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

Good morning, good afternoon, everyone. Welcome to our Q1 '22 results webcast. First, I would like to draw your attention to our disclaimer. Our CFO, Orhun Kostem, will make the introduction today, and I'll be reviewing our businesses. Orhun, the floor is yours.

Thank you, Kerem. Good morning, good afternoon, everyone. Thank you for making yourselves available today. Obviously, like the quarter -- the first quarter of 2022, that's behind us, today is also quite a dynamic day. So again, thanks for joining and taking the time. I'm happy to report that Sabanci Holding on a combined basis has been -- have been able to deliver profitable growth in this highly volatile environment. And obviously, we -- what I'm going to touch base today is how we also proceed towards our strategic goals that we have communicated to yourselves last -- starting from 2 years back. At the same time, reaching for the moment, the highest-ever consolidated return on equity for the quarter and maintaining a very healthy balance sheet with ample liquidity that obviously gives us flexibility of maneuvering in this otherwise challenging times. We are also happy to report that our efforts and initiatives in sustainability continues to be recognized by independent bodies, Refinitiv, as I'm sure you know, which also is in cooperation with Borsa Istanbul, has rated Sabanci Holding, and we have been among the highest, if not the highest, of 50-plus global investment holding companies. In the quarter, the first quarter, in addition to our good financial results, we have produced the first green hydrogen in energy uridine in our Bandirma power plant. Obviously, going forward, we would want to continue capitalizing on this capability so that we can, on one hand, replace our fuel usage for electricity generation by using hydrogen. And at the same time, we will try to see how we can further commercialize and create a business potentially out of this. On the industrials, as you have -- I'm sure you may have followed, Arvento was acquired by Brisa and Microtex was acquired by Kordsa, which I'm going to touch base very briefly. As we have been telling a few times for most of you who we have been in communication with that we were planning to build a digital business. And the first inroads into that, we have taken the steps and as we have announced, I'm going to briefly touch base on that as well. And finally, on the building materials, we have initiated -- Cimsa initiated a calcium aluminate cement capacity construction which is obviously important because, as you know, Cimsa is one of the white cement -- global white cement players. This, even though it's a niche sector is a high-end value part of the business, of which Cimsa, hopefully, is going to also participate in the global business of calcium aluminate cement. With that, I'll move to the next page. As I have discussed briefly, I'm happy to say that we are continuing our path in terms of delivery on our strategic initiatives. I'm not going to repeat what has happened until the year-end. As I'm sure you see on this page, our efforts also have accelerated since the start of the year, in the first quarter of 2022, including then April. We have closed the disposal of Philsa and PMSA shares, as you have followed. As I touched base, we started producing green hydrogen in Turkey. Acquisition of Arvento was completed by Brisa. On the bank side, the transfer of Turk Telekom shares owned by Levent Yapilandirma Yonetimi, LYY, to Turkey Wealth Fund was completed. Microtex was acquired by Kordsa. That's in the process of completion. The calcium aluminate cement investment has been initiated by Cimsa, and we have initiated our digital investments by the acquisition of Radiflow and SEM. Next, obviously, we don't only move towards our strategic goals, but we continue delivering very good financial results. And first quarter of 2022 is no exception. I'm happy to report that we have been able to deliver ahead of the very high inflation levels and obviously, raw material and supply chain-related pricing increases in the quarter. And on a combined basis, as you see, our revenues have grown more than double year-on-year. Our EBITDA growth was faster, again, on a combined basis year-on-year, course to double. And then the consolidated net income more than doubled on a year-on-year basis. So that's a very healthy, as far as we are concerned, delivery of financial performance. Coming from both our bank as well as our nonbank businesses, obviously, Akbank has -- they have announced their results, a very strong set of results, very good delivery against their ROE guidance, driven by a number of elements, including customer acquisition, delivery on their core business revenues, good position in their portfolio on the back of this high inflation environment where the portfolio supports net income generation, both for the bank and obviously, for our business as well on a consolidated basis. On the non-bank side, again, the performance is great. The growth is over 100% both in terms of revenue and EBITDA. But as we move towards profitability on the nonbank side, of course, we need to consider that the raw material prices, fuel prices, energy prices, I'm sure you know, have been increasing. So these results have been delivered on the backdrop of those increases. And of course, on the backdrop of the fact that the average dollar devaluation