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

Good afternoon. Good morning, everyone. Thanks for joining Sabanci Holding Energy Day. It has been 2 years since we haven't done our Energy Day, but we have a lot of good things to tell you today. We have Orhun Kostem and Kivanc Zaimler with us to talk you over recent developments, both in the holding company and the energy companies. Before we begin, we kindly ask you to refer to our disclaimer. Now I would like to leave the floor to Mr. Kostem.

Thank you. Good morning, good afternoon, everyone. Welcome to our Energy Day in Sabanci Group. Obviously, if you're following us, I'm sure you must be following the developments across our group, and we are quite happy and excited today to talk to you in detail about some of them under our energy business, which happens to be a fairly large contributor to our group's net asset value. If you look at the total listed assets of Sabanci Group, which were about $3.5 billion, that's the latest reading, 24% is generated by the Energy group. Needless to say, there are still assets under Energy group like Energy Uretim, which are nonlisted. So there's a lot of value that we believe in our energy business. Not only that, but our Energy Group also contributes quite favorably to the profitability of our overall group. If you look at our nonbank portfolios, EBITDA generation, which stood at TRY 14.3 billion. That's as of end of the first half of 2022. The Energy Group constituted 62% of that. So a fairly large contribution contributed to our financial performance in that sense. Now next, what I would like to show you something that you have seen for quite a bit of time because we were going through our new strategic house and our new strategic initiatives. And I remember at the time when we started discussing about them, obviously, we were referring to our plans or aspirations going forward and into the future. Now, I'm quite happy with each industry day that we're holding, whether it's digital that we work together or Industry Day, financial services, building materials, we can walk you through some of the initiatives which we talked to you about before. And now we are in the process of making and tell you what exactly has been happening as we realize these steps. We have boiled this down, this whole framework done, as you remember, into true distinct categories that are future-looking strategic initiatives will be around investing in climate technologies, advanced material technologies or digital technologies. Today, when we talk about our Energy group, we're not only talking about an important contributor to our business today, but also an important contributor to our business going forward, given that our energy business would be driving our efforts under climate technologies. So I'm very happy that we host today Kivanç Zaimler, our Energy Group President, who is going to walk us through the details of Sabanci strategy in Energy. Kivanc, welcome.

