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

Good morning and good afternoon everyone. Welcome to Sabanci holdings Industrial Day presentation and discussion. We're very happy to be with you today. Before we move into the content, we will show you our disclaimer statement, which I'm sure you must have seen earlier. Now today, you will see myself, my name is Orhun Kostem, I'm the Chief Financial Officer of Sabanci Holding and today, we are joined by Cevdet Alemdar, the Industrial Strategic Business Unit Group President, welcome Cevdet. Now today, we're going to talk about the industrial segment in the overall Sabanci Group, where it fits. Then we'll talk about the details of the Industrial segment because the last time we had this meeting was roughly a year ago in September 2022, so it will give us a chance of looking at what happened since then and what we expect to see going forward. And of course, finally, we'll be happy to take your questions and hopefully answer them towards the end of our presentation. Now if you look at the industrial business unit within Sabanci Group, as you know, in Sabanci Holding, we prioritized 3 distinct areas for investment: These are Climate Technologies, Advanced Materials Technologies and Digital Technologies and I'm sure you must see over the course of 12 to 18 months in the past, we've made a lot of efforts and investments in these 3 distinct areas to transform our portfolio into new economy businesses. Now the industrials group, in addition to its leading positions in a respective segments, which is with its capable and strong companies. also plays an important role in driving our investments and growth into the advanced materials technology businesses, basically. However, if you look at Sabanci Group's net asset value today, you're going to see the Industrial Group accounts for about 12% of the net asset value or if we exclude our bank, which has the largest share in our net asset value, it accounts for about 19% of Sabanci Holdings net asset value; and the third largest business unit in the nonbank necessary value in that sense. However, if you look at the contribution to EBITDA, then the Industrials group is hitting above its weight. It accounts for about 13% of the nonbank EBITDA which is TRY 21.4 billion. That is the least -- last that we reported at the end of June 2023. Now today, as I said, we are joined by Cevdet Alemdar, who's going to walk us through the industrial group and its strategic plans going forward. Cevdet?

Thank you very much, Orhun. It's a pleasure to be here and to address to all of you and also it's a privilege. As Sabanci Group's Industry group, we have three businesses under our roof: One is Kordsa, that is an advanced materials manufacturing company. Kordsa started is surely exactly 50 years ago by manufacturing tire reinforcement materials for tire manufacturers, namely nylon and later polyester tire and cord fabric. And in this area today, Kordsa is the world's leading manufacturer with its 6 factories in 4 different continents in North America, South America, Asia as well as in Turkey. And when we talk about Kordsa, our [ friends ] explained Kordsa by saying that, well, in any part of the world, if you touch a tire, there is 1 in 3 chance that you touch a Kordsa product. Well, while this is very flattering I think, even a better explanation of Kordsa's capability in tire reinforcement is if you touch any airplane tires, any part of the works, then there is 2 out of 3 of a chance that you touch a Kordsa product, where the performance is much important, where the quality is very important, then Kordsa is there, which is excellent tire manufacturing products. And in the last 3, 4 years, we have been transforming Kordsa by building upon this foundation to an advanced materials manufacturing company. This has -- this transformation started with inorganic acquisitions as well as our own R&D performance and as well as our cooperation with Sabanci University and other universities. And today, our composite business constitutes around 16% of total sales of Kordsa. Brisa, our tire manufacturer and joint venture with Bridgestone is an excellent company, and it's very -- with this joint venture partnership, which is lasting more than 40 years now. And Brisa is the leader in performance in this market in Turkey and also exports to more than 80 countries around the world with more than 5,000 point of sales, and also in Turkey, 1,200 point of sales. Our market leadership in Brisa in the Turkish tire market is not only a story of tire, but it's also a story of mobility because our practice businesses. Also combined with our recent acquisition of Arvento, the telematics company is now forming a solid mobility revenue of $124 million. So I am delighted to say that once we were telling to you that we want to transform Brisa mobility company. Now we are saying that it is a solid more than $100 million business and it's going pretty good and pretty fast. The third company, the third group of companies is Temsa where we are manufacturing buses, coaches and light-trucks. And also, we have a distribution business of Temsa Motorlu Araclar, where we distribute vehicles around the world from the world to Turkey and you will remember that the Temsa bus manufacturing plant has been affected -- business has been