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

Good afternoon. Welcome, and thank you for joining Sabanci Holding Building Materials Day. Before starting, I would like to remind you to review our disclaimer in the presentation. Today's speakers are Orhun Kostem, Chief Financial Officer at Sabanci Holdings; and Burak Orhun, the President of Building Materials SBU at Sabanci Holdings. There will be a Q&A session at the end. Now I'm leaving the floor to Orhun Kostem, Chief Financial Officer at Sabanci Holdings. Sir?

Thank you, Sule. Good morning, good afternoon, everyone. Welcome to our Building Materials Day. We're very happy to be with you today. My name is Orhun Kostem. I'm the Chief Financial Officer of Sabanci Holding. I assumed my position as of 1st of July this year. So I could be relatively new face for some of you even though we had our event at the end of the first quarter results. By way of quick introduction, I have about 28 years of work experience, mostly in fast-moving consumer goods sectors, brewing and Coca-Cola bottling businesses. We have invited today Burak Orhun who actually is also a relatively new face potentially for some of you. He had assumed that position earlier this year. Now -- and what we want to talk about is the Building Materials Group of Sabanci. If you look at the share of net asset value in Sabanci, of the $3.4 billion of the net asset value of our listed companies, the Building Materials Group accounts for about 9% of that. If we exclude the portion of the bank, which is just under 40%, then the share of the Building Materials Group is about 14%. If you look at the EBITDA contribution, of the TRY 6.7 billion of the nonbank EBITDA that's generated, about 9% is generated by the Building Materials Group. Now that's obviously until today, because I'm sure most of you must have followed, we have closed a very important acquisition earlier this year in July, the acquisition of the Buñol business which obviously not only opens up new potential with new capacities, but also new business opportunities and a very different geographic footprint for us. So therefore, we wanted to take this opportunity today, a, to introduce ourselves and Burak; b, obviously, to give an update on the Buñol acquisition and, of course, have Burak share his views about the direction of the business unit going forward in the new era. So therefore, today's discussion will not necessarily be about particular financial metrics of our companies or their operational performance, but more hopefully of a strategic discussion going forward. With that, I will leave the floor to Burak.

