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

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the Koc Holding conference call to present and discuss the 9 months 2020 financial results. [Operator Instructions] And 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.

Thank you. 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. 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 out our e-bulletin, which contains a 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. I hope you are doing well. Let's start on Slide 2. I would like to start by giving a quick overview of our positioning. We were able to manage volatility and proved 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 could not pay any dividends due to a loss in 2019 statutory accounts and Arcelik decided to retain earnings following the uncertainties brought by the pandemic. This year's figure does not incorporate the dividends of our unlisted companies. Note that around 80% of our dividend income is derived from companies with FX or FX-linked revenues. At Koc Holdings, we have a diversified business portfolio. The main components that ensure this are: We have a sectorally diversified portfolio, which hedges us against sector-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, around 30% is coming from international sales as of the first 9 months of 2020. If we also include Tupras, which is an FX-linked commodity business, approximately 45% of our revenues can be considered 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 you all know, prudent management has always been a key focus area. At the holdings standalone level, as of the end of September, our net cash position stood at $362 million, including Yapi Kredi Bank AT1 investment. We have $1.7 billion of gross cash, and 84% of this portion is in hard currency. Keeping an efficient level of net cash has been our approach for many years, and this allows us to maintain our resilience. Accordingly, we had a healthy and strong balance sheet prior to the COVID-19 outbreak. Based on the outcome of internal assessments and the stress test at both subsidiary and holdings level, our group companies obtained additional liquidity from the markets, especially in the second and the third quarter, ahead of the increase in Turkish lira interest rates. In terms of our funding at Koc Holdings level, we have 2-year bonds outstanding as of the end of September as we paid down our Eurobond issued in 2013 amounting $750 million in April this year. Following this, our gross cash decreased as much, while this had no impact on our net cash. We have no other debt at Koc Holding standalone level. As a reminder, Koc Holding's ratings are capped with Turkey sovereign at Moody's at B2 and one must evolve sovereign S&P at BB-. We have well-defined and prudent risk management policies that we strictly apply and regularly monitor 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 at 2.2x. In terms of FX, we have a policy of keeping unusual position, and we remain well within our risk management rules. As the largest investments holding company in Turkey and being active in diversified sectors, we manage our balance sheet to ensure that we always remain resilient against market volatility. Going forward, we'll continue to prioritize maintaining the solidity of our balance sheet despite challenging market conditions. Now I would like to briefly summarize our performance in the first 9 months, 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 8 months of 2020. We sold 56% and 5% decline in jet fuel and gasoline sales volume, respectively, compared to the same period last year, while DDA was relatively resilient and posted 1% decrease. In the first 9 months, Tupras domestic sales volume and export volumes were lower year-on-year, resulting in 18% fall in total sales volume. When we look at the refining margins, we see about $3.1 per barrel decline in the Med Complex margin to minus $0.2 per barrel due to lower crack margins. Mesh refining margin was a negative territory between May and September, despite a sequential recovery on a monthly basis. Continuous weakness in jet fuel cracks and raises in gasoline cracks compared to 2019 were the key factors of headline margin as relatively slow recovery in a traffic coupled with the substantial product inventories led to the weakness in cracks. On the other hand, Tupras net refining margin was $1.70 per barrel higher than Med Complex margin mainly due to crude selection ability of the company. Tupras overall net refining margin amounted $1.50 per barrel versus $3.70 per barrel during the same period of last year, mainly due to weaker crack margins as well as inventory loss effects and lower production despite support form by their differentials. In terms of capacity utilization, the first 9 months of 2020, Tupras operated with 81% capacity utilization rate, mainly because of the 2-month production suspension of Izmit Refinery in May and June, in line with the contraction in demand. Based on the developments, year-end expectations have been revised for Tupras in October. Accordingly, Medcomtech's margin expectation is lowered from $1 to $2 per barrel to minus $0.50 per barrel, while Tupras net refining margin has reduced to around $1 per barrel from $3 to $4 per barrel. Tupras also trims refining-related CapEx guidance from $125 million to $115 million in 2020. Capacity utilization rate will be around 75% to 80% on the back of around 2 million tonnes of floor production and sales expectations. On the LPG side, consumption decreased by 8% in the first 8 months of 2020. IGA, the leading player in the LPG sector, focused on profitability, and its sales volume was flat in the first 9 months. Accordingly, looking at the energy segment contribution to Koc Holding, we can see that its share in consolidated net income was negative. Bottom line was impacted mainly due to recrack margins and inventory losses incurred in the first quarter. Let's move to Slide 5 and discuss the developments in the auto segment. This year, except for April and May, domestic auto sales showed a very strong performance, thanks to improving confidence, pent-up demand and the favorable lending rates. Accordingly, domestic auto sales