reacquired by Sabanci Holdings in 2020. And in the last 3 years, we have operationally in performance-wise transform the company to an excellent level. When we took the company back, the net debt-to-EBITDA ratio was more than 50 multiples. And in the last 3 years, the revenues have been quadrupled and the net debt to EBITDA has decreased to [ 2.3 to 2.2x ] levels. So that's operationally, that's an excellent story and which gives us the courage that we can further transform Temsa by building upon its capabilities on assembly manufacturing and also the distribution of electric vehicles through our other terms, also constitutes an excellent opportunity for further synergies. One thing to mention here is in Kordsa, you will see that more than 100% of our revenues are APAC-based. When it is Brisa, you see 40%. And in Temsa, you see that it's around 65%, 2/3 of our revenues are APAC-based. All our companies are exporting either from their manufacturing plants in Turkey or from their plants around the world as Kordsa's case. Well, I mean, this introduction, you have seen that introduction for the ones we have participated in our previous meetings. And probably, you will also be remembering our comments around what shall we do in the beginning of 2023. One of them was growth in Brisa is which has been realized and is happening solidly, particularly with the demand from Turkey. Then one was developing and improving our performance in the Kordsa's composite businesses, and that's now happening, particularly with the aerospace industry, particularly in United States, our businesses in the U.S. and as well as our acquisition in Italy in the composite businesses are solidly performing. Kordsa North America investments was something that we were talking about and we were saying that, well, the world is going through a decoupling and supply chains are very important. And one of the distinctive features, of course, is being wherever the customer is. And in positioning, our company from the Asian competition towards the North American demand is going through our investments that we have started this year. And we will be -- we are manufacturing some tire cord fabric and some yarn, the feedstock of the fabric in North America today. And we are further investing in the fabric part of the business so that we can offer our customers in North America, the final product at a much faster speed. Temsa's transformation, operational transformation has been completed and our partners and us are pretty happy of the performance of the company. Now the time comes, how we can take Temsa further by using its assembly capabilities. It's acute manufacturing capabilities. And delivering cash flow has been a major team that we have been talking in the last 3 years, particularly strongly and that meticulous cash flow improvement is also reflecting on our results, also in 2023 and also in our dividends as well. We have acquired Arvento and Microtex and we said to you that we're going to integrate those companies and create further synergies. Arvento is our telematics company, which has more than 50% market share in the Turkish market for following vehicles and giving information to our [ practic ] chains so that Brisa can offer further mobility solutions to the customers, particularly to the fleet orders. And in 2023, we are seeing double digit in U.S. dollar terms, growth in our rental. When it comes to Microtex, Microtex is our Italian establishment where acquisition, where we have been producing composites not only for the aerospace, but also for the automotive industry, and that was a diversification from aerospace to automotive and as well as the diversification from U.S. to Europe and Microtex this year is achieving 25% plus growth in U.S. dollar terms. So those are not only the performance of our acquired companies, but also happening because of the synergies created with the local Sabanci University and the Kordsa R&D capability in Microtex as well as in Arvento's case, the synergies with Brisa. While this is happening, although we are very proud to announce those -- the whole [ open sense ] saying that we deliver what we promised, the markets are not that shiny. I mean a tire market particularly is tightening and when we are looking to the European demand, the reduction of 4 percentage points is considerable. And it's not only in Europe, while Europe is significant, but we see the same loosening of the markets in the demand and the tire demand in other parts of the world as well, except for China. And on the other hand -- on the plus side, the Turkish market is strong and is growing strong in real terms. So that gives leverage to Birsa for its performance by achieving better than expected in the local markets. Those developers also reflect upon our results. You see that in the revenue side, here, you see the Turkish lira performances. But let me tell you in another way, in U.S. dollar terms, our combined revenue has been growing in the last five years x minus [ 5% ] till today by an annual average CAGR of 8% in U.S. dollar terms. So considering that this is a time phase where COVID was there, where supply chain crisis were there. Sabanci Industrials Group is providing a very consistent solid growth in real terms. This also reflects to EBITDA, particularly at a better level even. So here you