Thank you, Orhun. Dear guests, thank you to each and every one of you for showing your interest -- we are really honored to be here with all of you to discuss the strengthening strategy in line with the purpose of the Sabanci. Let me remind you, we Unite Turkey and the world for a sustainable life with pioneering initiatives. No doubt that the announcement of the energy investments as of last week and also this week are the strong evidence of our concrete road map. The 3 topics dominate the agenda of the energy sector in the world today. Every year, these 3 categories are measured for all nations worldwide by the World Energy Council, of which I am the Vice President on behalf of Turkey. First one is the supply security. Possibly the government's top concern. The second one is the energy equity or consumers' affordability, an important factor influencing cost of the economic growth. And the third one, the effect of energy consumption on the environment and carbon emission. This triangle is a trilemma. You cannot maximize all of these 3 criteria. You can only optimize each access because they contradict each other. All the bubbles you see around, that is all initiatives and innovation are the main topics that almost an entire energy work is talking about and working on. And the energy policies of countries also include all of these issues to different extents. Every country has a policy, a recipe. The first one is more renewables. Second one is efficiency and the third one, transmission and distribution lines. However, even with all those initiatives, as I previously stated, this triangle cannot be maximized. A completely new and disruptive technology is the only way to maximize this triangle. The world is looking for this disruptive solution. Perhaps we are developing it now but has not yet been given the name or given a [ name ]. In line with these developments, Sabanci holding is moving towards its strategic direction in the energy business from traditional to disruptive. In line with these trends, while we continue to apply the recipe in our current businesses, we have turned our long-term view to find disruptive. In line with our focus on sustainability by using all our resources, including human resources and digitalization. We are committed to staying at the center of the technologies that will shape the future energy world, both in Turkey and abroad. Everything you will hear from now on shows how much we are dedicated to and believe in these 4 strategic directions. [indiscernible] companies well balanced position to serve value chain [indiscernible] and companies [indiscernible] forces of the strategic direction change. Our prestigious international partnership provides great support for us to carry out [indiscernible] in harmony. On the left side, the generation and trading company in our portfolio and this business lines consisting of generation and trade. Energy rating generates electricity from 21 power plants in 5 different technologies and 44% of the 3.6 gigawatt installed capacity comes from renewable sources. On the right-hand side, Enerjisa Enerji operates 2 main business lines, again, power distribution and retail, with operational excellence and reached 10.1 million customers in 4 cities and 7 metropolis to provide distribution services to 22 million users. The fact that the regulated asset base, which is the most critical indicator in this business line is far above the sector average. It's also an important indicator. I must also say that both of our companies continue to grow in their own fields, our leading innovations used [indiscernible] place also shows the balance, the diversification in their generation portfolios. So you see that Enerjisa Üretim with its well-balanced generation portfolio makes a difference in this chart.  While running these businesses in the energy sector, more than 25 years, we have gained diverse competencies, which are key to our success. Our energy business is balanced and resilient, positioned vertically integrated and covers the entire value chain from generation to distribution and retail. Risk management is one of our strongest muscles. In line with this, our effective risk management approach rewarded with solid balance sheets of portfolio companies, so companies can keep making investments, which I will explain soon. Operational excellence is aimed at the companies where the processes and efforts improved consistently. We seek efficiency while generating and distributing the power as well as managing the businesses. But most importantly, we have one of the most digitalized companies in the energy sector of Turkey. And I'm also very proud to say this, we work with the most competent and qualified people of Turkey. I consider these last 2 as our greatest strength of all. All these competencies gained in current businesses encouraged to embark on this transformation journey. This slide really captures our game plan, and it's a slide that I like a lot. We will execute generation, trading, distribution and retail businesses, which you see in the lower left corner through Enerjisa companies. Here, relying on these competencies, we are growing our current businesses while still following the recipe in Turkey where we operate in. While we are expanding our businesses here, we partially move these businesses to new areas of competence and even partially abroad. When we move to the upper left side, we will perform our current electricity generation competencies abroad in the U.S.A. Under the company, we have just established a sub-100 climate technologies. We will conduct electricity generation activities as we see on the left side and then move to the right [ posdant ].  We established a climate tech venture structure to gain new competencies, discover new technologies and, in fact, search for that disruption. In the U.S.A., where we took our first step, our goal is to be involved and to be part of the technologies that we will develop under this venture. Our ultimate and prime objective is to transfer these new technologies and solutions as they approach commercialization and use them to boost the value of existing energy firms and open up new business opportunities in Eurasia and particularly in Turkey. Yes, let's look at [ Turkey ] while going into the details of the story, let me start with the recipe in Turkey. As I said before, while protecting and growing our core businesses in Turkey, companies will transform their businesses by entering adjacent areas. As shown in the block on the left and Enerjisa Üretim in generation and trading, this significantly increased its capacity for electricity generation with additional investments in renewable energy. If you recall, it was a crucial component of the recipe. And at Enerjisa Üretim, we expand and commercialize its competencies in trading and digital as well. As the first business to produce green hydrogen in Turkey, they will keep researching this area as well. In the block on the right, Enerjisa Enerji under distribution and retail. Turkey's distribution network still requires significant investment. This was also an essential part of the recipe and the main driver of its growth, the network will continue to be invested in by Enerjisa Enerji. Enerjisa Enerji is also in a leading position in the field of customer solutions. They started to offer different services to their customers, especially with the instalment of distributed generation units such as solar at the customers' facilities and the further expansion of the electrical vehicle charging network and various efficiency and decarbonization solutions.  