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

Ladies and gentlemen, welcome to the Sabanci Holding Third Quarter 2021 Consolidated Financial Results Conference Call and Webcast. Thank you very much for standing by. [Operator Instructions] And if you would like to participate in our written Q&A, just type your question into the Ask A Question text area and then click the submit button. Now before the presentation, we'd 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 audio visual and written form on Sabanci Holding Investor Relations website in order to inform interested parties. So please be informed that while you take the floor, you give explicit consent to Sabanci Holding to process your voice and speech as well. With that, I'll now hand you over to your host, Mr. Orhun Kostem, the Sabanci Holding CFO, and Mr. Kerem Tezcan, Sabanci Holding IR Director. Gentlemen, the floor is yours.

Thank you. Good morning, good afternoon, everyone, wherever you are. Welcome to Sabanci Holdings' third quarter results webcast. I'm happy today to be able to share with you another successful quarter that we left behind us. Our success in this quarter, driven by improved contribution from our bank, obviously, as well as solid performance in our nonbank businesses. In the third quarter, we've seen a solid demand environment that positively impacted some of our business units and operational efficiencies across the board which has partly offset the increasing trend in input costs, and obviously, we also had a quite important growth in Turkey that has been there in the period. We benefited having complementary businesses, not as a holding group portfolio but also within business units. And in this quarter, our energy generation business is a good example of that, which you're going to hear in a little bit more detail later. But of course, the R generation portfolio was quite resilient, generating strong top line growth and profit growth despite this massive growth that was impactful in the third quarter, especially in the third quarter of the year. Now the demand growth in our local businesses and our global markets, obviously, was also benefiting from last year's low base and as well as we made use of the challenges in the global supply chain based on our existing geographical footprint, which reaches a wider coverage and proven to be a competitive advantage for us. Our operating cash flow was solid in the first 9 months and obviously led to continued deleveraging of our balance sheet. And our net debt-to-EBITDA is at 1.4x compared to 1.5x at the end of 2020. Our consolidated return on equity was up to 17.5% in the first 9 months. That follows our midterm guidance and obviously benefiting the sharp increase that's coming on return of equity of the bank in the period. You have also heard, in the meantime, that there has been changes to the ownership of our insurance companies, a new partnership with Ageas, and then after which we started to fully consolidate both of our businesses with Ageas having being a shareholder in both Axigorta and Agesa, and this full consolidation started from July 1 this year. This had a positive TRY 1.4 billion one-off impact on our third quarter consolidated net income. However, as we have our discussion today, you won't be hearing about this one-off bottom line impact. Now just to remind ourselves because these were announced earlier, but in the third quarter, we also completed the restructuring of our white cement business outside of Turkey and have finalized the acquisition of the Buñol plant in Spain. Now this, we believe, is an important milestone for our Building Materials business, in which we believe we will create an efficient and strong platform abroad in order to position ourselves as a leader in the global white cement business. Moreover, again, you heard but -- ourselves together with Philip Morris International, have started the process of transferring all of the shares that we hold in Philip Morris Turkey, which is about 25% of that business. And again, then Philip Morris International, therefore, applied to the Competition Authority, which was on October 6 of this year, for approval of that share transfer process, which were valued at roughly TRY 2.9 billion. This price, obviously, will be subject to certain adjustments at the end of this year. You will hear once obviously, we closed this transaction, hopefully, which is expected to be in the last quarter of 2021, pending relevant permissions and approvals as customary. Last, but not least, obviously, one, still a big unknown is how the pandemic will take shape in the months and quarters to come. We have -- we believe we have done to the best of our ability to roll out at least vaccination across our group. And I'm happy to say that the average vaccination ratio stands at 98% in Sabanci Group as a whole. Now on the next page, if you look at the -- on a top line basis, first of all, the financial performance in the period, obviously, you see a 33% growth of revenues, 38% growth of EBITDA and 45% growth of consolidated net