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

Good afternoon, good morning, everyone. Welcome to Sabanci Holdings First Quarter Webcast. Please refer to our disclaimer before we move on to the presentation. I have our group CFO, Orhun Kostem with me today. Orhun, floor is yours.

Thank you, Kerem. Again, good morning, and good afternoon, everyone, wherever you are. Welcome to our first quarter results. We're very happy to be here. Of course, when we announced our annual results, we had, at the time, referenced to the earthquake given that happened back in February 6. Having said that, this is the first time that we can quantify some of the impact that actually we can show and talk about. Now if we look at the general highlights, first of all, we believe we have a reasonably good start to the year and potentially more opportunities in rest of the year. We have seen our top line growing by 76%, combined EBITDA by 27% and our consolidated net income by 18%. And we're happy that we have been able to deliver an ROE of 35%. Obviously, that's higher than what we have achieved at the same time, same quarter in 2022. We believe we still maintain a very healthy balance sheet at 0.4x net debt to EBITDA at the end of the period. We have -- across the group, a long FX position of $318 million. And the holding on the cash position at the end of the first quarter was $338 million. Now we believe, depending on the outlook and expectations for rest of this, let's say, dynamic 2023, we believe it will allow us to be more defensive or offensive as the case may be, as the year unfolds ahead of us. One really important a message. I hope that we have been able to follow that in addition to our 2050 carbon 0 commitment, we have just announced our interim objectives. So we have committed now to reduce our Scope 1 and 2 emissions by 42% across the board by 2030. These are actually without any carbon credits to be more specific. We are obviously working with the science-based target initiative. And our companies -- group companies, they're already defining the Scope 3 coverage is now 7 so we are continuously supporting our objectives. And as you know, our objective statement as a group. And in that aspect by the third quarter of '23, we will be able to cover about 60% of all our Scope 1 and 2 emissions under science-based targets initiative. So that's an important milestone, we believe, in our journey. Our net asset value has grown by 54% on a year-on-year basis at the end of this first quarter. As you know, our net asset value discount is down to 26% and have grown -- have improved by from about 34% compared to a year ago. And I believe this obviously adds quite well to our overall value proposition in Sabanci Holding market capitalization. Now moving into the financials. First, on Page 5, I would like to draw your attention to a little bit about background what's happening this year. Obviously, if you look at between '21-- 2021 and 2022, where the commodity and the energy prices have been relatively higher which was quite remarkable in the first quarter of 2022. Obviously, owing to the fact that this was at the start of the Russian adversary against Ukraine as well. So we're seeing at the first quarter, easing on both fronts, both in commodity and energy indexes. Now it's a debate for rest of the year how China will grow and how the demand for both commodities and energy will shape up, but that has been the environment in the first quarter globally. If we look at something more specific to Turkey, I'm sure you must be following some of the discussions that given the relatively higher inflation that you see on the top left corner, the consumer price index was 72% across 2022 and now it came down a little bit about 50% in the first quarter of 2023. Nevertheless, the minimum wage increase was quite significant to see on an index about 100 basis points between the first quarter of 2022 to first quarter of 2023. And if you see how it has developed between the years, of course, there was a massive increase starting from 2022. Now what that means is, obviously, in certain of our businesses, it impacts the operating expenses. In some of the other businesses like insurance, it potentially impacts the minimum capital requirement. So basically, that's also even though local and important, let's say, an important element to follow. And on the bottom right, you see the -- how the FX basket has been moving, obviously, a whopping 73% in 2022 and then starting from 79% in the first quarter of 2022 and now about 34% in the first quarter of 2023. So there's a slowdown in the basket devaluation, which obviously has implications on our bottom line, especially when you compare it to the first quarter of 2022, which you can see on the next page. Now on the net revenue or combined net revenue side, we grew our net revenues by 76%. Of course, Akbank's net revenues have grown in excess of 100%. And then the nonbank business revenues have grown by 63%. If you look at the combined EBITDA, again, an overall 27% growth slowdown coming from the bank, which has grown by 31%, but also from nonbank businesses where the growth was about 20%. You'll see, I'm going to walk you a little bit detail about the breakdown of the contribution of different segments of our business into EBITDA. I think we can say that we're happy that we still have a diversified portfolio of businesses where one part of the business had a slow start to the year, which is compensated by some other part of our business. And if you look at the net income, the overall net income growth was 18%. On the bank side, this was 40%. On the nonbank side, there's actually, you see a like-for-like contraction of 15%. Now 2 things. Again, we're going to address going forward, one, something that our colleagues on the bank side must have been referring to as to their CPI-linked portfolio where the inflation assumption makes a difference about TRY 800 million percent. So from their assumption, which is 35% to, let's say, 45%, which was more or less the case, the difference would have been in this quarter would have been an incremental