Koç Holding A.S. (KCHOL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Koc Holding conference call to present and discuss the first half 2020 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Sinem Baykaloz, IR Manager at Koc Holding. Ms. Baykaloz, you may now proceed.

Hello, everyone. Welcome, and thank you for joining us this evening. This is Sinem, IR Manager of Koc Holding. I have here with me our IR coordinator, Nursel Ilgen; and our finance coordinator, [ Fadil Ashaboglu ]. I would like to remind you that our presentation and the Q&A session might contain forward-looking statements, including the effect of the COVID-19 pandemic. Our assumptions are based on the environment and our businesses as we see them today, and this might be subject to change. Before the call, we have sent our e-bulletin, which contains the link to our earnings presentation. After the call, you can also access a replay facility on our website. Now I would like to hand over to Nursel to start the presentation by commenting on our positioning and recent actions. At the end of the presentation, we will have a Q&A session.

Thank you, Sinem. Welcome, everyone. Hope all of you are well. Let's start on Slide 2. I would like to start by giving you a quick overview of our positioning. We were able to manage volatility and showed our resilience one more time, mainly thanks to our diversified portfolio structure and our disciplined risk policies. This year, our dividend income amounted approximately TRY 1.1 billion. As you know, Tupras would not pay any dividends due to a loss in its 2019 statutory account, and now she has decided to retain earnings following the uncertainties brought by the pandemic. This year's figure does not incorporate the dividends of our asset companies as well as potential dividends for the remainder of the year from some of our companies as per our past year practices. Another factor which contributes to the sustainability of our dividend flow is the fact that around 80% of our dividend income is derived from companies with FX or FX-linked revenues. At Koc Holding, we have a diversified business portfolio. The main components that ensure this are: we have a sectoral diversified portfolio, which hedges us against [ sectoral ] specific sensitivities and cyclicalities. No single sector represents more than 30% of our NAV. We are the largest exporting group in Turkey with our exports accounting for 9% of Turkey's total exports. In terms of the composition of our own revenues on a combined basis, 30% is coming from international sales as of first half 2020. If we also include Tupras, which is FX-linked commodity business, approximately 50% of our revenues can be construed not sensitive to the domestic economy. We have leading positions in the sectors where we operate. This allows us to maintain our strong pricing power. On Slide 3, you can see the main pillars of our solid balance sheet. As we all know, prudent management has always been a key focus area. At the holding stand-alone level, as of the end of June, our net cash provision stood at around $420 million, including Yapi Kredi Bank AT1 investments. We have close to $1.7 billion of gross cash and 82% of this position is in hard currency. Keeping an efficient level of cash has been our approach for many years, and it allows us to maintain our resilience. In terms of our funding at Koc Holding level, we had 2 year bonds outstanding as of end of June as we paid down on our Eurobond issued in 2013, amounting $750 million in April this year. Following this, our gross cash decreased as much while this has no impact on our net cash. We have no other data at Koc Holding stand alone level. As a reminder, Koc Holding's ratings are BB- from S&P and Ba3 for Moody's, 1 mark above Turkey's summer ratings. We also have well-defined and prudent risk management policies that are applied and regularly monitored on a combined basis as well as at each underlying company. In terms of liquidity, leverage and foreign exchange position, we are at conservative levels. On a combined basis, our current ratio is 1.4x, and our net financial debt over EBITDA is 2.2x. In terms of FX, we have a policy of keeping a neutral position and we remain zealous in our risk management rules. As the largest investment holding company in Turkey and being active in many diversified sectors, we manage our balance sheet to ensure that we always remain resilient against market volatility. Going forward, we will continue to prioritize maintaining the solvency of our balance sheet despite challenging market conditions. Now I would like to briefly summarize our first half performance focusing on our main sectors. Let's start with Energy and Tupras on Slide 4. The domestic demand for refined products continued its downward trend in the first half month of 2020. We saw 47% and 13% decline in jet fuel and gasoline sales volume compared to the same period last year while diesel was relatively resilient and posted 6% decrease. In the first half, Tupras domestic sales volume and export volumes were lower year-over-year, resulting in 20% fall in total sales volume. Now if we look at the refining margins, we see $2.10 per barrel declining in the Med Complex margin to $0.60 per barrel due to lower past margins. On the other hand, Tupras net refining margin was $0.50 per barrel higher than Med Complex margin, mainly due to crude selection ability of the company. Tupras overall net refining margin amounted $1.10 per barrel versus $3.50 per barrel during the same period of last year, mainly due to inventory loss for Tupras as