witnessed a massive 179% year-on-year growth only in the third quarter, carrying the growth rate to 76% in the first 9 months. Despite special consumption tax increase for passenger cars at the end of August, as well as TL depreciation and increasing low rate in the third quarter, we observed that consumers are still eager to buy vehicles in September, reaching all-time high September figure. Our market share in the domestic market increased by 5 percentage points to 30% with the support of all segments, especially light commercial vehicles. On the export side, in the European markets, the recovery was not as strong as Turkey. As of the first 9 months, European PC and LCV market registered a total shrinkage of 29% year-on-year. As a result of the disruptions due to COVID-19, our group market share in exports declined 6 percentage points to 38%. Meanwhile, similar to the trend in Turkey, light commercial vehicles' performance was better, thanks to the growth in e-commerce. During this period, Ford Otosan export sales volume was 37% lower, while Tofas witnessed 48% decline in its export volumes. Despite weak demand in the international market, strong rebound in the domestic market as well as the current tailwinds supported domestic -- supported total sales revenues of both Ford Otosan and Tofas, and they increased by 3% and 7%, respectively. Domestic revenue growth was robust for both companies with around 140%, 150% increases on the back of strong volume growth, favorable product mix and the pricing discipline. Strong euro against TL moderated the decline in international revenues, yet it was still quite high with 17% shrinkage at Ford Otosan and 34% shrinkage at Tofas in TL terms. Still, international revenues were the main driver for both companies, supported by euro-based cost plus contracts, and in the case of Tofas, also take our case. In the light of the first 9 months figures, both companies made some revisions to their 2020 guidance. We expect approximately 60% year-on-year growth in the domestic market, pointing to 750,000 to 800,000 units for total auto sales. Ford Otosan expects its retail sales volumes to be around 95,000 to 105,000 units, while Tofas expects 130,000 to 140,000 units. Regarding exports, Ford Otosan increased export volumes by 20,000 units to over around 250,000 to 260,000 units, still around 24% lower compared to 2019 figures. Tofas also raised the lower limit of export sales volume to 120,000 units, implying 33% lower exports year-on-year, taking the midpoint of the export guidance. The impact of lower exports on the P&L will be limited, as I mentioned earlier, thanks to euro-based cost-plus contracts and take-or-pay contracts. On the CapEx front, Ford Otosan is targeting some decrease from EUR 142 million in 2019 to around EUR 100 million to EUR 120 million in 2020. Tofas still expects CapEx to be higher compared to 2019 at EUR 150 million. TurkTraktor, our tractor company, enjoyed a very strong year. In the first 9 months, the pandemic-related slowdown in the economy did not cause a meaningful interruption in the ongoing positive momentum in domestic tractor demand since August 2019, and TurkTraktor's domestic sales volume surged by 92% year-on-year. During this period, the company's export volume was 24% lower, mainly due to COVID-19. Stellar growth in domestic revenue streams with 110% more than offset the 5% shrinkage in international sales, and TurkTraktor total revenues grew by 40% year-on-year. The company's net profit increased by almost eightfold to TRY 360 million in the first 9 months compared to the same period of last year. For 2020, TurkTraktor revised its domestic market guidance to 46,000 to 49,000 units, indicating approximately 84% year-on-year growth as the market recovery was faster than expectations. In line with the better market outlook, TurkTraktor increased domestic tractor sales to almost 110% year-on-year growth. In addition, after seeing recovery in export markets, the company raised lower limited of export sales volume to 11,500 units, still implying around 20% lower export volume. Otokar, our leading bus and defense company, made one of the largest export deals of 2020 with Georgia with a public transportation project in a scale of around EUR 19 million. Otokar also signed a contract with Izmir municipality. Additionally, Otokar lines signed 2 defense contracts amounting to $135 million with deliveries to start in 2021. These successful deals are the result of superior R&D capabilities and prosperous products of Otokar. In the first 9 months, Otokar's domestic revenues increased 36%. However, in the absence of bus exports to Bucharest due to base effect, international revenues declined 16%. Overall, total revenues declined 7%, while net profit increased 8% to TRY 320 million in the first 9 months. In summary, we see solid performance from the auto segment of Koc Holdings. Overall, in terms of share in total combined operating profit and consolidated net income, the Auto segment has the highest contribution among our sectors with 40% and 31% shares, respectively. The Auto segment's operating profit increased by 32% year-on-year. The main drivers of this positive performance were substantial growth in domestic markets, favorable product mix, solid export contracts as well as OpEx control and pricing discipline. Better than the strong performance, Auto segment's consolidated net income surged by 72% year-on-year. On Slide 6, we can look at the Consumer Durables segment. As in the case of auto sales, micro sales in Turkey also made a strong start to the year with 11% growth in the first quarter. We saw the impact of pandemic in April and May, where our demand to shrinkage was 11% and 8%, respectively. Yes, with the improvement in the sentiments following the opening up of the economy from June onwards, the strong pent-up demand kicked in, and we observed a robust 13% growth in the third quarter, bringing the growth rate to 14% in the first 9 months. COVID-19 affected demand more severely in the international market. And unfortunately, Turkey's white goods export shrank 49% and 37% year-on-year on a monthly basis in April and May, respectively. However, it came down to a plateau in June and flattish monthly