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

[Indiscernible] and 2022 highlights. [Indiscernible].

Thank you, Turab. Hello, everyone. Welcome to our 2022 webcast. I'm Cenk Alper, Sabanci Holding, CEO. This time, I'm speaking to you with a great sadness given the tragic earthquake our nation has faced in the Eastern part of Turkey, while the thousands of lives are lost or permanently changed. We have been working to ensure the safety of our employees and our families first. It is very difficult times and, of course, supporting all citizens in the region, both directly and indirectly. We have so far allocated TRY 12 billion of resources to the region, and we are continuously working in the region from the first day on. It is our -- it is a long journey to reconstruct 11 cities, but we will be on the ground until all wounds are healed. I now kindly ask a moment of silence for the ones who lost their lives in the strategic events before going ahead with our earnings call. Thank you. Let me start with our group's 2022 highlights from my perspective. Orhun and Kerem will provide more details on our financials. 2022 was a year of dramatic changes in the world that affected global economy. The pandemic's continued impact in certain regions. Russian invasion of Ukraine resulted in sharp inflationary pressures on commodities, raw materials, energy prices and wages and further decelerated global supply chains. Given this background and adding up with Turkey's own issues, we showed an extremely strong resilience in 2022. We managed to model through the volatility with a very strong financial performance and by successfully executing our transformation strategy and by deepening our ESG approach. As you can see, the number speaks for themselves. Our financial performance remained strong with further improvement in earnings quality by also outpacing inflation across the board in 2022. Our balance sheet and cash levels remain solid, ensuring us a strategic position ourselves not only against potential headwinds for this year, but also continue to reap the benefits of new investments as well. In 2022, we have been very active on portfolio movements as we made various new investments following our exit from tobacco business at the beginning of the year. We have raised TRY 3.1 billion PMI divestments -- from PMI divestments and deployed TRY 4.9 billion, particularly in new economy, which is perfectly in line with our transformation strategy. We also managed to size several opportunities in venture capital, which will contribute to the diversification of our growth portfolio, build know-how and expertise on disruptive and digital technologies and develop an ecosystem of innovative partners with Sabanci Group. We were also active on ESG, which is now fully embedded in our investment strategy and in our day-to-day management in the group level. I'll touch upon ESG more detail in the following slides. Let's start with the investments. As I mentioned in 2022 -- as I mentioned 2022 was a very busy year in terms of portfolio management. We started the year with the divestment of PMI and captured various investment opportunities, which paves the way to raise our exposure in new economy, which we define as energy and climate technologies, advanced material technologies and digital technologies. As promised, we have deployed 76% of the invested amount for the investments that are following on the new economy, which is in line with our commitment to invest 75% of total CapEx in the new growth platform. In energy and climate Technologies, 2022 a milestone for Sabanci Group's commitment to energy business units through an expansion to the U.S. We have made our first renewable capacity investment in the U.S. with 272-megawatt solar power plant project locking in Houston, Texas. We have also invested directly in 2 of the world's leading originating start-up originating from MIT. Commonwealth Fusion Systems and Quaise Energy. Commonwealth Fusion Systems has been developing an innovative magnet technology that aims to fundamentally change the global energy industry through fusion energy. And Quaise Energy has been developing a deep drilling technology to better realize worldwide geothermal energy potential and convert thermal-powered facilities into geothermal power plants. In our generation business in Türkiye, we have launched a new 1,000 megawatts wind capacity investment in Türkiye [Indiscernible] an amount of $1.2 billion. This is one of the major greenfield renewable energy capacity investments undertaken in Türkiye and across Europe in 2022. Our generation company's total capacity will reach 4.7 gigawatts. And share of renewables will reach 57% once the project completed by 2026. Enerjisa Generation business also started the first green hydrogen production at our Bandirma