well as weaker crack margin. In terms of capacity utilization, in the first half of 2020, Tupras operated with 77% capacity utilization rate, mainly because of the 2 months production suspension of Izmit refinery from 5th of May to 30th of June, in line with the contraction in demand. White product yield improved by 4.6 percentage points to 82%, thanks to the efficiency use of conversion units. On the LPG side, consumption decreased by 11% in the first 5 months of 2020. Aygaz, the leading player in the LPG sector, focused on profitability and its sales volume was flattish in the first half. Accordingly, looking at the Energy segment contribution to Koc Holding, we can see that it share in combined operating profit and consolidated net income was negative. Bottom line of impact was mainly due to substantial inventory loss, softness in demand and weak crack margins. Let's move to Slide 5 and discuss the developments in the auto segment. The story was twofold in the second quarter of the year. Both the impact of the pandemic and the strong rebounds were the most visible in the auto sector and they coincided with the second quarter. Looking at the market sales trend in the auto market. Following the strong 90% monthly gross raise in January and February, March was muted. Eventually, in April, Turkish auto market reduced some 15% shrinkage, which got quickly stabilized in May with only 2% decline. Improving confidence with the normalization step, triggering pent-up demand and a favorable lending rate that reflects into the June numbers with 66% growth versus June 2019. Accordingly, domestic auto sales business 30% year-on-year growth in the first half. We continue to focus on profitable growth and maintain our total market share flattish compared to last year at 26%. On the export side, picture was a bit different. In the European market, the multichannel was similar to Turkey, yet, the decline was more severe. As of the first half, European PC and LCV market registered a total shrinkage of 39%. At some point in April, sales in Europe business close to 77% decline, with some markets like in U.K., Italy and Spain, declining around 96%, mainly due to lock down. In June, this has moderated down with reopenings to a monthly shrinkage of 23%. As a result of the disruptions due to COVID-19, our goods market share in exports declined 7 percentage points year-on-year to 36%. Meanwhile, large commercial vehicles performance was better even on the complete lockdown, thanks to the growth in e-commerce. During this period, Ford Otosan export sales volume was 42% lower, while Tofas business, 54% decline in export volumes. Weak demand in the international market [indiscernible] total sales revenue of Ford Otosan and Tofas and they declined by 18% and 90% year-on-year, respectively. Domestic revenue growth was robust for both companies with around 50% increase at each on the back of strong volume growth, favorable product mix and pricing discipline. Strong euro against TL moderated the decline in international revenues, yet it was still quite high with 28% shrinkage at Ford Otosan and 41% shrinkage at Tofas in Turkish lira terms. Still, international revenues were the main drivers for both companies, supported by euro-based cost-plus contracts and in the case of Tofas also take-or-pay. In light of the first half figures and having seen the pace of recovery in June and July, both companies made some revisions to their 2020 guidance. We now expect approximately 40% year-over-year growth in the domestic market, pointing to 670,000 to 703,000 units for total auto sales. For Otosan, expected retail sales volumes to be around 80,000 to 90,000 units while Tofas expects 96,000 to 102,000 units. Regarding exports. For Otosan, expect volumes to hover around 230,000 to 240,000 units, almost 30% lower compared to 2019 figures. Tofas reiterated its expectation of approximately 35% volume contraction to 110,000 to 140,000 units. The impact of lower exports on the P&L will be limited, as I mentioned earlier, thanks to euro-based cost-plus contracts and also take-or-pay contracts. On the CapEx front, Tofas' CapEx have increased from EUR 107 million in 2019 to around EUR 150 million in 2020. For Otosan, still expect CapEx to be similar compared to 2019 at EUR 130 million to EUR 150 million. Let's also touch on our tractor company, TurkTraktor. In the first half, the pandemic-related slowdown in these economics, it does not cause a meaningful interruption in the ongoing content momentum in domestic tractor demand since August 2019 and TurkTraktor's domestic sales volumes surged by 68% year-over-year. During this period, the company's export volume was 23% lower, mainly due to COVID-19. Stellar growth in domestic revenue streams with 83% more than offset the 11% shrinkage in international sales and TurkTraktor's total revenues grew by 25%. For 2020, TurkTraktor revised its domestic market guidance of 28,000 to 33,000 units to 41,000 to 46,000 units, indicating approximately 70% year-on-year growth. On the other hand, the overhead of the export volume guidance is revised up to 11,000 from 10,000 units and now the company expects 11,000 to 12,500 export volume. Otokar, our leading bus and defense company, made one of the largest export years of 2020 with Georgia with a public transportation project in the scale of EUR 18.7 million. Otokar also offers the best price in the [ open and life as auction ], caused by the Izmit management society. These successful deeds are the result of superior R&D capabilities and successful products at Otokar. In the first