export signals the recovery there. We observed 6% growth in Turkey's white goods exports in the third quarter while it was down 6% year-on-year in the first 9 months. Looking at Arcelik figures. Domestic revenues increased by 28%, with approximately 5% year-on-year gold in unit sales. On the international sales front, which costs due to 63% of total revenues increased by 11% on the back of FX impact despite lower unit sales. Looking at the key risk metrics, Arcelik managed to attain historically low levels, mainly thanks to strong cash generation. The company's working capital to sales ratio decreased further to 24% from 25.7% in the second quarter this year on the back of inventory management and strong performance on receivables. Leverage also stayed at very comfortable levels with a net debt-to-EBITDA ratio of 1.2x. Regarding 2020 expectations, Arcelik revised guidance on the back of strong rebound in the third quarter. Revenue growth is expected to be around 20% to 25% in TL terms on the back of less than 5% decline in international revenues in FX terms, while domestic revenues is foreseen to grow by 25% to 30%, again in TL terms. EBITDA margin expectation for this year is more than 11.5%. In order to meet higher demand, Arcelik increased CapEx guidance to EUR 180 million. Finally, working capital to sales ratio guidance is improved to less than 27%, which used to be less than 30% before. Overall, the Consumer Durables segment operating profit increased by 55% and contributed 20% to the group's combined operating profit. Solid domestic revenues, recovery in international markets since June, currency tailwinds, stable raw material costs, strict cost management as well as settlement income on competition cases drove this performance. Finally, let me also briefly talk about the finance segments and the developments at Yapi Kredi on Slide 7. According to BRSA financials, Yapi Kredi's net income increased 29% to TRY 4.3 billion in the first 9 months of this year, while pre-provision profit posted 27% growth. Return on tangible equity was realized at 13.7%, while the bank preserved its prudent approach in provisioning. Cost growth was 17%, mainly due to COVID-19 macro and regulatory impact, while the revenues increased 23%, bringing the cost-to-income ratio to 31.4%, which is 2.8 percentage points lower year-on-year. Fee income growth was at 8% in the first 9 months with the improvement in quarterly fee income due to improvement in transaction numbers and diversification efforts. Yapi Kredi is quite comfortable in terms of liquidity, as its short-term liquidity stands at $11 billion, that is 2.9x higher than its short-term foreign currency debt of $3.7 billion. At the end of October, Yapi Kredi also successfully signed a syndicated loan agreement totaling $805 million equivalent at 367 days maturity. In the first 9 months, the growth was Turkish lira driven in both loans and deposits. Total loan growth was 23% year-to-date. Customer deposits growth was 70% year-to-date. The bank's strategy to focus on value-added segments such as TL small ticket and demand deposits continued. Currently, loans to retail customers constitute 46% of the portfolio. As a consequence of the strategy, the bank continued to improve its stuff adjusted net interest margin and posted 43 basis points expansion year-to-date to 3.73%. The cumulative cost of risk improved 69 basis points year-to-date to 2.23%, despite continuing conservative provisioning for postponement and 90 to 180 days of past due. Similarly, the total coverage was 7.2% on a consolidated basis, in line with the conservative approach. NPL ratio improved slightly on a comparable basis on the back of strong collections despite negative impact of COVID-19. In terms of capital, the bank's capital ratios are well above the regulatory requirements CAR and Tier 1 ratio stands at 16.7% and 13.7% by September end, respectively, indicating 470 and 395 bps buffers without constant the forbearance measures. Yapi Kredi made no revisions in its full year guidance with upside potential in TL loan growth of high teens. Overall, the finance segment combined operating profit was up by 25%, and consolidated net income grew by 46%. If we move to the 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 registered TRY 217 billion in revenues, TRY 12.2 billion in profit before tax and TRY 11 billion in net income. Consolidated net income amounted to TRY 6.7 billion, with almost twofold year-on-year increase, mainly driven by strong performance of all segments, except for Energy, and 2 one-off items both related with the Yapi Kredi transaction in February 2020. Let me remind you of those 2 one-offs. First is the TRY 3 billion net gain resulting from the bargain purchase and change of consolidative of Yapi Kredi Bank, following the additional 9.0 point share repurchase at Yapi Kredi in February 2020, we gained full control over the bank. And starting from February this year, Yapi Kredi has been accounted for using full, meaning line-by-line consolidation instead of the previously used equity pickup method last year. The transaction is in the scope of IFRS 3 business combinations since there's a change of control. Accordingly, in line with the IFRS, purchase price allocation study is conducted. And as a result, the bargain purchase on additional 9% share and remeasurement of previously had 35% equity interest in the Yapi Kredi Bank to its acquisition date fair value results in a TRY 3 billion noncash gain in our consolidated net financials. And the second one-off was the TRY 0.4 billion termination fee income, which is consolidated net profit impact from UniCredit. On Slide 9, you 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 we mentioned earlier. I would like to wrap our presentation on Slide 10. In summary, we sustained our resilience in the first 9 months of 2020. We maintained our disciplined management approach our balance sheet is strong with solid liquidity and our portfolio structure and diversification ensures resilience against volatility. Value creation and diversifying further are always key priorities 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. So thank you for listening. Now we can open the floor for questions.