TRY 2 billion Turkish lira, which is an opportunity for rest of the year if you feel that the inflation would be more towards 40-ish than 30-ish. And moreover, as I said, if you look at the devaluation in the first quarter of 2022, which was 79%. Of course, we see an incremental TRY 400 million give or take that we have recorded in the first quarter of 2022, which is not the case in the first quarter of 2023 because the devaluation has slowed down. Now if there's anyone, obviously, that has a viewpoint that there could be more Turkish lira devaluation rest of the year. Of course, we should keep that in mind, again, there's a potential opportunity for our bottom line. So moving forward, if you look at, first of all, the return on equity on the nonbank business is pretty flat. And our overall ROE has grown with a -- some contraction on the banking side. Our operational cash flow was -- continued to be quite healthy. You remember, this time around last year, we were discussing for a little bit of, let's say, uncertainty on the working capital of Energy business due to the price equalization mechanism. Now as this has been resolved toward the back end of 2022, we see a very serious swing of our operational cash flow in our businesses. Please bear in mind, this comes at a time when the working capital performance of some of our businesses were far from let's say, far from perfect. That's primarily attributable to the -- that's primarily attributable to the impact of the earthquake. Some of our businesses like Brisa have already extended their receivables from their business partners like distributors in the period to ensure that they can support. And obviously, the altogether ecosystem that they are working on. The similar for businesses like Akçansa last business we had to shut down for a period, given their facilities are going to, although we didn't have any issues physically, of course, there has been some impact that flowed into this first quarter. So therefore, we're quite happy that we have been able to deliver this quite strong turnaround in the operating cash flow again, that's now significantly supported by our energy businesses. Now if you look at, as I discussed, our holding all in cash position is about TRY 6.5 billion, slightly less than the same period -- the same quarter of last year, it was at TRY 7.7 billion at the end of the first quarter. And our net debt to EBITDA stands at 0.4x. Now this is -- for me, this is quite remarkable because as we've discussed in 2020 across 2022 the amount of investment that we put into our business, acquisition of businesses or et cetera, I'm quite happy that we're able to maintain a very healthy cash and balance sheet position, as I said, which we hope will enable us to play both offense and defense based on how the rest of the year will develop. Now if you get to a breakdown of the businesses or the contribution of the business segments to the financial performance, as you've seen, of the overall 7% to 6% growth of our top line, we've already seen that the biggest contributor is the bank followed by the energy business. We now separated the digital, as you see, that's just for the reminder we have now established a separate digital business unit for the Teknosa underneath that. For those of you who we have discussed from also last year in 2022, that Teknosa is transforming itself to a marketplace, which we launched in February of 2022. So as long as we're successful in continuing doing that. And so far, we have done so. We see Teknosa is a digital business and part of our digital initiative. And the businesses that we acquired on the digital, the cybersecurity business is doing quite well. The digital marketing business had a relatively slow start to the year. That's owing to the impact of the earthquake and the impact of the earthquake on the general marketing budgets, which, again, is an area that we expect to be normalized in the course of the rest of the year. But otherwise, the growth of this business is quite satisfactory for us. The industry is -- I'm going to walk in through the industries when we get to the financials, but that was also an important contributor to our top line as well as the building materials basically. And the financial services on the other that you see here, obviously, now there is Carrefoursa, our retail business, again, a very healthy top line growth that we see in the first quarter. When we get to the EBITDA, you see the growth of the Energy segment was at about 13%. Now here, Kerem's going to walk you through in detail -- we're happy that we have both generation and distribution businesses together, something that we have repeatedly told you over time, the benefit of the portfolio. Given that the electricity prices are relatively lower, the electricity demand is relatively lower versus last year. And then we're going through a lower hydrology period. Generations start to the year was slower than the distribution. But overall, we're happy with the contribution, and we believe there are more opportunities as we go in rest of the year. There you see the industrials, their contribution was much actually less. Now that's owing to a general market outlook because, obviously, at the start of the year as the expectation on the economies was relatively bleak, especially rechanging part of our business, not the original equipment, but the replacement part of our -- business globally was relatively slow, which obviously had the impact on the industrial in general side, which again is expected to normalize, hopefully, in the next half of the year. But we're quite happy that the building materials contribution was very strong. The overall cement businesses basically -- and then together, if you look at these 2 businesses, obviously, we had a satisfactory contribution to our EBITDA base. And the Financial Services basically coming after that. If you look at the net income, again, the banking -- apart from the banking contribution, now the energy -- contribution of the Energy segment was much better than the EBITDA with a 49% growth year-on-year. Again, between the building