voice and text as well. I will now hand you over to your host, Orhun Kostem, the CFO; and Kerem Tezcan, the IR Director at Sabanci Holding. Gentlemen, the floor is yours.

Thank you very much. Good morning, good afternoon, everyone, and welcome to the Sabanci Holding Second Quarter Results Highlights. My name is Orhun Kostem. I would like to thank the IR team for allowing me to host the call today, for me, to introduce myself. I have joined at the start of July as the Chief Financial Officer of Sabanci Holding. I have just under 30 years' experience, mostly close to 27 years in the fast-moving consumer goods sectors, mainly brewing and Coca-Cola Bottling. I have obviously looked at businesses mainly in emerging markets. I have also run business units, especially with my tenure in the Coca-Cola system. And I'm quite excited and very happy to be able to join you today and together with the team. I also feel quite fortunate to do this at a time to talk about a relatively strong set of results in this quarter of the year. However, before I start talking about the results, I just wanted to tell a bit about the backdrop. Definitely, the whole pandemic still have influence on our business in general, our stakeholders, obviously, our people. And I think it would be safe to say, we're still looking at a relatively challenging environment, although much better than what we were looking at last year. The vaccine rollout is important, not only for the demand recovery as we see impacting some of our business units in the form of improved mobility, but also obviously our own way of doing business, how we conduct our business, and it will continue to be an important determinant in rest of the year. Last but not least, obviously, there are also quite severe climate events taking place, which we have recently experienced, unfortunately, in Turkey as well the wildfires at the Mediterranean and Aegean Coast and other regions of Turkey. At Sabanci Group, we have mobilized all our resources during this period. And obviously, we would very much like to continue taking part in the rehabilitation of the ecosystem as much as we can with all means that are necessary. However, this unfortunate event or incident also shows us that the importance we attribute and the resources we allocate for sustainability proves to be extremely important for us going forward. And therefore, we will continue, obviously, focusing on our sustainability initiatives, which you're also going to hear as part of this presentation. Now if we go back to talking to the results for the quarter specifically, we believe we have delivered quite successfully despite the challenging environment. Our growth is quite strong in the second quarter. However, obviously, the second quarter of 2020 was also impacted by the COVID, so there's a certain base effect. Having said that, we also are quite happy that we are growing strongly over a relatively strong quarter 1 in 2021 as well. We have seen accelerated growth in all of our lines. We believe that's owing to our resilient and noncyclical business model and portfolio. And this first half, therefore, we believe, marked another period that we benefited our complementary business portfolio. We believe we have successfully captured the relatively increasing demand in the local and global markets and obviously taking advantage of the global supply chain issues, thanks to our wide geographical coverage as a system. We have improved our operating cash flow quite sharply. We are also happy that this is primarily driven by EBITDA growth with sound working capital management. So the underlying improvement is solid and sustainable, which makes us also quite happy. If you looked at our return on equity, our nonbank return on equity, it has come to just under 19% at 18.8%, which is so far at least the highest that we have reached when we look over the last 10 years, and obviously, has grown quite significantly about 6 percentage points on a year-on-year basis. We've continued to deliver our balance sheet at the end of first half of 2021. Our net debt to EBITDA was at 1.4x. This compares to about 2.2x at the end of first half 2020, and we continue maintaining a strong liquidity of around TRY 9 billion. Again, we will touch base a little more, but sustainability is an integral part of our both mission and strategy. As we reviewed our sustainability road map going forward, you're going to hear a little bit about some 80 actions that we started to implement successfully about climate emergency, creating and maximizing our positive impact on people as well as society and fostering sustainable business models as we proceed on our journey to reach zero waste and net zero emission by 2050. The last but not least, obviously, as I'm sure you've heard before, we see digitalization as an important driver of our business, which has 2 dimensions. One of them is our capabilities within our system. We continue to improve our digital capabilities in our ecosystem as we adapt to new business models like future of work, which we believe is also an important contributor to our strong operational performance over the