income, which is obviously a very good performance that makes us happy. As we discussed, the revenue growth obviously comes from strong demand growth, both local and international, which benefited the EBITDA performance, which furthermore accelerated through operational efficiencies, higher capacity utilization, and thereby, ending up in a higher margin, and consolidated net income was higher. And as we said, we continue deleveraging our balance sheet, which obviously helps us lower our financial expenses, and together with good cash flow generation, obviously, helps us drive a much stronger bottom line. This, again, we'll talk about later, comes through a number of challenges, including the drought in Turkey, rising input material costs, et cetera. So we can say we're quite happy with the performance and obviously need to underline the fact that our bank's performance in the third quarter was much better, obviously, supporting the overall performance of our business. We talked about cash flow. And then obviously, our operating cash flow, for our nonbank business, was up by 17%, which is great. It comes on top of a 28% CAGR growth over the past 5 years. So we continue with the strong momentum that we see. And therefore, as we said, we've continuously and gradually lower our net debt to EBITDA, deleveraging our balance sheet. In fact, our total nonbank combined liquidity, excluding financial services and tobacco business stands just under TRY 10 billion at [ TRY 9.6 billion ]. And Additionally, in our insurance business, there is additional TRY 5 billion. So that's a very strong position to be in. If you look at return on equity, obviously, it follows this good performance. Our nonbank return on equity was 17.5%, which is great. The return on equity is driven by improvement in both bank and nonbank businesses, but obviously, the change in the bank business was much sharper. And then our cash position at the holding entity stands at TRY 1.9 billion, whereas some 63% was in FX at the end of September. If we talk today, I think it's more like 75%, 76%. So pretty much in line, continues with the trend that you are accustomed to. If you look at -- break it down into the quarter, if you look at the third quarter, per se, again, just to underline, banks performance in the third quarter was remarkable. I'm sure you must have heard from them earlier, they've announced our results. Outside of our banking business, obviously, the combined revenue of the nonbank business was up by 40% over a combined revenue of 43%, including the bank. The energy business was an important driver. You're going to hear more about that later in the presentation, but the pricing there supports this strong top line performance. On the industrial, we see good demand generates higher volumes, generates higher share of market for us, and obviously a relatively weaker TRY compared to last year, drives better revenue growth in terms of the export businesses. And on the building materials, the domestic demand was strong to support and contribute to the combined revenue growth of the business. If you look at the EBITDA, there is a strong growth of EBITDA, 46%, in general, in a combined all businesses basis, 16% on a nonbank basis. Again, as we discussed at the end of the second quarter, now obviously, on our generation business, the mix is different. There's less hydro and less wind per se, and then there's higher natural gas, which results in very strong absolute profit growth but relatively lower margin growth. So therefore, that's why you see energy business contribution coming from there resulting in slight contraction in margin. Together with the higher inflation, obviously, our EBITDA in the distribution business has done quite well. We look at a remarkable performance. On the industrial side, the good, let's say, top line growth flew through the profit growth, basically, which we've obviously amplified with a better operational excellence. And on the building materials piece, there's a higher fuel mix this year compared to last year, which stands at about, I think, 15%, at least a 2.5% increase compared to the mix last year. And if you look across past 3 years, obviously, that trend continues, which came underline. This is important for us because the input costs there is obviously increasing and the alternative fuel is a very good way for us to mitigate such input cost inflation. If you come to the net income line, on a combined basis, the net income was up by 40%. If you exclude the bank, actually, there's a slight reduction in net income. That's not necessarily operational. That's owing to, let's say, relatively stronger Turkish lira in the quarter, which you may assume has rectified itself since then, given how the Turkish lira has moved, excluding which actually the net income growth would be at 14%, if you only took an operational bottom line performance. And there as well, the industrials and the energy businesses were strong contributors to the bottom line performance. Now with this, I will ask Kerem to walk us through the business segments. Kerem?