Thank you very much, Orhun, and good afternoon, everyone. Welcome you all to our Building Materials Day. Before going into the business, maybe I'll just add a few sentences about myself as well since I have taken over this role about 3 months ago. I joined the group actually about 3 years ago as Head of Strategy and Business Development. And before that, I used to work for OYAK Group pretty much doing the same, Head of Strategy and Business Development, but also as executive management -- at various executive management positions at chemical companies -- chemical and energy companies of OYAK Group. And before that, I was actually in the U.S. working for a large consumer financing company in various management positions. As Orhun -- our CFO, Orhun, mentioned, we would like to use a different format today. And rather than looking into specific or specific company financials, I would like to share with you where we want to take this business in the next 5 years and where are we today and how we want to transform this business. And before going into our future plans though, let's have a look at where we are today. You are all familiar with it, actually. We are the leader in the Turkish cement market with about 14 million ton capacity, which means about 14% market share. And we are -- our share in Turkish cement exports is about 23%. Under our SBU, we have in Turkey 2 companies, Akçansa which is a 50-50 joint venture with Heidelberg, 3 factories under Akçansa in Istanbul, Çanakkale and Samsun. And because of its location in Çanakkale, it's a highly export-focused business or company. It's -- about half of its volume is exported. Meanwhile, Çimsa is, we have 5 factories, about 7 million ton capacity. And besides gray, one of the -- Çimsa, as you all know, is a major white cement player, complemented by a very strong network in Europe and a grinding station in U.S. And one overlook feature of Çimsa is also that we are -- Çimsa is the only producer of calcium aluminate cement in Turkey, which is a very niche and high-value product. So in July, we had a -- as also Orhun mentioned, we had a milestone for our SBU and for, in general, for Sabanci Group. We completed the Buñol plant acquisition. As you all know, it took some time to actually complete that acquisition because of the -- because we waited for the Competition Board applications to be completed also at various countries and across the world actually. And I guess the time it took for these institutions to analyze and give the approval for this acquisition shows the importance of this plant actually and the position of this plant, in general, in the white cement market. So we completed the acquisition on July 9. And along with this term -- along with this plant, we not only actually, with this transaction, acquired the plant, but we also acquired about 500,000 ton customer portfolio in Europe, in Latin America and the rest of the world. We are talking about 110 employees, we are now welcoming to our Sabanci family. And I mentioned about the customer -- Competition Board applications. In Spain, as part of the competition approval, we actually divested one of our terminals, Alicante terminal, as part of this transaction. So the Buñol plant acquisition not only shows -- is just a plant or customer portfolio acquisition, we also did a major reorganization under our SBU, as you can see on the right-hand side. We established a company in Netherlands, Cimsa Sabanci Cement BV owned 60% by Sabanci and 40% by Çimsa, where we are now combining the financial strength of Sabanci and operational strength of Çimsa, not only for the Buñol plant acquisition, but also for our future growth. We are -- our intention is to utilize this company as a growth platform for all our future growth initiatives, which I will come to in a few minutes. I mentioned that we have also moved the transfer to terminals in Europe and the grinding station in U.S. under this growth platform to complete the picture. And one thing I want to mention here is the Buñol plant acquisition is actually the end result of a successful expansion strategy by Çimsa, which is the -- we were producing white cement in Turkey. Afterwards, we actually expanded our footprint in Europe through very strategic locations, through terminals at very strategic locations, which brought us closer to the clients, closer to the market. We learned the customers, we learned the market and -- which also gave us the opportunity to screen what's the best opportunity as to become a regional manufacturer now, which showed us the Buñol plant. And we completed the picture or the value chain, so to speak, by acquiring Buñol plant and becoming a regional manufacturer there. I wanted to underline that because this is the strategic -- this is the expansion strategy we would like to mimic also for our future growth. If we can go to the next slide. Now speaking of future growth, obviously, we need to touch the global trends, especially the trends that are impacting our SBU, our building materials industry basically. So without going into too much details, there are -- we are actually categorizing the trends that are impacting us under 4 main pillars, let's call it. The first one is supply chain resiliency. You all know after COVID-19, the supply chain resiliency became a major issue for all players. That's including all the cement players and building materials players as well. And becoming a regional player, not only relying on export, but becoming a regional player in various regions became a very important issue. The second one is green construction. So the construction companies are more and more moving towards using less labor, less energy, less water, let's say, during construction and as such, requires ecofriendly construction materials and construction methodologies. The third one is sustainable buildings. So the society as well as construction companies are not only looking for a green construction but also expect that the buildings are ecofriendly throughout the life cycle of the building, which actually increases the demand for insulation, water resistancy, heat resistancy and basically energy-efficient buildings. And the last one is, because of the digitalization of all sectors, including construction, modular construction is becoming more and more the norm, especially in developed countries, whereby the construction companies are moving from on-site production to remote production, which increases demand for prefabricated materials and basically precast materials. So looking all these trends basically shows us 2 emerging key moves for us as well as actually for other building materials companies. The first one is geographic diversification. What it means is for us is growth in overseas operations and regional focus. The second one is product diversification. So not only actually for our end products, but also for our raw materials and the materials we use in the various process of the production, meaning fuel and alternative raw materials but also on the end side, on the end production or end consumer side, adding other sustainable products besides cement to our portfolio, basically. If we move into our -- if we want to explain our next 5-year strategy in just one slide, I guess, this slide will summarize it the best. And what we want to do in the next 5 years is