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

[Audio Gap] Welcome to Sabanci Holding's First Quarter Earnings Call. Please refer to our disclaimer before we start. We've today with us our group CFO, Orhun Kostem today to run through Q1 financials in detail. Orhun bey, floor is yours.

Thank you, Kerem. Good morning, good afternoon, everyone. We're very happy to be with you again in one of our quarterly calls. And of course, this one, our first quarter is the smallest quarter, it's about, give or take, 20% of our annual revenue. However, at this time, it has become quite an important one, given the fact that we'll walk you through our inflation accounted number. And also the quarter that we're comparing it to, the first quarter of 2023 was impacted by the massive earthquake, which has certain implications on the base. So that's how I'll try to walk you through our results for the quarter. First of all, I think it's fair to say that we've continued progressing of our strategic agenda and our solar project in Texas, Cutlass II has come on stream, with 272 megawatts of capacity. In fact, we were together with Kerem there last week. It's a massive project when you go and see it and quite spectacular. The second one, Oriana, if you remember, the construction continues at the moment. And we've also secured the funding of this. So hopefully, by the time that we report to you the first quarter results next year, we then would be talking about our up and running half a gigawatt of capacity in the U.S. Cimsa on the other hand, has completed its calcium-aluminate capacity expansion, obviously, which makes Cimsa the third largest capacity globally. That's quite important. And of course, in this period, quite recently, as you know, we've separated our materials business basically to material technologies and mobility solutions, which we believe captures better our focus on these each different segments. On the other hand, our progress on ESG also continues. Now, something, which you haven't probably seen in the press, yet, but Sabanci Holding yesterday has received an outstanding achievement for sustainability in the EFQM Global Awards, which makes us very, very proud. I'm pretty sure, you're going to hear more about that, but that's a very serious achievement. And we're actually, as you see here, moving forward, to implement the framework about circular economy, basically, that would be underway. And of course, we launched the Sustainability Academy. Financials. I'm going to walk you through certain details, but we -- after implementation of the inflation accounting, Sabanci Holding has a very healthy financial position. We've doubled our cash available. We've upped our CapEx to sales, progressing towards our target of 14%. Our net debt/EBITDA is just under 1x. Our consolidated ROE is just under 6%, but there's more detail into that, and I'm going to tell a little bit more about this. And we still have a long FX position of $324 million. In the next page, I'm going to show you the backdrop from a macro point of view, what's taking place. On one hand, the energy and commodity prices have continued to be favorable, especially in comparison to '22, '23, '21 and that period. So it's important, especially in a year when the pricing ability due to hopefully decreasing inflation will be challenging, this is an important driver for protecting and leveraging our margins. And needless to say, the wage increase in general follows faster than the inflation. And it's not only for us, but I'm pretty sure you must be hearing from all the Turkish corporates. That has an impact on everyone's financial performance. The consumer price index has -- at the end of the first quarter was 68%. Actually, it's a bit of an acceleration compared to the first quarter of 2023, whereas the year-on-year change of the basket FX was 65%. So pretty much in line with the CPI specific to this period. Now moving forward, this is for you, so to say, a 30,000 feet of what our financials look like, of course, on a combined basis, our revenues were up in winters by 6%. Our EBITDA was down by 17%. And we've -- it seems that our net loss have increased compared to the first quarter of 2023. In fact, since the bank still makes the majority, especially of our consolidated results, it's important to note that for financial institutions, of course, the impact of inflation accounting results in a monetary loss. And what you see in Sabanci Holdings consolidated P&L as a monetary loss is the majority of that comes from the bank. And nevertheless, if we move on to the nonbank side, there are certain businesses there like our Insurance business and Enerjisa Enerji, we still cost a monetary loss basically. Now if we start from the revenue piece here on the nonbank side, where there is a 15% contraction. This is mainly -- the biggest drivers of that are coming from our Energy businesses. I'm sure you must have listened to what Enerjisa Enerji had to say earlier. I think this is a relatively slow start to the year, but no change as to our expectations for the rest of the year. In fact, the customer solutions side of the business in addition to distribution is picking up quite nicely, and that's a very good indication, not only for rest of the year, but going forward as well. Enerjisa Üretim, the energy prices are low compared to the first quarter of last year. Nevertheless, as you must have heard from us, in general, the EBITDA generation of Enerjisa Üretim, there are 2 important contributors to that. One of them is the trading and the other one is the generation asset based EBITDA. And the generation asset based EBITDA, on a year normally it should be about $500 million. And this is no difference basically. On a year-on-year, there could be changes to the hydrology win or sun or et cetera, but that's a rule of thumb for you. And we don't feel 2024 should be a different year basically. In fact, we expect the generation asset based EBITDA to grow in dollar terms, whereas the trading income is decreasing. In the past 2 years, as there has been very serious volatility on the energy prices, which were quite high. Of course, that contribution was quite high. I think at best we've last year made