Thank you. To deep dive into segments, let's start with energy. In Q3, Energy segment delivered strong EBITDA performance and annual growth reached 14% despite continuous weakness in hydrology in generation and lower devitalized profit in retail. On Enerjisa Enerji, the company's EBITDA growth remained resilient with positive contribution from distribution business. In Distribution segment, despite lower theft detection performance mainly due to high base in Q3 2020, as field activities accelerated following the lockdown in Q2, EBITDA increased by 3% in Q3 on higher financial income, driven by higher long-term inflation assumptions and regulated asset base. As of September, RAB growth reached 14% on a faster pace on CapEx spending in line with our communication in previous quarters and higher long-term inflation. Meanwhile, in retail side of our energy business performed lower but was overall resilient despite the high base and the impact of increasing procurement costs. gross profit declined due to lower margins as a result of increasing procurement costs, strong base impact and change in product mix. Note that a part of the negative impact offset by higher digitalized sales volume and higher regulated gross profits over higher customer solutions and decline in provisions supported EBITDA growth in Q3. The company's net income declined 9% year-on-year due to higher financial expenses, driven by increase in the cost of CPI-linked financial instruments. Looking at the generation performance, electricity demand increased by 6% year-on-year in Q3 as a result of high industrial and and peaking temperatures in July and August. Average market price increased by [ 77% ] in Q3 due to higher demand, lower hydrology and increasing commodity prices. Enerjisa Generation revenue increased by an impressive 59% year-over-year, thanks to much higher prices on a year-over-year basis. On a separate note, higher power purchasing agreement prices in lignite plants and performance continued to support top line growth. Despite lower hydro generation due to extreme drought conditions and lower wind generation in Q3, EBITDA increased by 41%, thanks to higher spreads in natural gas plants and lignite plants with the increasing market and prices, respectively. Net income registered a remarkable growth of 60% year-on-year due to strong EBITDA pass-through and relatively slower pace in increasing financial expenses, offsetting negative impact of mark-to-market of hedging contracts. For Industrial segment, the combined revenues increased by 57% year-on-year driven by volume growth, thanks to not only strong demand but also higher market share in both businesses. Specific target is we operate to focus on local market in Q3, and we remain agile to provide more supply to the export markets in the coming quarters. Profitability remains resilient through operational excellence and volume growth despite the cost pressures in final expenses and commodity prices. The negative impact of higher raw material prices offset by well-managed hedging strategy in the tire business. The strong operational performance pass-through and declining financial expenses as a result of lower debt level supported segment's bottom line. Please note that our Tire Reinforcement business maintained its operational performance target for the year-end despite the negative impact of ongoing force majeure by a lot of manufacturers in the world and the fire that occurred in the mining production line in Indonesia in the last week of August. Moving on to Building Materials, most important highlight of the quarter was the completion of the acquisition of Buñol plant in Spain, which is an important milestone for our Building Materials business to create an efficient and strong platform abroad, which would pave the way for Sabanci Group to position itself as the leader in global white cement trades. Becoming operational back in early July, Cimsa Sabanci Cement BV not only runs