was about 88% in the first quarter. Euro was 75% and the CPI hit over 60%. So when we look at the results, of course, it's important for us to keep those dynamics in mind. Nevertheless, we are quite happy with the net income performance overall group as a whole, driven by our healthy leverage and our favorable cash position just under -- a long position of just under $400 million which you're going to see at the back end of the presentation on the appendices as well. So we had a great start to the year, a very strong start to the year. Having said that, we maintain our guidance, our midterm guidance for the period on the back of a number of volatilities and uncertainties, both on the inflationary front, on the raw material front as well as energy prices. Coming back on the next page, you see our return on equity have hit its highest levels. Both on the bank and obviously on the nonbank side, so on a consolidated level, Sabanci Holding return on equity was just under 25%. Our cash position on -- if you look on the holding based, net cash position was TRY 7.7 billion at the end of the first quarter. That's, of course, since the end of the year, the completion of the Philsa sale contributed to our cash position as well as dividend income. Since the end of March, our -- the net cash still stands about TRY 7 billion, around about TRY 7.2 billion, after the dividends we received, the dividends we have paid and of course, the ongoing share buyback program that we pursue. On the next page, you see our operational cash flow. You see the negative shrink on our operational cash flow. The main driver, as I'm sure you must have followed our friends in Enerjisa is the cash flow performance of Enerjisa. It's basically the distribution business of Enerjisa does quite well, which is the majority of the business, about 85%. On the retail side, the cost of electricity versus the tariffs still does not generate enough cash flow. And there is an impact coming from the VAT changes, which is temporary and would be normalized rest of the year. The cash flow impact normally should be normalized at one point in time, although looking from today it's difficult to say when. Having said that, again, I'm sure you noted that Enerjisa increased their underlying net income guidance for the year and runs a very healthy balance sheet of 1.5x. So this is -- this we don't see as a major impediment for our performance in 2022. Other than that, the cash flow performance of our other nonbank businesses are slightly less than last year. That's primarily driven by the fact that we're building inventory in most of our businesses, with the expectation that the raw material prices, fuel prices are going to increase the rest of the year. So it's -- take it as more like an hedging for the next 9 months for us to be able to protect our margins as well as our cash flow. And our balance sheet allows us to do that. We're still at 1.2x net debt-to-EBITDA, still around a very healthy level of leverage. If we go to the quarter-by-quarter review. Again, if you look at the revenues, on our nonbank business, the primary driver of the revenues is our, of course, energy business. We are quite happy that we have a portfolio of generation as well as distribution. Because we talked about the impact coming from the distribution, whereas our generation business have been performing exceptionally well, which makes us quite happy for the period and adds on to our financial performance. On the industrial side, obviously, as you will remember, the majority of the business are exports. And of course, we have been able to generate over 24% export growth year-on-year on our -- together with our industrial as well as building materials businesses which adds on top of our revenue performance. And our retail business has done well in terms of revenue. Obviously, part of that is -- once mobility comes back and we are getting back to relatively normal, the retail business benefits that, both Teknosa business as well as Carrefoursa. But also, let's keep in mind that on the back of higher inflation, there's a certain accelerated shopping behavior at this point in time. So although we still expect to see good results in line with our guidance, our year-on-year growth rates may normalize in the rest of the year if the shopping behavior does not continue. If you look at EBITDA, again, on the nonbank side, one of the important contributors is our energy business. Regulated asset base growth contributes that greatly from the distribution business as well as our generation business, which did quite well in terms of EBITDA generation. We would expect hopefully that's still early to say, but the first signs gives us hope that hydrology could be better than the past 2 years, which, obviously, helps us with better margins on our generation business. And Kerem is going to walk you through the details of these. On the industrial side, of course, again, as you remember, Kordsa benefits from the fact that it has a diversified footprint and does not get hampered by the supply chain disruptions globally, and that continues to be an advantage for the Kordsa business. And on the Brisa side, under the industrials, Brisa's raw material hedging strategy, obviously, adds positively on its profit performance. On the building materials side, the top line performance passes through the EBITDA line. And of course, the alternative fuel usage will continue to increase