in excess of $100 million. This year probably we should be able to make maybe about 1/4 of that. So the fundamentals of the business is intact, whatever we can guide you to. However, the trading business is coming back, which is okay for us because it's not a revenue objective-driven business. It's a capital return business for us. And we're happy with what we're seeing so far in the business. Other than that, of course, you must have also heard the building materials business where the pricing is a challenge, both domestic and internationally. So that's why, as I've tried to indicate, the energy and fuel prices in general in this quarter and rest of year is important. Nevertheless, you see our EBITDA performance is, in fact, better than our top line. So we're posting an EBITDA margin improvement in this first quarter compared to the first quarter of last year on our nonbank business. When we get to the net loss for the nonbank business, I'll take you to the next slide, which I hope should explain it a little bit better if we look on our return on equity numbers. On the left-hand side graph, you see our return on equity on an annualized basis for 2022, 2023 and the first quarter of 2024. And these are, of course, all inflation adjusted. The consolidated ROE moves from 19.8% to 7% on a year-on-year basis and now 5.9%, whereas the nonbank ROE moves from a massive 24.7% to 11.2% and then to 9.4%. Now the graph in the middle shows you the same ROE inflation-adjusted basis with certain items that are nonrecurring. For example, in 2022, you'll remember the disposal of the Tobacco business and the capital gains that we've received from that or the sale of Kayseri and Nigde facilities in our Building Materials business. So if we exclude some of these big one-off items that actually you see that our ROE has been moving from high single digit to low double digit on an annualized basis, which is, again, quite in line with our expectations. For 2023, you see there's an uptick, and that's mainly because of the incremental taxes that's attributable to the earthquake, which again, is quite difficult to guide on an ongoing basis. In addition, as you've seen in my first graph, our capital expenditure is increasing. However, our net debt-to-EBITDA is not. We're still under 1x. So our balance sheet continues to be quite healthy. And speaking of the balance sheet in the next slide, you see our whole cash that we hold at the holding has actually more than doubled compared to the first quarter of 2023, which sounds quite nice. But under inflationary accounting, unless we make use of that, it penalizes us in our bottom line because it creates a monetary loss when there's 6% to 8% inflation. And that limits, of course, to monetary gain in general that we should generate in our nonbank business. So going forward, you should expect that, of course, to be converted into investment to be made good use of that. Now operational cash flow that you see a contraction, which has more to do with the first quarter of 2023. Again, if you remember, at the time of the earthquake, mostly some of the expenses were postponed, some receivables were extended, especially for our Enerjisa Distribution business, which creates a massive working capital change. So therefore, with the exception of which we don't see that to be a change quite abnormal. Now this year, the free cash flow on an annualized basis may not be as high as the previous years because as you look at the next graph, our CapEx to sales has been increasing from 8% at the end of the first quarter of 2023 to about 11.3% at the end of first quarter of 2024, which is pretty much in line with our long-term guidance of 14% CapEx to sales of our nonbank business. But hence, has an impact on -- will have an impact on our cash flow in general for 2024. But also that, together with the increasing interest rates obviously explains you the drop in the ROE on a year-on-year basis, which I believe is more reasonable to expect in this period where we're investing basically but still healthy and in line with our expectations. Now if you move forward, our NAV has grown by about 28% in dollar terms. And the discount to NAV has moved from 52% to 43%. Now, if you look from a good side, obviously, on the right hand that the bank's contribution to NAV has accelerated. And in general, in this period, the banking industry, the valuations or the market capitalizations have moved. And of course, our NAV has benefited that basically. But then it's followed by material mobility as well as Energy & Climate businesses. Now the catch here is I think it's good that the bank's market cap is improving -- increasing, it adds on to our NAV. And more importantly, I think our Enerjisa Üretim business value has been creeping into our NAV more in terms of its potential fair value versus its cost, which used to be our historical way of reporting. Now this all adds very nicely on our NAV, but of course, also increases the potential to increase the discount. And of course, between the NAV growth and the discount, it's then becomes our job to make sure that we catch up with that increase in NAV every time it expands. And as some of you may know, as we've discussed in the past, our long-term incentives actually describes this on one hand to grow the NAV. And on the other hand, to make sure that the market cap performs better in comparison to this 30% basically. And the way to grow the NAV, if you look at the next page, obviously, we'd very much like to be able to see a balanced contribution from our business units to the NAV. The banks and financial services still has a high share. But as you know, the share of the Energy & Climate Technologies have grown quite significantly. However, going forward, we could argue the materials and mobility solutions piece as well as the digital has to catch up so that we could achieve our 3- to 5-year target of having a more balanced NAV contribution. And that's our aim to achieve going forward. Now here, I'd hand over to Kerem to walk us through the details of the segments, the financial details of the segments, following which, of course, we'll be happy towards the end to receive any questions that you may have. Kerem?