last 5 consecutive quarters. And the second one, obviously, on digitalization, we see this as a business opportunity going forward in Sabanci as we have generated great teams through Sabanci DX as we leveraged the importance of our university and see if we can contribute to our overall business prospects and maybe inorganic growth opportunities. Now specifically, moving on to the next page. If you look at the top line results, at the end of first half, we've seen our revenues overall growing by 27%. Our EBITDA, combined EBITDA growing by 33% faster than the revenues and our consolidated net income growing by about 48%. This, we believe, is quite a healthy and growth pattern. Our revenues have grown on the back of strong local and global demand that is recovering. Our EBITDA performance has obviously benefited the top line growth, but we believe we have been able to manage our input costs quite well, improve our efficiencies. And obviously, our relatively higher capacity utilization also assisted this EBITDA performance. And our net income and consolidated net income in the sense, as you have heard, did quite strongly on the back of strong operational performance. And due to delevering of our balance sheet on the back of relatively lower financial expenses despite the fact that the interest rates have been on an upward trend. I would like to underline the fact that these results also includes the relative weakness in the precipitation in Turkey, which obviously impacts the EBITDA performance of our generation business. However, as you've seen, together with that climate impact, we also have been able to deliver a relatively strong set of results. Again, on the top line, if you move to the next page, we have a great banking business at the core of our business. However, we have been continuing to improve our nonbank businesses and the contribution of earnings. As you see this year as well, the operating cash flow generation for our nonbank business continued to increase by about 1.4x compared to the same period of last year, a very healthy growth, as we believe. Related to that, our debt profile continues to be quite healthy. Our net debt to EBITDA was at 1.4x, which we feel is in line with our guidance and also quite a healthy level. And our total nonbank combined liquidity was at around TRY 9 billion. If you take our insurance business, our financial services business, there's another TRY 5 billion, so a very healthy liquidity position. If we move to the return on equity, as we have touched base, our nonbank return on equity was at 18.8%, which is obviously serious growth over last year. And our cash position at the holding entity at this level was at TRY 1.8 billion, of which the share of FX was about 54% increasing quarter-on-quarter. Now to give a little bit of color on the second quarter and the contributors to the business, if you move on the next page. There, you see on the second quarter of 2021, our combined revenues grew by 35%. Excluding the bank, in the second quarter, our combined revenues were up by 41%, a little faster than our combined overall growth rate. In this, major contributors were the energy business with higher generation volume and strong pricing. The industrials were also strong, again, with higher volumes, positively affected by the improvement in the overall mobility and a relatively weaker TL which obviously benefits our export revenues in that part of our business. Our retail business top line growth was also a strong contributor. The changes in the shopper behavior, the consumer behavior was positive for us as well as a relatively higher basket size in the quarter that contributed to the revenues. For each of the segments later in the presentation, you will hear Kerem going into a bit more detail for discussion. For the EBITDA, if you look at our combined EBITDA, this was up by about 36%. The nonbank EBITDA growth on a comparable basis was about 29% in quarter. The contributors to this was, again, our industrials business with higher capacity utilization, better efficiencies and well-managed input costs. Our building materials contributed positively to our EBITDA, positively impacted by the volume growth, which offset the higher input costs in the period. And then our energy business, despite the fact that the mix of generation was not favorable because of the weakness in the rainfall in the second quarter, this was offset by the positive contribution from natural gas and lignite plants, which obviously, at the end of the day, contributed positively to the absolute growth of the EBITDA. If you come to the net income on a consolidated basis, there, obviously, the growth was quite faster at 48% and 42%, if you look at the nonbank businesses. I would like to say also a relatively balanced bank versus nonbank in terms of the net income, 55% to 45%. If you look at the contributors, again, the industrials and building materials, together with the pass-through of the strong operational performance were strong contributors. And then we will take each segment one by one as I pass the word to Kerem to walk us through that part of our presentation.