material and the industry, there is a balance, although, of course, the contribution remained limited. Given the industrial segment's contribution was on the negative territory. As you see in the other piece, there is about TRY 850 million swing. Now that's owing to the fact -- majority of that is owing to the fact that, as I told you, the FX gains, which were there in the first quarter of 2022 with a 79% devaluation of the basket, which was not to the same tune in the first quarter of 2023. And that's how the net income has unfold between the first quarters. If we move to the performance of our stock price, our -- as we said, our net asset value has grown by 54% in dollar basis. And again, an 8 percentage point contraction of our discount rate. If you see, since the -- starting from the third quarter of 2022, our discount has more or less stabilized around mid-20-ish levels. Basically, that's obviously quite low when you compare to the averages of the last 3, 5, 10 years. And if you look at the contribution of the net asset value, again, here, you see the way that we strategically described to you, the banking and financial services together. And then the Advanced Material Technologies, which is mainly today is building materials and industrials contribution together. The Energy & Climate Technologies piece is relatively understated to you given at the back of this presentation here in the appendix, you're going to see the breakdown of our net asset value, where we refer to the unlisted [ Enerjisa ] generation piece by the book value and that actually represents its contribution basically and then the rest, digital and the rest, as you see. Again, we move, hopefully, going forward, more balanced between the energy and the advanced material technologies and hopefully, with the growth of the digital technologies across our net asset value breakdown. We -- again, if you look in the course over the last 12 months, even though our share has comfortably overperformed this 30 index, we believe that our PE multiples potentially could point to more value generation going forward. So with that, I'll pause and leave the ground to Kerem, who's going to walk you through some details of our business segments.

Thank you. Let me start with the Energy segment as always. We continue to benefit from our diversified business in the energy in terms of generation and distribution. In Q1, Energy segment delivered a robust performance despite the earthquake in the eastern part of Turkey, which affected more than 10 cities at which both of our energy businesses operate. Specifically for the generation business, revenue growth remained limited at 15% year-on-year due to low demand, decline in interest prices and low hydro generation due to drought conditions in Turkey. In natural gas, EBITDA remained below last year due to lower prices, lower demand and lower dispatch contribution. On renewables, EBITDA performance remained in line with last year as lower generation volumes, offset by higher dispatch contribution and FX [indiscernible] revenue. On coal, EBITDA performance was strong, thanks to higher back spreads driven by higher market prices and high generation volume on strong availability. Net EBITDA further dropped to 0.6x in Q1. In addition to strong EBITDA performance, lower financial expenses and lower effective tax rate resulted in a 48% year-on-year growth in net income in Q1. With regards to Energy, -- with regards to financials, despite the impact of the earthquake, Q1 operational earnings increased by 41% to KRW 3.5 billion. On distribution business, positive impact on financial income, driven by high inflation was neutralized with negative efficiency and quality impact mainly due to earthquake-related operational expenses. The contribution of the retail customer solutions business units in operational earnings slightly increased to 21% in Q1 from 20% versus last year same period. Customer Solutions business gross profit resulted below previous year due to the shift of the projects for the subsequent months because of the earthquake focus. The Regulated segments gross profit increased by 50%, mainly due to increasing energy prices. Meanwhile, the realized gross profits increased due to increasing energy prices and low comparison base. Below operational earnings line, financial net expenses decreased due to lower average debt and decrease in financing costs. For our Industrial segment, combined revenue growth remained at 43% year-on-year in Q1 due to weakening demand in tire reinforcement markets despite strong work of demand in tire business. Moreover, strong TL and last year high-base have created an important role in stronger momentum in revenue growth in tire reinforcement business. Segment EBITDA margin deteriorated due to high base impacts. Moreover, in Q1, COGS to sales ratio of tire reinforcement business was negatively affected from high priced inventories and rising share of personal expenses due to wage inflation, which remains well above TL depreciation. Coming down to the bottom line, net profit declined by 19%, led by higher net financial expenses due to increasing net position related with financing of Microtex acquisition. Net EBITDA for both businesses remained a bit above last year. In tire business, higher dividend payments and CapEx spending are the major drivers of this increase. And as I mentioned, in tire reinforcement business, Microtex financing is the major reason. Yes, it's important to note that net debt level of the tire reinforcement business is still in line with its global peer average. On Building Materials, despite sluggish demand -- global demand segment top line grew by 9% year-on-year as local demand remained strong. EBITDA growth and margin improved in Q1 driven by sales mix that is dominated by the domestic markets, better energy margin and full mix optimization. Segments net income grew almost by fivefold compared to last year, it has strong EBITDA pass-through and relatively lower financial expenses as segments net debt continued to decline. Our digital segment's top line grew by 117% year-on-year with a