transform this business from a pure cement SBU, pure cement business to a building materials group. B, we want to move from a local power with international expansion to a more, what we call, geolocal building materials group. What it means is having local capabilities, regional capabilities in a global framework. And more importantly, we want to change our color from gray to green, in line with Sabanci Holdings' commitment to 2050 net 0 target basically. So under that vision, we have 2 main pillars. First, we want to -- obviously, cement is our bread and butter, our main business. So we want to protect and grow our main business. To do that, we will, a, look at our network, especially with the addition of [ Algos ], we have now 10 factories. We will focus on integration of [ Algos ] to our network, and optimize our network, our whole supply chain for max value creation for our shareholders and for our stakeholders. Second, we are already the leader in the Western Hemisphere of the world in white cement, but we will strengthen our white cement -- further strengthen our white cement position by light asset investments globally, meaning what we have done in Europe, strategic terminal locations, we want to replicate globally basically in various parts of the world, where we are to get, again, closer to our customers, closer to the markets. And in those markets, once we learn the market, the customers, know the customers directly, we will explore other value-creation opportunities such as maybe partnerships with various stakeholders basically. When it comes to gray cement, we will more or less mimic actually the same strategy. Right now, we are a major exporter, but again, we would like to get closer to our customers, clients in the export markets through light asset investments, meaning terminals and warehouses, commercial warehouses, et cetera, which will lead ultimately to a vertical integration just like we have done with the Buñol plant acquisition basically at our export markets. Obviously, we will support that with a -- by improving our trading capabilities, which means we will actually build a trading organization to support our business. Now this is the cement slide. But as mentioned, we would like to add other products, other building material products besides cement to our portfolio for product diversification. And first of all, we will expand our -- or we are looking to expand our calcium aluminate business. As I mentioned, we are the only producer of calcium aluminate in Turkey, and we are one of the very few actually producers in the world. This is a niche market, a very profitable market. And in many countries, actually calcium aluminate is categorized as a building -- specialty building material rather than cement. So we will use that as a bridge to actually expand further into building materials and explore other adjacent segments in building materials. And we have done that already. And for example, precast concrete and insulation emerge as 2 interesting areas to explore for us in the near future. So before we -- obviously, it's not -- if you can go back one slide, the one thing I want to mention here is as we are growing our business internationally and as we are transforming also by adding -- by expanding into building materials, we will support that with a global R&D center. We need to be close to the innovations, disruptive innovations, disruptions, both in building materials and cement because the world is changing very quickly. And right now, we have a very good R&D center in Turkey, but we want to move that to Europe or potentially to U.S. to actually become closer to the, as I mentioned, to innovations and disruptions. I mentioned about building materials -- going into further building materials. I'm not going to go too much into details. But as I mentioned, precast concrete and insulation caught our eye as potential expansion areas because it's really matching -- or it's really responding to all the global trends we are observing. Both are very fast expanding industries, expanding markets. And we believe there are synergies not only with cement, but also with our other SBUs such as Energy SBU and Industrials SBU. In fact, we are -- with Kordsa from our industrial side, we are actually already in construction building materials through our KraTos product, which is concrete admixtures basically. So if we can move one slide. So I mentioned we are -- sustainability, obviously, is a major theme for all of us as well as for our sector and for us. Sabanci Holding is committed to 2050 net 0 emission targets. And we will, as part of Sabanci Holding, we will be in line with that target, and we will do our best. We are committed to the same target as well. Right now, for us, we are taking various actions such as being the waste solution provider, waste solution partner actually with the Istanbul Municipality for more and more increased waste tyre utilization. However, these are obviously, first actions, but beyond 2022, we will -- together with all the cement sector across the world, we will take actions to decrease the clinker ratio, utilize more alternative raw materials, utilize more alternative fuel, which we will all, in detail, explain at our CO2 roadmap, which we are working on currently, together with the industry, together with the Global Cement and Concrete Association to actually decrease the CO2 emission of our SBU and of our sector in general, basically. One thing I want to mention is that in alternative fuel usage, we are already the leader in Turkey. The turkey average is about 7%. As a Sabanci Group or Sabanci Building Materials SBU, we are at 15%. We know this is below European percentages, but the Buñol acquisition will also -- there will be a know-how transfer from there as well to increase the alternative fuel usage share. So net-net, what is our vision? Where are we today? Where do we want to take this business, as I mentioned? Today, by end of 2020, when we look at our numbers, about 55% of our revenues are FX based. Not a bad number, but we want to increase that. About 5% of our revenues comes from international operations, meaning 95% either domestic sales or export from Turkey. We want to increase that. And 3% of our revenue come from non-cement -- only 3% of our revenues come from non-cement businesses. That's mostly port operations. Post Buñol, we are already in progress to increase these numbers. With Buñol acquisition, we have increased our FX-based generation -- FX-based revenue generation over 70%. And our revenue from international operation percentage increased to 15%. But that's not enough, obviously. We want to further increase that. And in the future, we want to be at a much higher FX-based revenue generation ratio. We want to share -- we want to have a -- we want much higher share of our revenues come from international operations. And we would like to diversify our portfolio where we most -- a good amount of our revenue comes from non-cement businesses, but mostly from sustainable building solutions, basically. That's it, I guess, are for our vision for our future plans. As I mentioned, we didn't want to really go into company-specific numbers, but explain to our friends where we want to take this business. I guess we are ready to take any questions, if there are any. Thank you very much.