Thank you, Orhun. Let me first start with the bank. And before I start, please note that banking figures are based on BRSA financials, as banks are exempt from inflation accounting for this year. Akbanks's robust expertise in flexible balance sheet management, including quick adaptiveness in navigating the tight regulatory environment as well as sustained excellence in fee performance continued to be supportive factors for its profitability. Regardless of the sector-wide challenges, especially in margin evolution, Akbank started the year as projected with 25% ROE and 2.7% return on assets. Akbank's strong demand in expanding the customer footprint persists. The bank added 600,000 new customers in Q1, reaching 13.7 million in total active customer base with cumulative increase of 5.2 million since the end of 2021, solidifying its recurring revenues and the footprint for the long-term success in evolving markets. In addition to this, the bank keeps its leading position in capital with a robust 17% capital adequacy ratio, which will continue to provide the bank significant competitive advantage going forward. Continuing with our largest nonbank segments. In Energisa Generation, revenues dropped by 48% year-over-year on lower electricity prices and lower natural gas volumes compared to last year. The decline in EBITDA was related to lower dispatch contribution and higher operating expenses. However, Energisa Generation from renewable assets remained solid, mainly supported by high hydro generation, thanks to favorable weather conditions. The contribution from Enerjisa Commodities softened. There was a limited profitable opportunities because of lesser volatility and liquidity in the market. With regards to Enerjisa Enerji, operational earnings in distribution and retail business increased by 45% year-on-year, mostly driven by higher financial income and CapEx reimbursements as well as the recovery of efficiency and quality related earnings. Customer solutions segment's operational earnings has significantly improved compared to last year, primarily due to solar power projects. Yet retail segment's operational earnings declined by 48% year-on-year due to lower sourcing costs, both in regulated and [ retail tariff ] segments. As we mentioned in the headline of this page, our Energy segment has initiated a new CapEx cycle. The segment's total CapEx to sales ratio surged 9 percentage points compared to last year and reached 21% in Q1. As a result, the segment's net income declined mainly due to increased financing costs and negative impact of inflation accounting on deferred tax assets. On Building Materials segment, top line declined by 8% year-on-year. Even though domestic volume growth remained solid, price adjustments failed to cope up with the inflation. Despite positive contribution from lower electricity prices, higher fuel and labor costs, had an adverse effect on EBITDA. The segment's net income dropped by 80% compared to the last year, mainly due to EBITDA pass-through. Industrial segment revenues dropped by 3% year-on-year in Q1 due to price competition and lower volume in Tire Reinforcement business. However, segment's EBITDA was up by 19% year-on-year, thanks to improving profitability in Tire business and solid performance in our bus business, which we start to consolidate following the Exsa merger at the beginning of the year. Lastly, net income increased by 67% in the first quarter as the negative impact of higher financial expenses were offset by positive contribution from deferred tax liabilities based on inflation accounting. Financial Services segment, inflation adjusted top line growth was 15%, driven by both Life and Non-life business. In the Life business, I guess it became the leader company and ranked as #1 in the Turkish market in terms of private pensions -- private pension asset under management as of January 2024. Agesa also maintains #1 position in terms of gross written premiums in Life and Personal Accidents. Despite the growth in Pension business, strong contribution from increasing volume of high-margin credit-linked and stand-alone life products, EBITDA was negatively impacted by higher personnel expenses, the impact of valuation of deferred acquisition costs and deferred income reserves, which is -- which are indexed to minimum wage increase and the increase in commissions paid on premiums. Net income were negatively affected by sizable monetary assets and net cash position. In a Non-life business, despite the lower moderate third-party liability premiums, revenues increased by 11% year-on-year, thanks to favorable trends in health and nonmotor segments. Despite the growth achieved in the nonmotor segment, EBITDA was 52% below last year due to high loss ratio and rising share of reinsurance premiums after the earthquake. The segment's bottom line effects negatively after adjusted with inflation as insurance company's balance sheet is highly dependent on monetary assets. Digital segment was up -- increased by 27% year-on-year with a higher contribution from electronics retail business, thanks to its omnichannel strength, right product range, new customers and valued services. E-commerce sales performance also remained solid as gross merchandise value was up by 13% in real terms and reached 3 billion TL in the first quarter of 2024. EBITDA increased by 26% year-on-year, thanks to strong top line growth in electronics retail business. The segment's net income was negatively affected by higher financing costs on higher interest rates compared to last year. And finally, on Retail segment, top line increased by 5% year-on-year, thanks to the growth in alternative channels. Disciplined cost management resulted in a major recovery in EBITDA margin despite negative impact of minimum wage hike by the beginning of 2024. However, net income was affected negatively by higher financing costs. So this concludes our segment information as well. So let's...