Energy base, which will be used in generator cooling first. This pilot study was a critical step for our group to boost its capabilities further in possible actions on green hydrogen. In 2022, [Indiscernible] won the national charging tender for 495 fast charging units in 53 cities in key regions with more than of electrical vehicles in Türkiye aims to reach 1,000 stations in 81 cities by the end of 2023. Temsa, our commercial vehicle manufacturer, restructured its international network and bolstered Sabanci Group's electric cars journey by providing e-buses to Sweden and major show case markets. In 2022, Temsa reached 18% market share in North America. It also became one of the world's leading manufacturers by providing electric bus models to the U.S. and European markets. Temsa is also diversifying its renewable streams -- revenue streams by producing better effects and better management systems. This new product portfolio take us one step further into the fast-growing world of electrification. Under advanced material technologies, Microtex acquisition was an important step to diversify our composites portfolio. 2 new R&D centers in Munich started operations to provide tailor-made building and advanced material technology solutions. Meanwhile, how to eliminate [Indiscernible] investment has initiated to double group's capacity. 2020 was a year of transformation for our digital businesses as well, aiming to create a global player in the digital world by focusing on business model based on next-generation technologies. We invested in Radiflow and SEM, acted in cybersecurity and digital marketing, respectively. Similarly, with the acquisition of Arvento in our tire business, the aim is to create higher value while involving more telematics in our business. Teknosa took a major step forward in our digital transformation journey by successfully launching Türkiye first consumer electronics specialized marketplace at the beginning of the year. In just 11 months of operations, Teknosa marketplace has increased its product offering by 22x. Traffic on digital channels has risen by 38%, and the platform overall performance has reached global benchmarks. We were also very active to strengthen our leading positions in core businesses with capacity and efficiency investments, mainly in building materials and tire reinforcement business. Coming to Sabanci Ventures. Sabanci Ventures has completed 5 new deals in 2022, with a total investments amount of $6 million. These are all separate from our other venture investments that I mentioned before in energy and climate technologies. Corporate venture capital investments are a crucial part of our growth strategy as well as an instrumental tool to post innovation and create value in our existing businesses. ESG. As you follow us, we were also very active on ESG, which is now fully embedded in our investment strategy and in our day-to-day management in the group level. We have already 35% ahead of our -- of a number of actions in our sustainability road map. Our transformation in ESG is currently driven by 4 main initiatives. First main initiative is our responsible investment approach. We developed a group-wide responsible investment policy to guide the entire value chain of our group companies. Second, we started a group-wide decarbonization project to identify key improvement areas related to our net zero emission targets. We are now 60% of our Scope 1 and 2 emissions that are subject to decarbonization plans that are aligned with science-based target initiatives. For the remaining part, we have identified absolute or intensity emissions reduction targets. Third, we have integrated ESG in every aspect of our business. From strategy and capital allocation decisions for executive management performance and daily operations and everything in [Indiscernible]. And the fourth one is sustainable innovation. For this reason, we prioritized sustainability as one of the major teams in all our internal and external entrepreneurship programs and innovation platforms. We are proud of the acknowledgment by ESG rating agencies after our long-lasting efforts in this area. We have received rating of A in MSCI ESG rating assessment. 3 notches increased in 3 years. We became the first congregate from Türkiye to be included in Bloomberg Gender Equality Index for 2 consecutive years. We are also included in the Sustainability Index. We received an A rating among more than 50 companies in the investment holding companies category in the Refinitiv ESG assessments. We are also categorized as low ESG risk by Sustainability Index. These are all achieved in just 1 year, and I believe it will continue as we increase our efforts to transform our business. Now I will hand over the call to Orhun to discuss our financial performance more in detail.