Now, I will give the details of the businesses of both portfolio companies. In this context, which also excites me, an important growth move is being initiated by utilizing all the potential in renewable energy in Turkey. Today's installed capacity of 3.6 gigawatts, which consists of 44% of renewable sources will increase to 57% as 4.7 gigawatt installed capacity in 2026. And hopefully, this number will increase even up to 5 gigawatts. And with the additional renewable investments, they will not only increase the green rate in the portfolio, but also significantly increase the competitiveness of their portfolio. As you may have seen on our latest announcement, we are pleased to reshare the 1 gigawatt [ Yerkavin ] power plant investment, which is worth $1.2 billion. In this deal, Enerjisa Enerji recently acquired 2 more additional licenses each 250 megawatts, in addition to its existing 500-megawatt licenses and now has 1,000 megawatts. Turbine procurement agreements for this 1,000 megawatt went in the Aegean region of Turkey, our site and the investment with a total cost of $1.2 billion will be operational gradually, and the last turbine will be commissioned in the first quarter of 2026. Most of the investments will come into operation in 2025. The investments are based on a 15 [indiscernible] and dollar-based purchase [ guarantee ] contracts as one of the dollars guaranteed KPAs in this project size and one of the most important milestones in the history of our generation company. Meanwhile, renewable investments will not be limited to these YEKA projects and [ ceratin ] installing so-called hybrid solar provident plants in every part area within the [indiscernible] power plant. [indiscernible] if you've missed something, use the [indiscernible] for any additional questions. So I was on the next-generation capabilities. So, I was talking about asset-light growth and trading. And let me continue from this point onwards. I mean European electricity and §offer today high profit for traders who manage risks well. And getting the first-mover advantage is valuable, where Turkey geographical location gains important after the Russian crisis. When it comes to digital Enerjisa Üretim can commercialize technological, novel and digital services while sustaining the competitive advantage. Digital and energy services can be offered at low market entry costs with a comprehensive product offer that can create a synergy with the business as usual. Finally, about green hydrogen. Hydrogen could be a critical enabler of the global transition to sustainable energy and decarbonization. It is important to be positioned in the market in advance of others. So, we believe that this pilot applications in Turkey will develop and grow. Now we look at how Enerjisa Enerji will grow and transform its adjacent areas. Having the most extensive customer network because of distribution and retail business in Turkey, it turns from an electric seller to a solution partner, thanks to the technology. When you look at distributed generation solar, you may have heard the news about the world's largest solar power plant installed on the roof of the stadium housing, the Turkish best-known football team in Europe, which entered the Guinness book of records. And on the facilities of our customers, dozens of similar projects have been installed. As they operate with a long-term income model while offering financing to customers, this business has an extremely high growth potential. Enerjisa Enerji is creating a sustainable and a service-based business model through energy performance contracts and offering to customers environmentally-friendly energy solutions with a focus on decarbonization and efficiency. Electrical vehicle sales are growing rapidly in Turkey as elsewhere in the world. As everywhere charging stations are one of the most important bottlenecks. In 2018, Enerjisa Enerji acquired the start-up business Esarje, and with that it began to build Turkey's fastest network. Esarje will consolidate its leadership by continuing its investments here with the tender they won in the past. So, to summarize, Turkey, both companies, the businesses you see in the level left have already engaged in these growth initiatives using their own financial resources, and they are committed to paying regular dividends as they have done so far. Let me move on the top, to the new markets in the next slide. At Sabanci Holdings, we have communicated our commitment for a long time. We united Turkey and the world for a sustainable life with our leading enterprises. So, we can reflect on this commitment to our energy business. We define it as follows: we lead energy and climate transition by bridging the gap between emerging and developed markets. While we create sustainable base return through Sabanci Renewables in the generation business. We also invest in revolutionary ideas through Sabanci Climate Ventures. In Sabanci Renewables, while we focus on wind and solar power plants in the U.S. in the first stage, we aim to use the digital asset management competencies that we have developed in Turkey. Moreover, we will ensure the geographical diversification of our portfolio, and we will be able to increase the share of our revenues in hard currency. On the other side, in Sabanci Climate Ventures, we have defined the investment areas and geographies that we will focus on. We have defined our competence that will differentiate us here as early market penetration of start-ups in emerging markets.  Why we did we start from the U.S.A.? The reason is obvious. The U.S.A. is the second largest renewable energy market after China. And in addition to the rapid growth in the last 3 years, U.S. companies have committed to sourcing 80% of their consumption from renewable resources by 2045. New investments are incentivised by the government and the U.S. power market is one of the most developed, least regulated power markets. Renewable investment secure long-term stable base revenue streams. Finally, the U.S. has the most liquid financial market with the lowest cost of funding. On the other hand, when it comes to the technology, the United States attracts nearly 60% of worldwide start-up investments, which amount to around $270 billion in 2021. More than 50% of global unicorns emerged in the U.S.A. In summary, we were able to find everything that will take us to our destination and primarily in the U.S.A. It gave us the sense of a safe harbor to begin with, but this does not mean that our vision for energy and climate technologies will be limited to U.S.A. However, we are not able to share further information about our further expansion plans yet. As you have learned from our last disclosure, we start our first renewable energy investment in Texas with a greenfield solar project of 272 megawatts. We made detailed analysis of renewable energy in all United States. Texas seriously needs additional capacity due to electricity supply and demand in base. The seasonal arbitrage between demand and supply renders many opportunities. Both solar and wind potential are very high. The East region-- The East is a region where the demand is very high and supply is limited and market prices are much higher in the East, especially in the Houston area. On the other side, the Western region, which has low demand but great supply potential has attracted companies that requires huge amount of energy like data centers, cryptocurrency miners or hydrogen products. Our project is in the Houston area where the demand is highest. It's a [ show already ] project and the construction will start in December. Considering these solar panel constraints globally, we plan to activate all the capacity gradually no later than mid-June 2024.  