Thank you, Burak-bey. We can begin Q&A questions. Please submit your questions. Yes. Now we have the first question from [ Jamal Demirtas ]. What do you think about energy trends, recent increases in coal, oil and natural gas? Are you worried about costs at all?

Yes. I guess I will be lying if I said no, I'm not worried. Of course, we are all worried and all sectors, but this is a global phenomenon. This is not only Sabanci SBU or just Turkish players' concern. Obviously, we are at the up cycle of all commodities. Coal prices since the ending of last year has gone up about 40%. Petro coke -- pet coke has gone about 90%, and energy prices in Turkey has gone up about 25%, is expected to go further. And we are doing our best to actually accommodate those prices and not to reflect on prices as much as possible. But at the end of the day, we have to take the necessary actions obviously to live with these prices as well -- with these increased prices as well. However, as I -- this is a cycle. We are at the up part of the cycle. And in the midterm, we expect that energy as well as commodity prices, in general, coal, pet coke, et cetera, to normalize and get back to normal levels basically.

Next question from Hanzade Kilickiran. Thank you for the presentation. Can you please share more information on Buñol acquisition and its potential financial impact on Çimsa?

I see a different question here. But can you repeat the question because I see a different question here.

It is another question, Burak-bey. Can you please share more information on Buñol acquisition and its potential financial impact on Çimsa?

Okay. So further information, I guess, we already made public that we have acquired the Buñol plant for EUR 155.2 million, the acquisition -- $155.2 million, I'm sorry. The acquisition was funded 40% equity and 60% debt, long-term debt with very preferred -- very good rates, I might add. And the acquisition, as you have seen in the structure and the equity structure, was divided by 60% Sabanci Holding and 40% Çimsa. So net-net, the -- we are -- for Sabanci SBU, the contribution of Buñol plant, we expect that EBITDA impact will be around 10% to 15% in the short term, meaning our SBU -- total SBU EBITDA will increase about 10% to 15%. But in the medium term, as we realize the synergies through network optimization and through the whole value chain, we expect that contribution to go up to 20%. And I guess that's good information for now.

Thank you. Next question is from an anonymous attendee. Hi, thank you for the insightful presentation. Should we expect the shareholder structure in Çimsa international operations to be maintained in the future?

Sure. As I mentioned, this Cimsa Sabanci Cement BV, we have constructed this structure not only for Buñol plant, but to fund the future growth of SBU in general, basically, and use it as a future growth platform. If we -- the intention there was to utilize the financial strength and financial magnitude, obviously, of Sabanci Group, Sabanci Holding and -- but benefiting also Çimsa from the value created there by not putting too much burden on Çimsa's balance sheet. And as such, for the growth period, we are expecting this structure to remain the same because there will be funding needs, obviously, to grow and Sabanci will continue to support this funding, which will benefit Çimsa and Sabanci mutually obviously. But after the growth, after 5 years, in the next second 5-year plan, we will look at the structure again and find the most optimum structure for all stakeholders basically. But for now, for the near-term future, yes, this structure will remain the same.

If I may add to that, I think that's a great question because you heard from the business unit perspective. From Sabanci perspective, obviously, I hope you have seen what you heard today fits very much in line with our long-term expectations, meaning as we grow our businesses in Turkey, make sure that we generate more business on FX base, more revenues from international, invest in new parts or new economies adjacent to our existing know-how base. So the business unit, the Building Materials Unit, as Burak has explained, fits into this. Moreover, it also, I think, represents, as Burak explained, our ambition to ensure that we create momentum into our businesses that could grow in the right strategic directions. And going forward, obviously, we will be seeking alternatives to ensure we generate maximum returns from a Sabanci Holding portfolio perspective. Thank you.

Thank you. Next question. Can we have some words related to Kordsa's construction enhancement business, specifically about the growth opportunities of construction enhancement business?

Sure. Obviously, this is the Industrials SBU, but there's a major overlap there. We believe this is a very, very important business with a very high growth opportunity actually. And we are actually cooperating together, working together with Industrials SBU to further grow that business. And since we are selling cement and concrete and they are building concrete admixtures, and concrete admixtures and the enhancement business is -- we are basically selling to the same customers, as such, there's a major synergy we can actually create by growing that KraTos business as well. So net-net, we see in the medium term, we see a major growth opportunity there for Sabanci Group from that for Kordsa's construction enhancement business.