Thank you. To deeper dive into segments, let's start with energy on Slide 10. In Q2, energy segment's operating performance remained resilient despite continuous weakness in hydrology. On Enerjisa Enerji, the company's EBITDA growth remained strong and reached 20% year-on-year with the contribution of both distribution and retail businesses. The distribution segment's EBITDA increased by 16% year-over-year in Q2, mainly driven by higher theft and loss, debt collection and CapEx outperformance. Regulated asset base growth has accelerated and reached 16% year-on-year, owing to much higher CapEx spending as we have guided in Q1 and higher inflation. On the retail side, higher liberalized and regulated gross profits declined in doubtful provisions with improvement in customer payment behavior, supported EBITDA growth in Q2, offsetting OpEx inflation. The company's net income was up by 34% year-on-year with the positive contribution of strong operating performance and ongoing supportive effect of last year's refinancing despite higher cost of the company's CPI-linked financial instruments. Looking at the generation performance. Electricity demand increased by 20% year-on-year in Q2, driven mainly by above-average performance in April and May, thanks to last year's low base and faster growth in industrial power consumption. We expect demand growth to normalize in the second half of the year as low base impact disappears starting from June. Energy generation revenues increased by 62% year-on-year with higher volume on increasing spot spread in natural gas plants and higher spot list prices compared to last year. On a separate note, higher power purchasing agreement prices in lignite plants and higher energy trading volume continued to support the top line growth of the generation business. Despite positive contribution of natural gas and lignite profitability on solid spot spread in natural gas plants and dark spread in lignite plants, EBITDA dropped by 11% due to negative impact of decline in hydro generation as a result of prevailing drought and lower dispatch contribution from hydro assets. Note that water inflow in Q2 is hovering around 38% below last year and 47% below its long-term average. Net income declined by 41% year-over-year due to EBITDA contraction and higher financial expenses driven by negative impact of mark-to-market hedging contracts. Moving on to industrial segment. Our tire and tire reinforcement businesses managed to register solid volume growth driven by strong demand due to last year's low base as both businesses were heavily affected from collapse in mobilization in Q2 '20 on COVID-19 pandemic. Both our tire and tire reinforcement businesses gained substantial market shares in their respective markets. The strong volume growth resulted in a sharp 107% year-on-year top line growth in Q2 '21. In addition to strong volume growth that has positively affected both businesses' profitability, the segment's EBITDA has almost tripled on higher capacity utilization in tire reinforcement business and surge in exports and effective cost management in tire business, the negative impact of higher raw material prices, offset by well-managed hedging strategy and bargaining power in tire business. The strong operational performance pass-through and declining financial expenses, as a result of lower debt level, supported the segment's bottom line. It's important to highlight that successful operational performance of tire reinforcement business achieved despite the negative impact of following force majeure by nylon manufacturers in the world and continuous weakness in the aviation sector. Moving on to the building materials. According to Turkish Cement Manufacturers Association data, domestic demand grew by 37% in the first 5 months of the year, mainly with the contribution of Mediterranean and Central Anatolia regions. Consequently, the segment revenues jumped by 75% on strong domestic volume growth and positive contribution of weak PL on exports. In addition to the strong top line performance, cost optimization and better energy margin led to doubling EBITDA, resulting in 3.4 percentage points improvement in EBITDA margin on an annual basis. Net income more than tripled in the quarter on the back of solid operational profitability and well-managed financial expenses. The continuous improvement in the net working capital to sales ratio prevailed in Q2 supported improvement in segment's earnings quality. It's also important to highlight that following the completion of the restructuring process of Sabanci Group's overseas white cement investments, they have finalized acquisition of Buñol plant in Spain, which is an important milestone for our building materials business to create an efficient and strong platform approach in order to position Sabanci Group as the leader in global white cement trades. Moving on the next slide on retail. Segment combined revenues increased by 30% year-on-year, mainly driven by strong growth momentum in electronics retail as home office and home schooling fostered discretionary buying in addition to improvement in the basket size in food retail business. Despite significant e-commerce sales realized in Q2 '21 due to last year's high base, total e-commerce sales and the share of e-commerce sales has slightly declined on a year-on-year basis. However, if you compare e-commerce sales of our retail companies, it's increased more than fivefold and the share of e-commerce sales in their combined revenues almost quadrupled compared to pre-pandemic period of Q2 2019. Solid top line growth and relatively limited impacts from elevated operating expenses translated into impressive improvements in operating profitability as IFRS adjusted EBITDA jumped by 68% year-on-year, yet the adverse impact of high financial expenses continued to affect bottom line of the segment in Q2 as well. Moving on to financial services. The segment's top line growth remains solid, driven by 38% year-on-year growth in non-life premium production, thanks to strong performance in all business lines. In non-life business, technical profit was adversely affected by the increase in FX-linked claim expenses of motor segment due to last year's lower claim frequency due to the collapse in mobility. Combined ratio reached 102% in Q2 compared to 80% in the same period last year. In the life business, technical income increased by 52% year-on-year, driven by the growth in life protection volumes and the assets under management in the pension business. The improvements in life business bottom line was led by strong growth in all major business lines and increased financial income, yet non-life businesses bottom line has deteriorated on lower technical profitability, which resulted in slight decline in segment's net income. The important developments for this segment is the change in life business partnership. In May, Ageas became the JV partner of Sabanci Group in the life business as well, paving the way for new synergies in non-life business where Ageas has been a partner since 2011. On the banking, despite the challenging environment, along with higher global inflation as well as ongoing uncertainties regarding pandemic, the bank's positioning enables to leverage its strength while carrying priorities for improving profitability. Growth, proactive securities positioning, low maturity mismatch as well as across the board robust fee income growth were supportive factors for the core operating performance. Thanks to proactive and prudent IFRS 9 implementation in previous periods, net cost of credit has been improving since it peaked in the second quarter of last year. The fortress balance sheet builds with robust total capital of 20% without forbearances, strong foreign currency liquidity and low leverage at 8x underlying the inherent benefits of the bank's diversified business model and remains as a significant source of strength. Finally, let me elaborate on service interruption in our bank system that took place between 6th and 7th July. As previously shared by the bank, there was not any sort of cyber-attack and customers' personal data remains fully secured and intact. Since then, all of the systems have been serving to customers without an interruption. The core banking application runs on IBM mainframe system, also used by many large banks around the world. As mentioned in the bank's footnotes, the financial impact of the service interruption is immaterial. On the next slide, we have our sustainable road map that guides our progression in ESG. It includes 80 actions, which are being undertaken by the holding group companies or both. We believe 41% of them will make fundamental changes in our business model. In line with this road map, we recently issued our most comprehensive sustainability report to date with nearly 30 group-wide KPIs assured by a third party. We identified 828 products and services that significantly contribute sustainable development goals. The combined revenues from these products and services made up approximately $5.9 billion or 9% of our combined nonbank revenues in 2020. Note that the bank reports its total amount of sustainable finance at TRY 16.4 billion for the same period, which is not classified at combined revenue line. On the other hand, 44% of our R&D activities was sustainability focused in 2020. Thanks to our increased transparency and performance in this field, we made a significant progress in sustainability in MSCI. We will continue progressing in these areas moving forward. I now give the floor to our CFO, for closing remarks.