Thank you, Cenk, and good morning, good afternoon, everyone. This is Orhun Kostem speaking. Before we go into discussion of the financial performance in detail, I would like to first draw your attention to the macro backdrop in 2022. Obviously, the macro backdrop was also quite volatile, as I'm sure we will experience. Now if you look at the commodities on one hand, we could argue that the rate of change has been somewhat behind the previous year. Having said that, the buildup throughout the quarters in the year have been different. We have strong commodity index price growth in the first half, which has eased in the second half of the year. A similar picture and even amplified picture is true for the energy. As you see, the energy prices have gone quite significantly. And this time, the growth throughout the quarters in the year have been longer. The energy prices have only come down beginning from the last quarter of 2022, which obviously was an important factor when looking at the performance of some of our business units. If you look at the consumer price index in Turkey, the change in the average CPI was 72%, a massive increase compared to 2021, of course. And if you look at how the basket of effects have changed, it was at 75%. Now of course, within this, the dollar devaluation was over 80% and euro was lower at about 60s, and given the -- how the parity has moved through the course of the year, as you all know. Now with this, I'll get to talking about the financials. Now we're quite happy as Cenk was underlining that we've left behind another year of successful financial performance delivery and a healthy one. Now a healthy one suggests for us that our top line, the growth of our top line should follow the growth of our bottom line. So the profit should be growing ahead of the top line, which you've seen in our performance this year. Now on one hand, of course, Akbank's performance have been very, very strong, and that's quite understandable given that the whole banking sector performance in Turkey in 2022 was strong. So without only looking at the numbers, I would also like to draw your attention to the fact that the fundamental -- some of the fundamental banking performance was also quite well. The net customer growth, a true digital onboarding of the bank has exceeded TRY 2 million, which is a very significant number. The cost income ratio has been very, very satisfactory. The capital adequacy ratio was very satisfactory. So we should keep in mind that beyond the numbers, the fundamental performance was also satisfactory for Akbank, which I'm sure you must have heard from my colleagues in their own webcast last week. Looking at the nonbank performance. Again, we're quite happy that the net income has grown faster than the top line. Having said that, the EBITDA growth, although was strong versus 2021, was behind the net revenue growth, primarily impacted by -- as I've tried to underline the rate of increase in the energy prices and the commodity prices, fuel prices in some of our business units. And again, we are referring to mainly the underlying business, but what impacted our bottom line also this year was about TRY 9 billion one offs primarily coming from the revaluation of energy assets and then the gain on sale of the divestment of the tobacco business. Now obviously, this strong performance has led up to good return metrics or return on equity overall on a consolidated basis was 45%, whereas the nonbank ROE was up to 31%, which obviously was a massive growth. And the banks our ROE was 54.7%. And as they have indicated, even on an inflationary accounted business, the bank has achieved a low teens ROE level. Now we could argue with the numbers versus the impact of inflation. However -- which is also true. However, for us, it's important that we continue with this healthy trend of return performance going forward as well. Our holding on the net cash position has increased from TRY 2.5 billion at the end of 2021 to TRY 3.1 billion. And therefore, we continue to maintain a healthy cash position in our balance sheet at Sabanci Holding only. The operational cash flow, if you look outside of the bank where our nonbank business has been very, very strong and has reached to almost TRY 30 billion in the period. And hence, our net financial debt to EBITDA on the nonbank businesses has come down to 0.4x. Now that's obviously important because, a, as we're trying to mention we have closed the year where we have seen a very important number of strategic investments as we stepped up our CapEx and at the same time have been able to meet that with our cash flow growth and our dynamic portfolio management so that we still maintain a healthy balance sheet, which we hope will enable us, obviously, in managing our business beyond 2022, both in a volatile environment that, at the same time, allows us flexibility to continue investing for growth. And when we talk about CapEx, as you see, we have stepped up our CapEx as we have committed to you as that was back in 2021. Our nonbank CapEx to sales was at 10.3%. So moving closer to our midterm guidance. As we've indicated then, a quarter, about 76% of the CapEx has gone to the new economy investments and a quarter [Indiscernible] went to our core business. Now -- the -- if you look at the strategic investments that we at Sabanci Holding and our group companies were making to support the -- our portfolio transformation, it was actually about TRY 11 billion. Without accounting for the renewable capacity investments of energies that we retain in Turkey that's going to kick in, in the years to come as we've disclosed. And therefore, if you look at the composition, of the CapEx, of course, the majority went to the energy business, especially with the new investments that we are undertaking in U.S. on renewable as well as our acquisition of renewable capacity in Turkey within 2022. If you look at the last quarter, our combined revenues was up over 150%. Of course, the primary contributor was the bank followed by the energy business. As I'm sure you've seen that the bank's share in the overall revenues has grown disproportionately this year. But we believe this is especially fueled by the special conditions within 2022. And going forward, we will obviously expect a more normalized distribution of revenue among our business units. If you look at the EBITDA, again, growing by 212%, a major contributor was the bank followed by energy and the building materials businesses. On the financial services, both on here and you see at the net income, there is an impact coming from Aksigorta, although finished the year on a satisfactory note from a capital adequacy point of view, nevertheless delivered a net loss in the last quarter of the year as we were seeing. But I would very much like to draw your attention to the performance of our financial services business quarter-over-quarter throughout the year, which has improved towards the back end of 2022. And if we come to the net income, Again, the net income has grown by 171%. Again, bank was a major contributor, followed by energy and building materials. Here, we've also seen a reduction coming from the industrial side, although our businesses there has delivered a net profit, of course, that was lower than the last quarter of 2021. This was primarily coming from our [Indiscernible] business where we already have started to feel the slowdown of the economies outside of Turkey in the international markets where we operate or sell our products. If you come to the how Sabanci Holdings stock has performed in 2022. Now first of all, we are obviously quite happy that the discount on our net asset value has shrunk to about 26.6%. Of course, that's significantly below the past year's averages. And if you look at the net asset value, the contributors to our net asset value, as we present to you in our major investment areas as Cenk was underlining. The banking and financial services, obviously, is a big part of our business, followed by material Technologies, which is industrial and building materials business. The energy is another important contributor. But just to underline here, of course, we have [Indiscernible] which is not listed. So I'm sure as you've seen in our disclosure, we account for that by the book value, so that's traceable, which suggests some more upside to the current contribution to the net asset value of Sabanci Holding portfolio. And at the same time, you see a reduction coming from mainly disposal of the tobacco business within 2022. But we've grown our net asset value quite satisfactorily throughout the year, which has obviously been reflected on the stock performance vis-a-vis the index this currently, we've significantly outperformed the index, which is very nice. Probably, we could still argue whether it has been -- the investments that we're making and the value that we've been creating, whether it has sufficiently have been reflected onto the stock performance, which is indicated by the PE performance of our stock in the course of the year that suggests some more value appreciation potential, hopefully. Now with this, I will hand over to Kerem, and he's going to walk us through the details of the business units. Kerem?