year-on-year which also helps us -- on the light of increased fuel prices, helps us in terms of managing our margins. One question though, I'm sure you must have seen as well. In our elementary insurance Aksigorta's insurance business, the profitability of Aksigorta both on EBITDA and net profit levels were not well. That's the nature of the business. The premium generation does not, at this point in time, match it's cost increase, driven by the abrupt increases in the inflation levels and with high negative real interest rate environment. Nevertheless, we benefit having a diversified portfolio of businesses, which allows us to double our EBITDA compared to last year well ahead of the inflation as well as devaluation levels. And same is true for the consolidated net income. Again, the profit performance of energy contributes as well as the industrials contributes positively on our bottom line. I talked about our cash position, which also helps delivery to our bottom line. And therefore, we have been able to grow our bottom line at more than 2x in the period. Now very little on what we have disclosed to you before the [indiscernible] break that we have been -- and telling you about since last year that we intend to create a business, a digital business going forward. One arm was cybersecurity. Cybersecurity is an interesting, obviously, industry because -- it's one of the fastest growing on the digital space. In the past 3 years from '18 to '21, the CAGR growth of the industry was 9%. Within it, actually, what we have been focusing on was the operational technology part, basically. The operational technology security OTC, which has been growing by 14%, so faster than the overall cybersecurity segment. And looking forward, unfortunately, this operational technology security market is expected to grow even faster, just over 20% CAGR growth. And I don't need to tell you the risks associated with cybersecurity. And the operational technology security deals with power generation and distribution, oil and gas distribution, utilities and transportation. We have acquired a business called Radiflow, not a large deal size, but a very good growth profile, a very good technology that we expect that would benefit most in this fast growing segment of the cybersecurity domain, still already a global business generating revenue streams globally, operating in Europe -- EU and the Middle East, APAC markets as well. So we don't have this technology. Obviously, we bought now the technology, and we will very much like to continue building on this position to grow. On the other hand, we also acquired SEM. When I say acquired, both of these are subject to completion, after customary processes. SEM actually was a subsidiary of Ströer, some of you may have heard. That's a globally acclaimed agency. It's -- specifically, its business is digital marketing. And it creates us to leverage the engine that we have generated internally in Sabanci Holding for marketing intelligence, basically with this experience and its customer base, data-driven technologies to manage marketing services. So both of these businesses we expect to have great potential going forward. And I want to also show you how we structured these businesses. I'm sure you must have heard from us, our digital arm, Sabanci DX, we are now accumulating these digital investments initiatives under our component-based subsidiary, our wholly owned, home-based subsidiary Sabanci Dx Technology Services and Investment B.V. So ready for SEM and the commercial businesses and services of Sabanci DX will be under this whole subsidiary. And obviously, will create us a platform to enjoy synergies with Sabanci University to grow on the digital front and hopefully create a good business for us. I will briefly touch base on the acquisitions on the industry side. One of them is Microtex, which was acquired by Kordsa. As you will also remember, Kordsa has expanded to composites. That was before the pandemic. A great move, not a great timing, unfortunately, but have been able to diversify its business, both geographically and product-wise. Acquisition of Microtex, which obviously is in Europe, and especially an important player as a supplier in the automotive and motor sports industry accelerates that diversification for Kordsa, and will add on top of the existing composite business going forward. Brisa announced the acquisition of Arvento. And -- it's a mobility solutions business, fits exceptionally well with Brisa's existing business as Arvento is leader fleet telematics and IoT solutions company, with a high market share in the subsegment. So we are quite happy with these 2 acquisition initiatives under industry as well. As I said, Microtex also is subject to closing procedures. And finally, again, I'm happy to report that we continue our initiatives in ESG performance. I'm not going to repeat our advances under MSCI Index or the CDP climate ratings, which we continually look to increase. But we have been the only Turkish holding company to be represented in the Bloomberg Gender Equality Index, which was in 2022. And also, as I mentioned, we had a very good result under Refinitiv's rating with the rating of A among the 50 -- over 50 companies in the investment holdings category globally. So we're quite happy with our first quarter performance on all fronts. I'm just now going to deliver over to Kerem to walk you through specifics of our segments. Kerem?