Sabanci Group's overseas white cement business in Spain, U.S., Italy and Germany, but also started to contribute to segment's financial performance. Following the ramp-up period, CSC BV is expected to become a key driver in segment's financial and strategic value creation. Continuing with the financials, segment's revenue growth registered 79% year-on-year in the quarter on strong domestic demand and new synergies created by CSC BV as well as positive contribution of weak German exports. As the cost side pressure started to escalate in the quarter, top line pass-through operational profitability remained very limited, while fuel mix optimization, better energy margin and operational efficiency helped EBITDA growth to remain in green territory, while year-to-date EBITDA growth reached 70% year-on-year. Bottom line, however, slipped down by 4% on the back of higher financial expenses, driven by higher interest rates. However, year-to-date net income grew by 240% on an annual basis. Looking forward, trends fuel and electricity and freight costs as well as supply and demand and capacity dynamics in the sector should be monitored closely. On retail segment, combined revenues increased by 18%, thanks to the improvement in the basket size, both in electronic retail as well as food retail, bringing the top line growth to 24% in the first 9 months of the year, which is well above inflation. Meanwhile, e-commerce sales continued high pace trajectory, reaching 7.2% of total sales revenues in 2021 compared to 5.7% last year. Compared to the pre-pandemic periods of Q2 2019, the e-commerce sales of our retail companies nearly quadruples. Solid top line growth and relative limited impact of elevated operating expenses translated into double-digit operating profitability as IFRS-adjusted EBITDA increased by 20% year-over-year in this quarter. Yet the adverse impact of higher financial expenses continue to affect bottom line of the segment in Q3, mostly driven by Moving on to Financial Services segment, top line growth registered 26% year-on-year driven by strong growth performance in both Life and Non-Life business. In Non-Life business, underwriting results was adversely affected by decreasing positive impact of lockdown coupled with increasing FX-driven claim costs in motor segment and big claims in non-motor segments. Combined ratio reached 112% in Q3 compared to 104% in the same period last year. In Life business, on the other hand, total technical income increased by 15% year-on-year, driven by the growth in life protection volumes and assets under management in the pension business. Recovery of financial income on the back of increasing interest rates and FX rates continued in the quarter. Yet [ Sabanci's ] bottom line remained almost unchanged compared to a year ago as Life businesses performance managed to offset the deterioration in the Non-Life business bottom line driven by lower technical profitability on higher claims. To remind, we have TRY 1.4 billion of impact in insurance companies due to the consolidation methodology change. However, this onetime positive impact is eliminated in the financial numbers on this slide. Finally, on the banking. Despite the challenging environment, along with higher global inflation as well as the negative impact of ongoing pandemic, Sabanci's ] positioning enables the bank to leverage its strength while carrying priorities for improving profitability. Robust TL loan growth, strategic securities positioning as well as across the board, stronger-than-guided fee income growth were part of factors for solid core operating performance. Its net cost of credit evolution has fared much better than guidance, thanks to strong risk discipline through the cycle. As a result, the banks already reached 14.9%, and return on assets reached 1.8% and leverage realized at 8.4x, already delivering mid-teens RoE targets for the year. So this is the details on the segments. We can go to Q&A now.