see is that the CAGR in U.S. dollar terms is approaching around 13% in the last 5 years. So that solid performance is also recorded over there, and that also shows the profitability of the growth. So it's not growth for growth sake. While this year, we are having demand issues, we are also observing that not only observe, we are also realizing that our fixed cost management and our operational fixed cost management has improved drastically. In nominal terms, in U.S. dollar terms, we are at the lowest sales and administrative expenses levels of the last 5 years. So this gives us a unique position of being competitive once the volatility of the market bounces back. Same thing as well as for the operational cash flow, when we make comparisons of our industry with our competitors, we are seeing that both in fixed costs and as well as in cash flows, we are the leading performance. And that also reflects the total dividends paid. One thing to mention here, particularly in the last 3 years, you see a hike in total dividend payments. And this is also due to Birsa Aksaray factories investment finalization and this coming back together with Kordsa's tire cord fabric performances and has taken our dividends to a different level, and we are consistently delivering the growth here in real term [ case ]. How do we do that? We do that based on 3 main competencies that we have: The first one is the one that we are most proud of, I mean if a comparison is the right thing to do here, which is not. But in Sabanci Holdings Industrial Group, we say that whatever we do, we do it the best and that's the operational excellence muscle. And with our partners, we have networks, we are able to compare our performance not only open to public data, but also with operational data of the networks that we are in and given any operational parameter on quality, yield, efficiency we are confident that we are among the first top 5%. And we intend, and we are investing on building up on this muscle through artificial intelligence and autonomous technologies being a part of our further processes. Today, in Industrial Group, more than 7,000 processes are being managed by robotic process automations. So -- and this also gives us an edge on our operational excellence. And that's not only digital, that's also related to our workforce and to the future of work initiatives that we are taking with our workforce. Commercialized innovation is the second foundation that we are very proud of. Out of 4 R&D centers that we have, we have more than 500 patents and one of them, Temsa's R&D center is actually literally #1 R&D center in Turkey approved by the government once the law has passed. And we intend to take this R&D capability towards our customers even further so that once the technology readiness level of our inventions reached a scalable level than through technical centers, we intend to take this closer to the customer and make the adjustments for the customer -- for each and every customer at their own place. That's why in Indonesia, we have opened our technical center in the spring of this year. And that's why you will also see that we will be opening another technical center in many approaching to the end in autumn of this year. ESG environment, social and governance capabilities of our groups have been have been labeled by CDP as a level as benchmark level, but that's not enough for us. That was not enough for us because getting a label, being a ticket that has the benchmark level environment-friendly companies is not enough for us because the second question follows. What are we doing to take this to a further level? What are we doing to use this capability to form a distinctive position in the market. And that's why we have been approved by science-based targets initiative to for our environment projects for the future. Brisa has been the first in Turkey in the sector and Kordsa and Temsa have also been approved by SBTi for our futures commitments for the environment for sustainability. And once we have those capabilities, those 3 capabilities of operational excellence, innovation and as well as ESG. So how shall we use that? What shall be the new industry look like in the future? There, we think that there are 3 macro teams: One is sustainability; the other one is digitalization; and the third one is as well as important, sometimes overseeing, but we think that it's very important, is changing operating models of the businesses through supply chain, through offerings to the customers. And through those, we have analyzed what can be the new areas where we can create and be an important player for new industries. And we have gone through 26 to 27 business points, business ideas. And we have prioritized them, we have worked in depth for many of them, and then some of them have been deselected because either of -- some didn't yet have the technological maturity enough, and some didn't have the potential to impact our corporate growth enough. By deselecting them, we have focused on Advanced Materials Group and Equipment for Climate Technologies group. So those are the 2 groups of businesses where we are designing our future growth towards. Having set those 2 initiatives, it will be unjust for me not to mention our protect and grow the core initiative that is portfolio and geography agility of our