half, Otokar's domestic revenues increased 9%. However, in the absence of bus exports to Bucharest, due to this effect, international revenues declined 16%. Overall, total revenues declined 11% and net profit declined 5% to TRY 172 million. In summary, we see solid performance from the automotive segment of Koc Holding. Overall, the auto segment accounts for 47% of our combined operating profit and 21% of our consolidated net income. The auto segment's operating profit increased by 6%. The main drivers of this post performance growth substantial growth in domestic markets, favorable product mix, solid export contracts as well as OpEx control and pricing perceptions. Better than the strong performance, auto segment consolidated net income surged by 25% year-on-year. On Slide 6, we can now look at the Consumer Durables segment. As in the case of auto sales, White Goods sales in Turkey also made a strong rebound in June. Looking at the market sales figures, White Goods also made a very strong start to the year with 11% [indiscernible] in the first quarter before the impact of pandemic in April and May, where the monthly shrinkage was 11% and 8%, respectively. Yet, with the improvement in sentiment following the opening up in the economy, the strong pent-up demand kicked in, and we absorbed a robust 14% growth in June, bringing the annual growth rate to 4% year-over-year in the first half. Demand was more severely impacted in international markets. And unfortunately, Turkey's White Goods exports shrank 49% and 39% on a monthly basis in April and May. However, it came to a plateau in June and sluggish monthly exports signals the recovery there as well. Overall, White Goods export in the sector were down 14% year-over-year in the first half. Looking at our tax figures. Domestic revenues increased by 17% year-over-year despite 7% decline in unit sales. On the international sales front, which constituted 61% of the total, revenues decreased by 6% on the back of lower unit sales, despite positive FX impact and acquisition of Singer Bangladesh. In terms of profitability, strong domestic sales supported raw material prices. And settlement income from the competition case were among the positives of the first half. Looking at the key risk metrics. Arcelik managed to maintain them at sustainable levels. The company's working capital to sales ratio decreased [indiscernible] 25.7% from 26.4% in the first quarter this year on the back of inventory management and strong performance on receivables. Leverage also stayed at comfortable levels with a net debt-to-EBITDA ratio of 1.9x. Regarding 2020 expectations. Revenue growth is expected to be around 10% to 15% in TL terms on the back of 5% decline in international revenues in effect while domestic revenues is foreseen to grow by 15% to 20%. EBITDA margin expectation is 10.5% to 11%. Overall, the Consumer Durables segment operating profit increased by 13% year-over-year and contributed 20% of the group's combined operating profit. This performance was driven by solid domestic revenues, supportive raw material prices as well as settlement income on competition cases. Finally, let me also briefly talk about the Finance segment and we developed a preview on Slide 7. The previous net income increased 4% year-on-year to TRY 2.5 billion in the first half, while pre-provision profit posted 22% growth. Return on tangible equity was realized at 12.1% while the bank preserved its conservative approach in provisioning. Cost growth was below 17%, mainly due to elevated regulatory costs while revenues increased 20%, bringing the cost-to-income ratio to 32.4%, 40 bps lower year-on-year. Quarterly fee income was under pressure due to regulatory impact on COVID-19. Yet, the growth was still positive at 7% in the first half. The bank's asset ratio was above 115%, well above the minimum requirement of 100%. Yapi Kredi is quite comfortable in terms of liquidity as shorter liquidity stands at $14 billion, that is 3.5x higher than its short-term foreign currency debt of $4 billion. In the first half, the growth of Turkish lira driven in both loans and deposits. Total loan growth was 11% year-to-date and customer deposit growth was 8%. The bank posted substantial increase in demand deposits and the strategy to focus on value-added segments such as TL, small ticket and demand deposits continues. Currently, loans to retail customers constitute 45% of the portfolio. As a consequence of this strategy, the bank continued to improve its swap-adjusted net interest margin and posted 26 bps expansion year-to-date of 3.7%. The quarterly cost of risk improved from the high base of the first quarter as the bank prudently and proactively booked at healthy provisioning with the outbreak of the pandemic in the first quarter this year and the cumulative cost of improved 40 bps year-to-date to 2.52%. On the other hand, the already strong total coverage further increased to 7.5% in line with the conservative approach. NPL ratio was stable on a comparable basis despite negative impact of COVID-19. In terms of capital, the bank capital ratios are 350 to 400 bps above regulatory requirements. CAR and Tier 1 ratios stand at 15.7% and 13% by June, respectively, without considering forbearance measures. Yapi Kredi Bank made some revisions in its full year guidance. The bank revised on its fee income growth expectation of high single-digit growth to single-digit contraction, [indiscernible] this expectation is slightly revised to less than 300 bps from around 225 bps. Growth expectation is slightly revised to low teens from mid- to low teens. And