We have one question from [indiscernible] Securities. How would you evaluate the possible impact of recent significant increase in energy and natural gas prices on your business?

Thank you. Thank you very much. Obviously, the energy segment, in general, has been quite volatile globally as well, not only in Turkey. Obviously, the market prices, the input prices have been changing. Now, I believe so far we have been able to let's say, successfully deliver on our expected performance between our, let's say, a diversified portfolio of generation or, let's say, aligned balance sheet between revenue growth versus exposure, our hedging, let's say, initiatives that has been in place, our sourcing abilities in terms of both access to raw material or our trading capabilities, all of which obviously comes to where we are today. And again, we have been able to successfully deliver on that. Now obviously, going forward, if you take a longer-term view for next year, I mean I believe this year, looking from today, we see no reason why we shouldn't be able to deliver in line with our guidance. Having said that, next year, obviously, as in -- globally, there are, let's say, some challenges building up. And obviously, we will be making sure that we leverage our abilities to mitigate such challenges. Ask the same question when we discuss about next year, and obviously, we'll be happy to continue discussing that.

[Operator Instructions] With that, I hand you back to our speakers.

The next questions come from [indiscernible]. What are the plans for deploying cash generated by PHILSA sale?

Thank you for the question. Now obviously, let me tell you, in a nutshell, there are 4 pillars of how we would like to deploy our capital. Obviously, one of them is to ensure that we continue investing on our core businesses. One of them is, obviously, making sure that we grow our business by expanding into adjacent businesses and new businesses. Thirdly, we want to continue generating an above-average shareholder return that includes, of course, dividend distributions and then potentially other instruments like buybacks, which I know has been in discussion for a very long time, which again, is a good, I think, value -- could be a good value driver for the business going forward. And finally, of course, making sure that we maintain our net debt-to-EBITDA at or below 2x going forward. So depending on the chronological order, you could expect to hear from us based on these elements as to how we're going to deploy the cash that we're going to receive once those -- that transaction is closed.

We have another question from Victoria from Investments. Are you speeding up, increase your CapEx in Enerjisa Generation renewables given the current positive environments?

I mean, obviously, we already have discussed the -- we already have discussed the expansion strategies on the renewables or expansion opportunities on the renewable base, which have already been in our CapEx plans. Yes, I mean, look, it could be. If you look at the general environment in our generation business, as you rightly put, we believe we are at an opportunistic place, with our portfolio, our trading abilities, and et cetera, maybe. We will be keeping a close eye on additional opportunities that we can see because as I'm sure you know, as you heard us state many times that we would very much like to continue expanding our renewable generation base and would capitalize on the opportunities as they come our way. We have the means to do that, not only our capabilities. But also, obviously, financially, we are also able to deliver that.

The next questions come from [indiscernible]. What will be the dividend income growth this year?

I mean I can't give you a guidance for the full year, obviously. However, what I can say is, you know how our dividend policy goes. We say -- and it's not changed, obviously. And then you see how our bottom line is improving. So I'm sure you can have an estimation from there, as indicated earlier.

The next question comes from Sashank from Bank of America. Thank you for the presentation and the opportunity to ask questions. Congrats on executing the PHILSA sale. Are there any other businesses that you may to loop divest the stake, we should think is noncore to our strategy? Also, any update on the share buybacks given some of the peers have become active in short duration?

Thank you, Shashank. Now let me start with the second one again. It was part of the answer to an earlier question. Look, technically, I won't be able to say whether or not we can do a buyback. Obviously, I'm sure you're not expecting, that all I can say as I wanted to underline. It's been part of our capital allocation. It is part of our capital allocation strategy, and we see potential value creation in doing so given where the stock trades today, but I can't say anything more than that. Again, other businesses could be -- in the meantime, of course, what we didn't put here is, there are some assets that has been also in the third quarter actually that we've sold under the Building Materials business, which was part of the network optimization in Turkey, which is again expecting from the Competition Authority. These are relatively small, but I believe should give you an indication to -- obviously, going forward, if we feel that any of the businesses does not necessarily perform -- or industry-wise, we feel that's not fitting to our overall purpose and portfolio going forward, yes, and if -- in the case of this Building Materials business, if it doesn't fit for some reason from an operational point of view, obviously, we will be quite willing to liquidate those assets and see how we can invest those.

All right, gentlemen, I don't see any more written questions. [Operator Instructions] Speakers?

We don't have any further questions.

All right. Thank you. Thank you very much, Kerem. That's Mr. Orhun Kostem, Sabanci Holding CFO; and Mr. Kerem Tezcan, Sabanci Holding, IR Director. Thank you very much, gentlemen. If you would like to conclude, please.

Thank you. And again, thanks for everyone for joining. I hope what you have left since we started this conversation to remember for the third quarter this year is, a, obviously, we continue with our remarkable financial performance and quite poised to meet our guidance for the year, and despite the challenges, there has been some portfolio movements in the period, some of which were in the pipeline for a bit of time. We are happy to be able to close them and move on. And obviously, going forward, quite keen to continue adding value to our portfolio by such movements as and when we feel these are opportunities for us. And finally, we are quite happy that we find ourselves healthy and hopefully do the same at the end of the next quarter after hopefully another successful period. Thank you very much for today, and have a very good weekend.

Thank you very much, gentlemen. Thank you for the presentation. And ladies and gentlemen, that now concludes today's webcast call. We thank you again for your participation. You may now disconnect.