business. To take this to a little bit to a detailed level, this protect and extend part is as important as the initiatives. And here, you see 5 different projects/initiatives in the projected extent part that we commit ourselves to realize. Those are mainly for Kordsa's outstanding position in North America; another one is superior nylon products manufacturing for Kordsa. That's important because tire manufacturing is also changing. We don't only see the economies of scale big tire manufacturers, but we will -- we are and we will further see modular tire manufacturing, which requires a different type of reinforcement, which is called single and cord and as Kordsa, we are -- we have a distinctively better positioned in the world among our competitors. So we'll going to invest upon that further. Same thing goes for recycle circularity in tire manufacturing. And that's where against superior nylon products, recyclable polyester products, reinforcement products get into the picture. For Brisa, it is top notch Aksaray plant. Our Aksaray plant is -- and along with our Izmit plant is one of the newest and by far, one of the most technologically advanced tire manufacturing plants around the world. With our Bridgestone partner, we have finished it and now we are further building upon it, particularly for tire manufacturers, manufacturing for electric vehicles. And today, in our plants, we are manufacturing tires that go to both in Turkish market and as well as in the European market to automotive factories which are putting our tires to their electric vehicles. Being a mobility leader in Turkey is an important commitment of Brisa will continue and Temsa with it's operational performance today and with it's competencies of assembly and with it's performance of battery management software, I remind you that Temsa has been the first coach manufacturer in Turkey, which has manufactured electric buses. And those buses are still up and running both in Turkey and as well as in prominent markets such as Sweden, such as U.S., and we want to build upon those and turn Temsa to an electric vehicle house. On the Advanced Materials side, we count our composite business as an advanced materials. And together with biochemicals, bioplastics and as well as chemical recycling, that group of business that Advanced Materials group of business is something that will have an important impact to our corporate growth. And we are also finding important hills, if that's the right metaphor for to tell. Important hills where the technological and market maturity is at the right level for us to enter. Same thing goes for Equipment for Climate Technologies. As you know, as Sabanci Holding, we are in the energy business, well, generating energy and distributing energy is important and key, and it's a big business. and the equipment to do that is as important as this. And electric vehicles and integrated solutions through solar panels, chargers, inverters, and of course, for the future hydrogen, where there is no net carbon zero scenario that can never be achieved without hydrogen. To this area, we are investing upon, we are working upon, we have already invested through our corporate venture capital to smaller start-ups for understanding the business around their better. And we have also invested particularly in the EV business, not only by manufacturing EV, but also through tracking the electric vehicles and offering solution for true telematics to the overall sector is also giving us excitements. And we have -- we are not only -- this time, we are not only giving you theoretical conceptual models of advanced material and equipment for Climate Technologies investments, and giving you ideas about what we shall do. But I'm also glad to tell here that this is not what we shall do. This is actually what we are doing today. Microtex acquisition here is an advanced materials investment. Our Arvento acquisition to the telematics that I explained to you, gives us the position, the unique position for offering better -- a bigger solution to all the EV manufacturers in the market. And also for the electrification or developments, particularly at the R&D level, I'm taking from R&D commercialization level, gives us the coverage and the performance of Microtex and Arvento, as I explained to you in real terms, their performance are also giving us the benefits that, yes, we are doing the right thing, and we will do further. So all in all, our operational excellence are investing for today and our investing plan for the future, altogether to us constitute a wholesome picture and our performance in the bigger term also gives us the courage that we are on the right track.

Thank you, Cevdet. Now we can move on to take your questions, and we would be happy to answer them. You could type your questions on the Q&A section of Zoom, where we could read them and respond. Thank you. Just a reminder, you could type your questions in the Q&A section of Zoom, where we could see and respond. There are no further questions. However, we would be more than happy to answer them. Should you wish to direct those with us in due time. And for the time being, many thanks for joining us today and we'll be happy to -- more than happy to report back to you once we get there again to discuss our Industrial Group. Thank you very much.

Thank you.