Thank you, Kerem. To wrap up the presentation piece, the key takeaways from today is in the second quarter of 2021, Sabanci Holding has delivered solid growth with very strong profitability and outstanding cash flow generation with continued deleveraging of the balance sheet and a record-breaking nonbank return on equity, at least for the time being. The first half results, therefore, makes us quite happy compared to our plans. It's fair to say that we started the third quarter strongly. However, we are mindful of the challenges in the rest of the year, generally in the macro volatility with rising interest rates globally, the pandemic and the rate of vaccination to be an important determinant to shape the second half of the year and the general input cost inflation and supply chain challenges that we have been managing in the first half of the year. Despite the fact that together with our strong momentum and results for the first half, we have and we will maintain our medium-term guidance for our financial performance and our sustainability goals. Thank you for listening to the presentation. We may now get to the Q&A.

[Operator Instructions] We got a question from Hanzade Kilickiran from JPMorgan.

Orhun, congratulations for your new post. I have a quick question on the generation business. I mean you mentioned about outstanding, I mean, operations throughout the year. But in the second half, you observed some weakness on the EBITDA margin. That's truly because of the product mix change probably from renewable to nonrenewable. So how do you see the second half outlook? Because last year, I remember that there were similar hydrology issues as well. So if it's reasonable to assume that the profit level from generation will stay low in the second half. And because this is going to be quite important for next year's dividend income, I guess. And can you please confirm your dividend inflow in 2021? I'm calculating something around EUR 1.5 billion. And I just want to be sure if that's the right number.

Hanzade, thank you very much. I will actually ask Kerem and the team to contribute, and I will not, let's say, pretend that I know all the answers as of today. Having said that, on the generation business, first of all, yes, it is true that the hydro contribution this year has been lower than compared to last year and probably the previous year as well. However, the overall demand is growing. So even though the mix could be averse off, we see a very strong demand going forward. And for all practical purposes that could continue in the second half of the year. So therefore, at this point in time, I don't think there should be any reason why we should deviate from our guidance or our expectations for the year as a whole even though with a different mix maybe. Can you for me please repeat your second question?

So basically, this year's total dividend income for the holding is something around 1 point -- actually, on my calculation, something around EUR 1.59 billion to EUR 1.6 billion. So is this true? I mean we could -- I can't see a chart that shows the dividend inflow to the holding?

I'm not sure if we have disclosed explicitly the dividend income for the holding.

Hanzade, you can find the [indiscernible].

Okay. So you don't expect a year-on-year decline in energy generation profit in 2021 versus 2020, right? So you are looking to receive a similar amount of dividends next year as well from the company?

The -- of course, apparently dividend is a function of the profitability. So the change in the profitability of the generation business might be affecting the dividend income from that company as well.

[Operator Instructions] All right. If we could move on to the written Q&A, the written questions, that would be wonderful. Over to you.

Sure. We have a question from Karim Sawabini from Moon Capital. Would you please discuss opportunities to divest certain assets and where you see a desire for further expand in certain segments of the portfolio?