Thank you, Kerem. Yes. Thank you. As I wrap up, again, in the first quarter of 2024, we continue with our strategic growth agenda. We continue with our progress on the ESG front. In fact, we've, so to say, shifting gears. And we continue holding a healthy financial position, and we're quite excited about the rest of 2024. With that, we'll leave the floor for any questions. Thank you.

Thank you Orhun, [Operator Instructions] Yes. We've a question from [ Mora ]. How do you see the ARPU for the energy generation, given the current development of energy prices? Do you expect any increase in tax? And the second question, on the Energy segment, I presume you expect strong EBITDA generation from energy generation in the rest of the year. How comfortable are you that the prices will increase to achieve the targets?

Thank you. Again, these are 2 quite similar questions. So I just wanted to make sure that we could address them at once. Now look, if you look at the electricity prices in Turkey, for the past 2 years, especially in 2022 after, obviously, the Russian invasion of Ukraine, we've seen electricity prices to reach as high as $120. This was obviously not necessarily quite sustainable. We, on a normal basis, if we project over a very long term, we should expect the prices to be at around $80, that as a rule of thumb on a year-on-year basis. And today, we're more like 60s. So -- and I don't think this is also sustainable. Having said that, it's quite difficult to crystal ball what could be the prices, energy -- electricity prices for the rest of the year, we're aware and we make our plans with the expectation that given the program to reduce the inflation, obviously, such elements would be probably considered quite carefully by the government. However, as I tried to say earlier, normally, we should expect our generation assets to post an EBITDA closer to $500 million. But obviously, for this year, the trading income is going to be reduced quite significantly, which again is okay because we could guide you and we could tell you what our generation assets could produce as EBITDA. The trading contribution is dependent on the market volatility. And again, it's a capital allocation and a return on capital issue for us. So we'll be quite happy to have a reduced income on years like this. That doesn't unfortunately answer your question because, again, as I said, it's difficult to guess what it could be. But all I say is we expect to deliver quite closely -- quite close to our normal EBITDA abandonment in terms of the output of our generation assets.