Thank you. Let me start with energy this time. It's going to be a little bit long, so bear with us. A lot of things happening in the energy sector. So in Q1, energy sector's EBITDA has more than doubled, thanks to positive contribution from both Enerjisa Enerji and Enerjisa Generation. When you look at Generation's performance, it had exceptionally strong results in Q1, thanks to higher logistics prices, big Turkish lira, diversified portfolio, higher hydrology compared to last year and optimum capacity usage that led to major improvements in both spark and dark spreads. Electricity demand growth was approximately 5% year-on-year in Q1, driven by lower-than-average temperatures despite negative impact of gas supply curtailments. Average spot prices increased fivefold in Q1 compared to last year, mainly due to increasing commodity prices, gas supply limitation and change in maximum price formula to maintain supply security. Enerjisa Generation's total generation volume declined by 14% year-on-year because of lower volume from natural gas plants, again, which is the optimum level of production to reach highest profitability level as far as spark spreads are concerned. Despite lower generation volume, revenues increased by fourfold year-on-year, mainly driven by much higher spot electricity prices, higher energy trading volume as well as weak Turkish lira. EBITDA more than tripled as natural gas and lignite profitability continued to drive higher spark and dark spreads in generation business, driven by higher market prices. Congruent with this, hydro profitability started to show some signs of recovery as its contribution to EBITDA increased, thanks to higher water flow and weaker Turkish lira compared to last year. Moreover, we have successfully captured market opportunities that benefited from higher spot electricity prices and our team's ability on commodity strengths. Higher dispatch contribution also supported the EBITDA in Q1. All in all, net income more than quadrupled in generation business compared to last year, thanks to this robust EBITDA contribution. When we go to the details of distribution and retail business, Enerjisa Enerji Distribution segment's EBITDA increased by 48% in Q1 driven by higher financial income on a higher short- and medium-term inflation assumptions. Regulated asset base growth reached 61% compared to last year, reflecting higher inflation despite lower CapEx spending due to seasonality. Retail business, the growth reached 98% year-on-year in Q1, fueled by increasing gross profit of regulated market segments, thanks to higher electricity procurement prices and higher retail service revenues. Despite the strong operating performance, net income degrew by 6% year-over-year due to higher financial expenses as a result of higher financial debt and interest rates and devaluation expenses of bonds and customer deposits due to higher inflation. Excluding noncash deposit revaluation, net income growth was actually becoming 16% year-over-year. The decline in net income in Q1 is not a proxy for the full year due to quarter-specific drivers. The peak in consumption took a toll on financial expenses in Q1, while the impact of inflation on costs will be lower in subsequent quarters. Meanwhile, the positive impact of inflation on revenues will continue to be affected throughout the year, notably for distribution segments given when the inflation start to ease. Like in many countries, Turkey authorities also made some changes to the regulation in the energy sector, which you -- back in April, which you all know. The regulation introduced maximum price limit application for power generators. And maximum settlement price is set for each electricity generation technology. For low-cost generators, difference between the market price and the resource-based maximum settlement price will be allocated through special funds. Discounts will be used to both ensure supply security and to support cash flow of retail companies. The impact of this newly introduced regulation is likely to have limited negative impact to our generation company, actually limited impact not negative. But likely to have positive impact on the retail company. Therefore, net-net, our businesses are likely to make the balance even in a changing macro and/or regulatory conditions. Once again, I just wanted to stress Q1 has marked another quarter when we benefited from having diversified businesses in our energy segments, while cash flow and net profit of Enerjisa Enerji weakens due to extraordinary market conditions. On the other end of the spectrum, Enerjisa Generation business benefited from the same conditions by delivering exceptionally strong performance and succeeded in partly offsetting the swings. Moving on to industrials. Segment