There is a turnkey contract with the EPC and they secured the panel supply. So, we will fulfil all the requirements for the project to be financeable. Beside the EPC contract with the first class engineering and construction company, we agreed to sell 70% of the generation to a highly rated counterpartner through a power purchase agreement of 10 years. In terms of financing, we have reached the point of agreement on terms and rates. In addition to regular financing options of the benefits of investing in the U.S.A. is using a tax equity option, which is one of the most important ingredients of the financing that lowers the WACC of the project and those maximized return. On the tax equity, we are in contact with reputable partners with high ratings. Although this is our first investment, we are actively monitoring many other projects in the pipeline. We are evaluating a portfolio of around 1,000 megawatts in total with projects in different sized locations and technologies such as solar, onshore wind and also grid-sized battery projects. We will be sharing those projects with you once they reach to a certain point. Sabanci Climate Ventures, the other corner store of the U.S. investment plan will be investing in start-ups for early access to technology and creating sustainable business in the medium to long term. When we set up this venture capital business, we received a very comprehensive consultancy service. The current VC ecosystem mainly focuses on developed markets. However, the energy and climate transition is a global paradigm and there is a blue ocean for CVCs that can bridge the gap between emerging and developed markets. So, we have defined our mandate and purpose in detail. Our value proposition to start-ups, how value extraction, different methodologies on value extraction, fund size and allocation, investment areas and states and how to access funds. Finally, in this business line, we seek strategic benefits complemented with financial return, but also we offer pilot execution and earlier market access through the existing asset base, I'd say, 10 million customers, 5 gigawatt of portfolio in 5 different technologies and also direct access to academia through Sabanci University. Most importantly, strong presence in the emerging Eurasian markets. And in this context, investments have already been made in a Climate Technologies fund and directly in some start-up companies. First, the investment. We invested in a venture fund, namely Safar Partners with a portfolio of start-ups from seed to growth stage and within and around MIT, Harvard and Rochester University ecosystem. We have committed $25 million Safar Partners builds a portfolio, focusing on innovative energy and climate technologies, advanced material technologies, artificial intelligence and robotic technologies. This fund has some very reputable investors. So, we are the LLP, the limited liability partner, in the fund and actively participates in the fund meetings. We also see a chance to learn from this fund investments and collaboration. Apart from this fund, we have made 2 direct investments. The first one is CFC, the Commonwealth fusion systems came out of MIT's plasma science and fusion center and already reached a valuation of $5 billion last year. There is a high venture capital interest in the early-stage technology, and CFC has the potential for clean nuclear energy production in the future to remove the limits of energy. CFC stands in the next big disruption and is one of the most invested start-ups in the world. It's a simulation of 2 [ signs ]. Breakthrough Energy founded by Bill Gates is among the major investments of CFC. The second one is Quaise Energy, which is a great potential in the disruption of fossil fuel-based power generation. They also came out of MIT and reached a valuation of over $100 million in last June 2022. And Quaise is planning to provide access to deep geothermal energy resources economically with its revolutionary drilling technology. It is important, and it is important for Turkey as the first country in Europe to the geothermal potential. So, we have initiated a joint task force to search for cooperation opportunities in our thermal power plants. This is an important collaboration, as we have outlined, transferring new technologies and solutions on the way to commercialization and utilize them to increase the value of existing energy companies and initiate the opportunity to start a new business in Eurasia.  Our search continue in every field that can change the energy work, so we aim to leverage our existing competencies while acquiring new ones. And as we always said that we will focus on climate technologies, now you can see that we are investing in that. We will continue to act on investment fields in line with our strategic direction. In conclusion, I would like to say a few words about sustainability and the term sustainability was in our energy business long before it has become the trend. The United Nations 17 sustainable development goals are a part of our daily lives. In our energy business as we live together with a population of around 25 million, considering all aspects of sustainability. As the main contributors to energy transition, we are diversified and inclusive for all of our stakeholders. We invest in community, we create positive social impact. We support agriculture, education and regional development wherever we have a power plant. For the time being one power plant. There will be more. Not only with our electric generation capacity, but we also take the electricity need and comfort of the life of one out every 4 people to their homes. And we play a leading role in every component of the energy transition and not only with the investments I mentioned so far, but also shaping the regulation, shaping the future. To sum up my speech, my presentation. First, the road map of existing subsidiaries in Turkey [indiscernible] and transform continuously to all resources as the leading player of the sector. In generation and trading companies grow the share of the renewables in the portfolio, expand in trade business to new geographies and leverage digital capabilities to offer energy services, strengthen green hydrogen [indiscernible] continued great investments, grow distributed business, expand e-mobility infrastructure, the e-mobility network and gradually help customers to decarbonize and make energy-efficient their business. Second, we initiated significant steps to widen our renewable portfolio, and we continue to invest in [ levels ], both in Turkey and abroad. When I say abroad, as I have given the example particularly in the U.S. With the investment in the U.S., we create a new story for Sabanci Group. Thirdly, we invest in funds and start-ups to identify and support good ideas from the start-up ecosystem in the U.S. at an early stage [indiscernible] Ready to answer all the questions. Thank you. Thanks, everyone, for joining. Now we can move with Q&A. You can start your question on the Q&A section. Over to you. [indiscernible] So, again, I'm very sorry that will begin an introduction in the broadcast. So I would like to actually summarize the last slide, which is the key message for those, sorry, I also forgot to turn the microphone. Let me summarize the key takeaways. The road map for the existing businesses in Turkey was clear, actually. And while creating cash, they will continue to grow and transform resources as the leading player into tier of the sector. In Generation and Trading business grow the share of renewable portfolio, expand the trading business to other geographies, leverage the digital capabilities to offer energy services and strengthen the green hydrogen capabilities. On the other hand, in distribution and retail companies continue definitely the great investments and grow the customer solutions, which covers distributed generation. e-mobility e-charging network infrastructure as well as offer customers decarbonization and efficiency projects. The second one is obviously expanding renewable generation, both in Turkey and abroad, and in this case, particularly in the U.S. We believe that we create a new story for Sabanci with this expansion in renewable generation in the U.S.A. Thirdly, we invest in funds and start-ups to identify and support good ideas from the start-up ecosystem in the U.S. at an early stage. Around these ideas, we aim to create new business areas in energy and climate technologies by establishing a strong link between emerging and developed markets in Turkey and in Eurasia. So this was the summary, so we can start with the Q&A.