Okay. Another question, when should we expect energy cycle to take place? What is the time line on this project?

Yes. Thank you, Adam. I think if we've that much of a clear time line, probably you'd hear. For the time being though, I can say, again, we feel that the business is in great shape. And as shareholders, we'll need to align, obviously, going forward. And I believe, It's more than what -- how the business takes shape, it's more about how the markets could take shape. And I'm not going to speculate about the potential valuation of Enerjisa Üretim. I'm pretty sure you must follow as I was trying to say, how it's now contributes to our NAV compared to what it used to be a few years back. We'd very much like to -- if we do, we do something at the best possible market conditions. And then we'll see when that happens. So it's more like an issue of getting ready and capitalizing on the market conditions, but there's no specific announced timetable for that yet.

Second question is on U.S. investments. How much CapEx is allocated for the solar investments in the U.S.? How much EBITDA may it generate once it's fully operational? And is this going to be fully consolidated?

Thank you, Hanzade, Now first of all, let me start with the easier one. Yes, it's going to be fully consolidated because as you know, Sabanci Climate Technology, which is a parent company of Sabanci Renewables, that runs these businesses in the U.S. is a wholly owned subsidiary of Sabanci Holdings. So that's a full consolidation. Now how much CapEx is allocated, it's a -- I'll tell you how it works. If you take Cutlass, where the generation capacity is about 272 megawatts, I think the overall CapEx was around $350 million, $360 million, give or take. And when we started the project, we started assuming that of that CapEx amount, roughly 1/3 equal installments would be shared by capital debt and tax equity. But when we finalized the project, it was more like 50% of tax equity, debt and capital was a quarter each. So therefore, our estimate for the amount of capital we use going forward is a little bit conservative when you look at how we can achieve. So for the time being, you could assume, we spent about $120 million to own a generation asset of 272 megawatts. Here, in terms of the EBITDA contribution, I think if you look at the full scope of our EBITDA, these -- in the first instance, at least the projects that we plan to own and operate, they contribute in size maybe 15% more, all of which, obviously, at this time would be a FX obviously. But the real, of course, returns there would be also as we can expand our base. That's for you our initial phase up to, let's say, 1 gigawatt, which can increase our overall EBITDA from the generation business by another 15%. And if you take the expansion of Enerjisa -- capacity increase in Turkey, that's another 20%. So we expect, of course, hopefully, a very reasonable uptick in our EBITDA coming from our Generation businesses, Turkey and outside of Turkey.

With regards to banking industry, what would be the normalized ROE once the inflation stabilized below 25%?

Yes, that's a difficult one. I've to tell you. I mean, and I'm pretty sure our colleagues at the bank would be much comfortable answering that. All I can say, if you follow what Akbank had to say last year and before that, when they started inflation accounting that they were looking at, I think, at least high single-digit ROEs or low double-digit ROEs, which could be some guidance, Hanzade, but I believe that's a very good question to be discussed with our colleagues at the bank. If you look on a consolidated basis, as I said, for Sabanci Holding. And I can tell you that over a longer term, basically, we could argue that, as I said, our -- without any -- let's say, without any one-offs or nonrecurring items, we should expect our consolidated ROE to be low double digit to high single digit. The nonbank business does something quite similar to this currently, and we don't expect to see anything longer than this when we project this ahead.

Well, thank you, Orhun bey. [Operator Instructions] Well, it seems we've no further questions. Thank you so much for participating, and I hope to see you in the next quarter.

Thank you very much. Bye-bye for now.