Thank you, Orhun. For business units, let's start with energy. We continue to benefit from having a diversified portfolio in our energy business in terms of generation and distribution and retail. In Q4, energy segment delivered a robust performance as EBITDA growth doubled on a year-on-year basis, thanks to both Enerjisa energy and Enerjisa Generation contributions. Enerjisa energy recorded a strong performance as the distribution segment's EBITDA jumped by 89% year-on-year in Q4, thanks to higher financial income and high inflation trends and change in financial asset model approach, leading to a higher IRR. The strong growth in financial income, higher quoted bonds as a result of increased quality customer satisfaction scores and lower outages in addition to the higher [Indiscernible] accrual and collection now then compensated for lower OpEx and CapEx [Indiscernible] performance due to higher commodity costs during the period. As of end of 2022, regulated asset base growth reached 77% year-on-year, mainly reflecting reevaluation of opening balance with inflation. In the retail side of the business, a loss profit more than quarter books in Q4 driven by volume growth, impact of increasing procurement costs and inflation and to some extent, the base impact in [Indiscernible] segments. Higher gross profits in core business supported EBITDA despite higher OpEx spending as result of high inflation. In the first half of 2022, the cash flow was negative to a large extent due to high electricity procurement prices were not supported by national tariff levels and the fact that any inflation assumption incorporated to national tariff calculations were low realized inflation. The cash flow in the second half of 2022 recovered due to numerous measures introduced by the regulator to address the sustainability of the system. Finance and cost increase on year-on-year basis driven by both higher debt and interest rates also the increase in revaluation expenses of customer deposits due to the [Indiscernible] inflation. Tax strong operating performance, the company's net income surged by 135% year-over-year, more than offsetting higher financial expenses. Working cap generation performance, Enerjisa energy generation revenue increased by 112% year-on-year, driven by higher spot Enerjisa prices as well as weaker Turkish lira despite lower generation and sales volume. Even though hydro and wind generation volume increased compared to last year, total generation volume declined by 3% year-over-year as a result of efforts to optimize natural gas plants, production to reach highest profitable level as far as spot spreads are concerns. EBITDA growth reached 108% year-on-year as initially as profitability increased on higher [ spark ] due to higher market prices in addition to higher renewable volume in Q4. Moreover, our team's ability on energy trades, which led us to capture market opportunities and higher dispatch contribution supported EBITDA growth in core. Despite increasing tax, net income registered solid returns year-on-year, thanks to robust EBITDA contribution. By the end of Q4, net debt dropped to EUR 131 million indicated a net debt-to-EBITDA of 0.5x compared to EUR 289 million, net debt by the end of 2021. The quarter-on-quarter increase in debt is mainly due to 1,000 megawatt [Indiscernible] investments as we have already announced in October. Current industry segment, combined revenues grew by 89% year-on-year in Q4, thanks to well managed pricing strategy and higher volumes in tire business, driven by local markets. Segment's EBITDA margin derate due to inflationary pressures, lowered in tire and tire reinforcement business. In addition to this tire reinforcement business, negatively affected from [Indiscernible] Turkish lira against USD and higher-priced raw material inventories impacting pricing flexibility. Coming down to the bottom line, net profit declined by 18%, led by higher mid financial expenses due to lower FX related cash and increasing debt on completion of Microtex and Arvento acquisitions. All building materials. Segment revenue growth was driven by sales mix optimization from foreign to domestic markets and affecting revenue contribution from Sabanci business solutions previously known as Cimsa Sabanci Cement. Despite the negative impact of higher fuel, electricity, raw material and transportation costs substantial increase in alternative fuel usage provided a better energy margin. Better sales and improved efficiency led to a 5x EBITDA growth, which resulted in a 5 percentage points improvement in EBITDA margin. Finally, [Indiscernible] net income grew more than 5x, thanks to operational performance pass-through despite lower FX gains. On retail segments, compounded revenues increased by 145% year-on-year, thanks to a strong contribution from both electronics retail and food retail, which was well above the average inflation driven by like-for-like traffic and basket growth. Both companies recorded strong performances in online sales, thanks to increased investments and advertising activities. Segments IFRS adjusted EBITDA increased by [ 85% ] year-on-year or Q4. Despite the improvement in segments OpEx to sales ratio EBITDA margin declined 2 percentage points year-on-year due to contraction in gross margin. The decline in gross margin in the electronics retail business is attributable to relatively lower price escalation due to stable exchange rates. In food retail [Indiscernible], product and channel mix led by higher e-commerce and franchise sales were the main drivers of the gross margin contraction. Despite higher financial expenses, segment by line improved with positive contribution from both companies. Financial services segment had a record of robust performance as top line growth reached 99% year-on-year, driven by life and nonlife business. Segment's EBITDA declined by 75% as a result of weakness in nonlife. In life business, thanks to the life protection volume growth and pension assets under management, EBITDA increased by 8% year-on-year. But on other hand, in our nonlife business, underwriting results and combined ratio were adversely affected by, one, ongoing increase in inflation on claim costs; two, year-end minimum wage increase of 55%; three, update on underlying loss ratio of risky [Indiscernible]. Consequently, despite the improvement in technical profitability with new business portfolio written in 2022 on [Indiscernible] -- on damaged products, higher MTPL losses, driven by the increase in minimum wage, higher [Indiscernible] ratio and higher cost of rates and negatively affected the segments profitability. Turning now to banking. Despite all the volatility and challenging market conditions, Akbank [Indiscernible] priorities have always remained [Indiscernible]. Akbank is one of the best-positioned banks in this environment with its robust capital, highest in [Indiscernible], strong liquidity, highest level of efficiency and low operating cost base. Akbank's 2022 net income was up fivefold to a record level of TRY 60 billion, a record high historical income even adjusted for currency. The bank achieved an eye-catching full year return on asset of 6.2% and 54.7% ROE with a low leverage of 7.5x in 2022 ahead of its guidance. Akbank's advanced analytical and digital capabilities along with its state-of-the-art infrastructure resulted in a record 2.2 million net customer growth in 2022. Strong market share gains in small tickets, accelerated customer acquisition, across the board fee performance and agile asset liability media management contributed to solid operating performance in 2022. The bank also further built capital during the year, reaching a robust figure of 20.8%, excluding forbearances, of course, with main contribution coming from internal capital generation. The strong solvency ratio will continue to provide the bank significant competitive advantage going forward. I now would like to leave the floor Orhun to go through the midterm guidance.