for 2020, following expectations are confirmed: [ LDR ] is less than or equal to 105%. CAR is around 16%. TL is also at high-teens. NIM expansion is around 40 bps. Cost growth at mid-teens and NPL ratio is around 7%. Overall, the finance segment combined operating profit was up by 5% year-on-year and consolidated net income declined slightly. In terms of share in total combined operating profit, it has high contribution among our sectors in the first half with 48% share. If you move to Slide 8, we can talk about the overall results of the group, incorporating all of the segment trends we just discussed. On a combined basis, Koc Group produced TRY 126 billion in revenues, TRY 6 billion in profit before tax and TRY 5.6 billion in net income. Consolidated net income amounted to TRY 4.4 billion with almost two-fold year-over-year increase mainly driven by 2 one-off items, both a little bit -- of Yapi Kredi transaction in February -- February this year. The first one is just TRY 3 billion net gain result on the bargain purchase and change of control of Yapi Kredi Bank. Following additional 9.02% share purchase of Yapi Kredi Bank in February 2020, we gained full control over the bank. And starting from February 2020, Yapi Kredi has accounted for using full consolidation instead of previously used equity pickup method last year. Overall, the transaction is in the scope of IFRS 3 since there's change of control. Accordingly, in line with IFRS, purchase price allocation study is conducted. As a result, the bargain purchase on the additional 9% share and remeasurement of previously had 35% equity interest in Yapi Kredi Bank to its acquisition date fair value resulted in TRY 3 billion noncash gain in our consolidated financials. The second one is the TRY 0.4 billion termination fee income which is the consolidated net profit income is the net profit impact that's received from UniCredit. On Slide 9, we can see the breakdown of the consolidated net income performance. The biggest contributors were auto and finance segments, followed by Consumer Durables and other segments. Energy segment, on the other hand, contributed negatively due to the impact of Tupras that was mentioned earlier. Now I would like to wrap up our presentation on Slide 10. In summary, we sustained our resilience in the first half of 2020. We maintain our disciplined management approach. Our balance sheet is strong with a solid net cash position, and our portfolio structure and diversification ensures resilience against volatility. Value creation and diversifying is always a key priority for us. Going forward, we have the potential to further diversify our positioning both domestically and internationally through our investments while sustaining efficient level of liquidity. Thank you for listening. This concludes our presentation. Now we can open the floor for questions.

[Operator Instructions] Mr. [ Amir Kore ] from [ Unlu ] and I quote, "Two questions, if I may. Number one, shares are trading at a 27.6% discount to current NAV and 19.1% discount to listed assets, both at their historic highs. Is the holding, considering a share buyback program or any other measures to take advantage of the deeply disconnected valuation? Number two, can you elaborate on the financial performance of Otokoç? Do you expect the operational shrink observed at the entity in first half to be sustained in 2 halves as well?"

Thank you for the question for us. The first question about share buyback and NAV discount. Yes, I can say that our NAV discount widened compared to 2019 year-end mainly because of the risk was small for Turkish equities. And our year-to-date NAV discount is around 7% compared to the 3-year average of around 4%. So we are -- unfortunately, the current discount level does not reflect the strength of our fundamentals, and the majority of our listed companies performed very well as we have seen on the share prices, but that started like in Koç Holding's share price. And regarding the buyback. As I said, the volatility in the operating environment is reflected in the share prices. So yes, we analyze the potential for buyback. And obviously, approximately 85% of our NAV is comprised of our list of assets. And yes, we have a very strong cash position, but we believe that at these volatile times, it's important to hold on to this strong cash position, not only to be able to protect our balance sheet, but also to preserve all these areas. And second question about Otokoç. I can say that, yes, Otokoç had a very strong performance in the first half of this year. And like last year, remember, last year, the revenue growth was 15%, EBITDA growth was 23%, also with its contribution of Greece. And this year, in the first half, again, we have seen almost more than 40% year-on-year growth in the EBITDA of the company. That's also mainly driven because of the strong revenues and also the effective cost management and robust demand in the domestic market. And looking at the domestic market trends, that includes the leasing unit. Retail sales were quite strong in the first half and they increased by almost 22%. And the observed long-term leasing volumes to be in line with our expectations, whereas the short-term leasing volume was lagging, mainly because of COVID-19. And regarding second half sales. The strong demand and the shortage in the market that increased the second half sales significantly and we are very happy with the performance of Otokoç in the first half, as I said. And of course, looking at the trends in the auto sector, we expect this to continue in the second half