combined revenues surged by 130%, driven by strong demand, pricing flexibility and weaker TL. Our Tire Reinforcement business volume growth exceeded markets, thanks to its local agility, combined with strong global footprint. Segment's strong operational profit was driven by top line growth, raw material hedging strategy and churn diverse in Tire business and better margins and higher volumes in Tire Reinforcement business. Segment's net profit more than doubled, thanks to the strong operational performance and drop in financial expenses. Moving on to Building Materials. Revenue growth was impressive in Q1, reaching 179% year-on-year, on sustained demand, better pricing flexibility. Please note that contribution of Cimsa Sabanci Cement BV in segment revenues increased meaningful level this quarter. But even without Cimsa Sabanci Cement BV contribution, segment's revenue growth still stands at more than 100% year-on-year in Q1. Despite fuel mix optimization, better energy margin and better OpEx to sales ratio, escalated fuel, electricity, raw material and transportation costs limit this positive impact of strong top line performance, which resulted in a lower EBITDA margin of 11% compared to 18% last year. Yet EBITDA margin is almost doubled compared to Q4 '21. Segment's bottom line declined 6% on higher financial expenses driven by increased interest expenses and FX costs. I just wanted to highlight finally our efforts to improve [indiscernible] as our new alternative fuel investment in our Afyon plant became operational in this quarter. As a result, segment's alternative fuel usage improved even further and reached 21% compared to 14% last year, and this is way above Turkish 8% average. On retail, segment's combined revenues increased by 70%, thanks to strong contribution from electronics retail, while [indiscernible] revenue growth was in line with average inflation in Q1. Like-for-like customer numbers in both businesses have shown double-digit improvements. E-commerce sales growth prevailed, increased 48% in Q1, although e-commerce share in total revenues declined slightly by 1 percentage point due to easing COVID-19 restrictions as the mobility improves. As electronics retail company officially launched its own marketplace in February 2022, with the aim of much stronger presence in e-commerce markets, the pace of online sales in electronics likely to increase its share in total revenues going forward. Solid top line growth was able to cover elevated operating expenses and operating profitability is maintained in both businesses. Segment's IFRS adjusted EBITDA increased by 75% in Q1 and margin improved slightly by 0.1 percentage points, thanks to increased share from more profitable electronics retail. Despite higher financial expenses, segment's bottom line improved. Moving on to financial services. Segment's top line increased by 59% year-on-year driven by both life and non-life businesses. In life business, technical income increased by 49% year-on-year, led by growth in life protection volumes and pension assets under management. In non-life business, on the other hand, underwriting results was -- were adversely affected by the increase in mobility, coupled with negative impact of 50% hike in minimum wage and the increase in FX-driven claim costs in other segments. As a result, combined ratio deteriorated to 106% in the quarter compared to 108% a year ago. Despite higher financial income and increased interest rates [indiscernible], deterioration in non-life businesses underwriting results due to higher claims resulted in lower profitability of the segments. Finally, on banking. Despite the challenging environments, along with higher global inflation as well as negative impact of ongoing pandemic, Akbank positioning enables the bank to generate long-term stakeholder value. Akbank's quarterly net income of about TRY 8 billion is almost 4x of the first quarter of last year. Return on assets came at an eye-catching 4% and around 39% ROE, well ahead of the guidance. Robust TL loan growth across the board, fee income growth as well as strategic securities position were supportive factors for solid core operating performance. The bank further built capital during the quarter, reaching a robust figure of 17.7%, excluding forbearances, which is the highest amongst its peers. Its net cost of credit evolution under last proactive provisioning while improved collateral values and ongoing strong collection performance continued to contribute positively. For 2022, Akbank's focus will continue to remain on healthy, profitable growth and customer acquisition while sustainability remains at the heart of its strategy. This finalizes our details on the segments. I now would like to hand over to our CFO, for closing remarks.