Thank you, Kivanc. We have a couple of questions. The first question is what is the total budget to invest in these areas to expand in the next 5 years? What is your return prospects?

Okay. I mean, I start with the renewable investments, especially you can roughly calculate $1.2 million, $1.3 million per megawatt. I mentioned to you, I have given to you the capacity numbers in Turkey, in Enerjisa Üretim, an additional 1,000 megawatts and the upcoming capacities. In the United States, the first project is started 272 megawatts. On the pipeline, we have some other projects which can lead us to 1,000 megawatts. So, the investments, especially due to construction is a bit higher in the U.S. The range of $1.2 million to $1.3 million is a safe range, I would say. Would you like to say a few words about the returns?

Sure, Kivanc. Now obviously, as you remember, if you looked at our capital allocation principles, we've said that any projects in Turkey has to deliver a WACC plus 300 basis points and outside Turkey on average, should be WACC plus 100 basis points. Now, if you look from Sabanci Group's point of view, our cost of equity is about 14% on a dollar basis. That's a very high number. But we see, given our mix of funding in U.S., first of all, of capital which, let's say, is about somewhere around about 40% of the project cost. And the incentives that Sabanci was referring to that were made available in that market specifically to foster renewable investments. We see that the lack of these projects come to like half of our cost of equity in Turkey. So our WACC is quite satisfactory, and we can meet our return objectives as we put forth in our capital allocation. In Turkey, again, if you look at the mix, I think the lack of the projects should come to high single, low double-digit levels. But again, these clearly are capital allocation objectives on both, we believe we could generate very decent returns.

There are some other questions that I can see. Can I take a couple of them? A question about the debate on solar supply from China. We are closely following, especially in the U.S. market, this topic. So, we played quite safe. And we have already secured through the EPC contract, our solar supply and to be on the safe harbor, especially stay out outside of this debate. The question is why solar in the U.S. wind in Turkey? Again, thank you for the question. I mean these were the examples. In Turkey, there are more than 100 megawatts of solar in the pipeline and as I mentioned, the hybrids are built next to the existing power plant in Turkey. So, there is not any clear wind and solar, but wind has been the premier project in Turkey. On the other side, we are, again, not limited with solar, but this was the opportunity as a greenfield project that we have found in the U.S.A., and we are not limited to solar. But relatively, it was a safe bet to start in a new country. I think I have been able to answer this question.

We have another question from what would be the maximum capital to be deployed to the U.S. markets.

I think I have alluded to that about when I was talking about the funding mix. As I said, on average, we're looking at about 40% equity. Having said that, this is, again, as indicated, this is just the first of its kind. So, obviously, we'll continue growing our -- we intend to grow our capacity investments in the U.S. If you would like to follow those, I think it's great to look at our subsidiary under Sabanci Group, which is called Sabanci [ Iklem ] Technology, [ Annick ]. And the capital allocated to that specific subsidiary will indicate to you going forward, the amount of capital that you're allocating for such investments.