Thank you, Kerem. Our midterm guidance, in essence, have not changed from what you have seen earlier. On revenue and EBITDA growth, we could argue that we had a good performance in 2022 because we have actually grown ahead of CPI comfortably, but we will need to check these over the long run, obviously. On other elements, CapEx revenue run rate, FX revenue share, net debt-to-EBITDA and the share of new economy in the overall revenue, I'm happy to say that we are pretty much moving in towards our guidance. One important change in this page, since the last time you have seen is the old funds allocated for our share buyback program, which I'm sure you have seen that we have increased to TRY 3.25 billion at the end of December 2022, and we continue to run a successful share buyback program. With this, I will hand over to Cenk for his closing remarks.

Thank you, Orhun and Kerem. To summarize, our results were extremely strong in 2022. Despite faster pace in investments, we kept our cash level stable and further delever our balance sheet. Therefore, we are very well prepared for potential headwinds, but also ready to face growth opportunities to continue to transform our portfolio. We divested a major asset in 2022 and invested in various businesses that we classify as new economy that are hindering high growth potential and match our ESG road map. We accelerated our ESG efforts and fully aware of solid ESG commitment is a strong lever for additional value creation. Finally, we will continue to focus our -- on improving our shareholders' return by continuing to focus on value, create investments while ensuring to sustain our dividend policy and by continuing to manage our buyback program actively as we have done in 2022.