Thank you, Kerem. Again, we're quite happy to have a very strong start to an otherwise challenging year. Some of our businesses, obviously, like our bank where our electricity distribution business is very well positioned in this high inflationary environment, whereas some of our other businesses are more susceptible, we are aware of the fact that the energy raw material prices, fuel prices in general will continue to be challenging and will be driven by our ability to price as well as manage our cost and expense basis. Nevertheless, obviously, we maintain our guidance for the year after this very strong start. And we would be more than happy, hopefully, to share with you our good progress in the following quarters to come. So with that, we can go to Q&A.

[Operator Instructions] We have the first question. You mentioned that you are maintaining the guidance. Can you please share your guidance on holding level? On energy business, how should we think about your EBITDA margin consolidating this year?

Thank you, Hanzade. You will remember our midterm guidance, we were guiding for revenues growing 8% better than headline inflation. EBITDA doing better than -- 10% better than headline inflation. We were guiding for our net debt-to-EBITDA to be normal than 2x. You will also remember we have discussed that we are going to step up CapEx in the next 5 years versus the last 5 years, which is obviously true. I mean if you take the first quarter and including April, our CapEx to revenue has actually increased from 6% to around about 9%. So we're pretty much in line with what we have been guiding you. We were maintaining that we would like to increase the share of the FX revenues, and our midterm target is about 30%. Let me see -- and the other one is the -- as we're transforming our portfolio with investments in the new economy, and we expect the share of the new economy to come to some 13% from a base of 6%, which is the average of 2017 to 2021. So that was actually our guidance. On the second question, I mean if you look at the EBITDA performance of our energy businesses together, you take the generation as well as the distribution business segment-wise, the growth in the first quarter was about -- just under 130%. Obviously, most of the -- a substantial part of the growth coming from the generation part. As I said, although we will see in the second quarter more clearly, on the generation side, the hydrology could be different from last year. We would expect the energy prices to remain high given the energy deficit in Turkey. And on the distribution side, as I said, our regulated asset-based model actually protects us in terms of EBITDA growth. So we don't expect a negative, let's say, movement. In fact, we could see some margin opportunity, as I said, if the hydrology becomes better compared to the past 2 years.

Second question, after having leveraged the balance sheet, what would be Enerjisa Generation strategy, M&A, greenfield or dividends?

On the generation side -- thank you, [indiscernible]. I mean, look, it has become a very healthy business. Actually -- probably a bit of everything that you have underlined because we would very much like to continue expanding our renewable portfolio. And we would want to continue investing on our renewable portfolio. We already have -- as you will remember, we've communicated 565 megawatts of wind, of which 65 megawatts has started to get commissioned. We're looking to see if there are reasonable opportunities for acquisition. Obviously, the company is in the best position to do that from an M&A point of view. And as shareholders, we are quite happy with the dividend streams that are coming from the generation business. The beauty of energy is it could do everything that you listed without necessarily hampering its balance sheet health. So staying within our midterm guidance for our leverage in the group as a whole, our generation business could do the greenfields or acquire businesses as well as continue distributing healthy dividends.

[Operator Instructions] These are all questions, I guess. Everything is pretty clear. So I would now hand over to our CFO for closing remarks. Thank you.

Thank you, Kerem, and thank you all for participating today. Obviously, these were the -- this is the presentation and the discussion and the questions for today. We don't have to remind you, if you have any more questions, please follow up with us. We will be more than happy to answer them. And we look forward to getting together at the end of the next quarter, and hopefully, sharing a new set good results we will do. Bye for now, stay healthy. Thank you.

Thank you.