Thank you. Next question from Cenk Orcan. How do you expect growing share of international operations will impact Building Materials segment margins in the medium to long term?

Overall, I should say, positively impacting the margin because international operations growth, as I mentioned, will not be only on just one segment. We are talking about gray, white and other building materials, building materials that are in some instances, higher margins than cement. But as I explained, some of our international growth will come from white cement, which is -- white cement, which has a larger margin than gray anyway. So as you are mixing -- or as we are shifting the mix towards -- right now, a big portion of our portfolio is gray, there is white and then no other building materials. But as we are shifting the mix, we expect positive impact on our margin as well.

Next question from [ Sadritam Baj ]. Thanks for the presentation. Do you foresee any capacity shortage in case Channel Istanbul projects take off?

Not necessarily. There's -- we believe there is enough capacity actually in this region, Marmara region, to support both the ongoing consumption as well as the Channel Istanbul project. Obviously, Channel Istanbul is not just 1 year consumption. We are talking about a 10-year -- 5 to 10 years project, which will require cement gradually over the years. So we don't see any problems necessarily in terms of capacity for that region.

Thank you. Next question. Does Sabanci Cement Group have any plans on growing in U.S. markets, organic or inorganic?

Yes, U.S. is part of our plans as well. As I mentioned, we would like to get closer to our clients at our export markets. And as such, U.S. is already a market where we are exporting. In fact, we have a grinding station in U.S. And the importance of U.S. is obvious because of the very recently approved infrastructure plan. There will be a big major growth in cement demand over the next 5 years. And yes, U.S. is part of our -- is on our scope as well when we are looking at investment opportunities, both organic and inorganic.

Next question is from Sashank Lanka, Bank of America. Hi, thanks for the presentation and the opportunity to ask questions. Can you give some color on carbon footprint in terms of emissions from Buñol plant versus your overall Building Materials SBU currently? Also, can you talk about EBITDA margin profile of the Buñol plant versus the current SBU EBITDA margins?

Sure. The -- versus compared to our current factories in Turkey, Buñol plant has higher alternative fuel usage. As such, the emission rates are better compared to our current plants in turkey. That's why the know-how transfer is very important for us. So this is not only a financial investment or strategic investment in a way. But from carbon footprint perspective, there's a good amount of learnings we will actually transfer from Buñol to our other factories as well. And the second part is yes, the Buñol EBITDA margin is better than our current SBU -- overall SBU EBITDA margin mainly because Buñol is 100% white. And white cement has better and higher EBITDA margins than gray cement. And as such, our current SBU without Buñol, because our current SBU is a mix of gray and white, a, Buñol in itself has a higher margin; b, adding Buñol will slightly increase our overall SBU margin as well as EBITDA margin as well because of the mix.

Thank you. Next question is from [ Oscar Ternavides ]. What is your expectations regarding your noncement products in the future? Do you think that they can help you improve your FX-based revenues and margins significantly? Could you elaborate a little more about their contributions to growth and margins in the future?

Sure. So noncement products, when we are looking at growing in noncement business or going into adjacent building materials segments, we are mostly looking to do that outside of Turkey in advanced markets, in Europe or in U.S. because that's where the growth is. So we want to follow the growth, actually, growth for these segments. And as such, it will positively impact our FX-based revenue generation as well as margin impact actually because we will be looking for opportunities that will be value accretive, meaning higher margins, higher profitability than our current SBU basically. These segments usually have either same or better margins than cement business overall. But their cash conversion cycles are better. So their cash generations are in many cases actually better than cement business. As such, growing in those segments in noncement, other building materials segments will have a positive impact overall on the profitability and margins of the portfolio.

Thank you. And the final question is, is it possible that Çimsa sells some of its gray cement assets to reach strategic targets and to fund the transformation?

First of all, we don't need to sell target -- or assets, gray cement assets, to reach our targets or to fund the growth because, as I mentioned, we are actually -- we have built that structure to utilize the financial strength of Sabanci Group. But overall, just like Sabanci Group itself, within the Sabanci Building Materials SBU Group, we are running a dynamic portfolio. Dynamic portfolio management is very important for us. And we are constantly looking for network optimization and value maximization through optimization. And that's an assessment we are continuously making, and we will continue to do so basically throughout in the future as well.

Thank you. There is no more question, we can close. Thank you for joining Sabanci Holding Building Materials Day. If you have any follow-ups, please contact Investor Relations team.