Thank you, Cenk. Now the floor is open for questions. [Operator Instructions]. The one question, thanks for presentation, how do you see the profitability of Enerjisa Ãœretim in Q1 '23, given the continued drought conditions and recent cuts in [Indiscernible] prices by EMRA.

Thank you, Orhun. Obviously, we are now living through the impact of the climate change and therefore, has an impact on hydrology year-on-year. And so far, we see that this year hydrology will be lower than what we've experienced in 2022. And there were cuts in prices also reductions in natural gas prices for electricity generation. So again, we're quite confident given the fact that Enerjisa Ãœretim has the most complementary portfolio in the market from a renewable to natural gas, of course, as you know, apart the [Indiscernible]. We're pretty sure that we would be able to deliver still quite satisfactory and profit results for the first quarter. The margins on year-on-year could change. You're right. I mean that's dependent on especially the level of hydrology. But still, there's no reason why we shouldn't see strong profit performance.

[Operator Instructions] Thank you for presentation. I missed the earlier part of the presentation, therefore apologies if you talked about this, what about the total CapEx required in the earthquake affected region for Enerjisa?

Thank you very much for the question. Well, for sure, the infrastructure of the 11 cities effected will increase our CapEx investments. But the city plans are not fixed yet. There are opportunities that are -- not opportunity there are plans alternative plans to change the place of the cities or rebuild the cities in their original places. Depending on that, we will sharpen our numbers, but as of today, we cannot give you a ballpark figure.

[Operator Instructions] I have a follow-up question on the banking industry. Do you share any sensitivity for the sector under a potentially higher interest rate environment?

Thank you, Hanzade. I mean, as far as I know, we haven't necessarily shared any specific, let's say, work around the macro environment where the, let's say, interest rates could be higher. So therefore, I'm pretty sure that you would be looking at or calculating a number of different scenarios. Going forward, obviously, we have our internal, let's say, scenarios that we work on. That's how we manage our business, but it's too early to make an estimation publicly as to what we could expect.

[Operator Instructions] Well, it seems we don't have any further questions. Thanks, everyone, for joining, and have a good day or good afternoon.

Thank you. Stay healthy.

Thank you.