higher contribution from electronics retail business on basket size and customer traffic growth, driven especially by higher demand in telecom sales. Our new digital marketing and cybersecurity companies also contributed strongly to the top line growth of the segments. Worth to mention that we have successfully completed the acquisition of SEM, additional marketing company and Radiflow, the cybersecurity company back in Q2 last year, which were important steps for strengthening our position in digital business. In addition to physical store sales growth on higher basket size, e-commerce sales positively contributed to the segment's top line growth driven by more than tripling gross merchandise value owing to the marketplace investments in February last year. Segments EBITDA margin deteriorated in Q1, led by adverse impact of sales mix in electricity and retail and high fixed cost sales ratio in digital marketing and cybersecurity companies due to ongoing integration work process, higher financial expenses present net income growth. Financial Services segment had another quarter with robust performance as top line growth reached 112% year-on-year, driven by Life and nonlife businesses. Segment EBITDA more than tripled with the contribution from both businesses as well. In Life business, #1 market position maintained in all of its product range. While technical income before general expenses was as strong as top line growth, EBITDA growth remained limited at 27% due to major inflation. Assets under management reached TRY 8.7 billion, up by 102% year-on-year and the average annualized yield stood at 24%. Net income remained below previous year due to limited financial income contribution of lower [indiscernible] income and lower interest income. In non-life business, top line growth reached 108% compared to last year and selected growth approach in nonmotor and helped prevail in order to improve the combined ratio of the company. EBITDA growth remained strong, thanks to improved motor segment loss ratio that declined to 112% from 164% a year ago. Expense ratio increased from 11% to 15% on wage inflation. On retail, segment revenues increased by 105% year-on-year, which was well above the average inflation driven by like-for-like basket growth despite 5 store closures at the earthquake region. Operating profitability deteriorated compared to last year, led by elevated operating expenses, especially driven by minimum wage hikes in the past 12 months. High financial expenses continued to push net income down to negative territory. On banking, Akbank is one of the best-positioned banks with its purely capital and liquidity buffers, HR balance sheet management with lower sale interest rate risk among peers, prudent risk management and solid efficiency. It's cutting-edge infrastructure sophisticated digital capabilities and competitive product offerings gives the bank creditability to focus on future while dealing with the daily challenges and volatility. In Q1, the bank reached a solid 3.6% return on assets and 27.9% return on equity while maintaining a low leverage of 8.2x. Proffers remain for both turn assets and return on equity as the bank used 35% more CPI in conversation versus year-end inflation expectation of 45%. So the bank used 45% reported return on assets and return on equity would have been notably higher at 4.2% and 32.9%, respectively. Akbank proactively comprised with regulations while focusing on maturity mismatch. As a result, here, deposit ratio reached 60% as of February 2023. Meanwhile, fixed-rate bonds for CBRT pledge is limited TRY 30 million as of April 2023, which is only 2% of its assets. Our outstanding momentum in the customer acquisition accelerated further during the first quarter as Akbank gained 730,000 new customers on top of 2.3 million gained last year. This customer acquisition has resulted in record-high market share gains across the board in consumer loans, broad-based deposit base and demand deposits. Robust XL ratio, along with sizable customer acquisition led across-the-board peak performance in Q1 as well. The bank keeps its lending position -- leading position in capital with a robust figure of 18.6%, which will continue to provide the bank significant competitive advantage going forward. This concludes our segments as well. So let's move on to Q&A. If you'd like to ask a question, please go to Zoom's Q&A section.

Can we have the first question, what is driving below inflation growth in the Energy & Industrials business in Q1...

Hanzade, thank you. As Kerem also explained a little bit on the energy side, on the generation side, especially the electricity prices have been low in the first quarter, lower. There have been reductions in electricity prices I'm sure you must have noticed, which impacts our generation business, negatively impacts the distribution business positively. More importantly, the hydrology has generally been lower this year compared to last year, which I believe is something we're going to see for the rest of the year as well. So basically, it was more about the spark spread -- and the spark and dark spread was relatively stronger. Now that's going forward, hopefully, is an opportunity for rest of the year between the energy demand and electricity prices, especially for the generation business. On the industrials, again, as I said, it's more about a general global market outlook also through for the Turkish market, where we see a slower demand pickup in the replacement business. And then that is met by a stronger demand in the original equipment business. But obviously, the -- if you look at the automotive industry, which actually is relatively stronger compared to last year, the replacement -- the tire replacement business potential in rest of the year could pick up, but that's a time lag issue. We don't see that in the first quarter, which resulted in a relatively slower growth for the industrial section...

And the second question about the food retail, do you think to exit Carrefour operations in line with your investment strategy, which focuses on lower regulation, more FX revenue.