The first question is from the line of Kilickiran Hanzade with JPMorgan.

I have a quick question on your cash position. Your cash -- I mean, cash position has declined substantially since last year from around $700 million to $350 million levels, I think. Would you please explain what caused this decline on the holding side? And what is the share of the YKB Tier 1 AT1 in this cash position?

Sure. Sure. Yes, as we said, as of end of September, our net cash position is $362 billion, and that includes the Yapi Kredi Bank AT1 investment. The Yapi Kredi Bank AT1 investment is $206 million as of end of September. And that number, as we stated, is showing a slight decrease compared to the previous quarter, and the year-end net cash figure was $673 million, by the way, as a reminder. So there was a decrease compared to our year-end net cash mainly because we bought additional 9% stake in Yapi Kredi Bank, as you may remember, and that happened in February this year in the first quarter. So the net cash outflow from Koc Holding, excluding the termination fee, I mean, deducting the termination fee, net of termination, I should say, it was TRY 1.2 billion in Turkish lira terms, which amounted to almost $200 million at that time. And additionally, we purchased some shares of Token from Arcelik, 54% of Token, and that caused another TRY 170 million cash outflow; and third, we paid down dividends this year, almost TRY 670 million cash dividends. And the reason for the decrease in our net cash compared to June end, we don't have anything specific other than we bought some shares of Arcelik and Ford Otosan from Vehbi Koc Foundation, and that amounted to TRY 67 million, almost $8 million to $9 million. That is also a minimal amount. And other than that, we have our OpEx. We have those interest payments and nothing special. And there's also the FX impact. I mean, 84% of our cash is held in hard currency, but the remaining is still in TL, right?

Okay. And is it possible to give some sort of indication for next year's cash inflows, potential cash inflow? Could it be higher than this year or...

I mean, that will depend on many factors. Of course, the first being the dividend income that we're going to receive from our underlying companies. So we never provide a number regarding net cash. We aim to maintain some liquidity, of course, an efficient level of liquidity and as you know, our cash requirements as a holding company is very low because we have more material working capital or CapEx requirements as a holding company, and historically, you remember our ability to pay down our operational expenditures and servicing our debt payments that has been strong, and we have recurring income from management fees and also interest income apart from the dividend income. So this year, we already collected our dividends from our underlying companies in the first quarter this year, amounting to TRY 1.1 billion. And the main cash outflow, as I said, was the dividend payment, including the acquisition of additional 9% stake in Yapi Kredi Bank. So the net cash level will be done on all of these factors and also the FX rates, I should say.

No. Actually, I'm trying to understand if you are going to ask your companies to pay the maximum dividend in 2021, given that Tupras is unlikely to pay dividends given that Tupras is unlikely to pay dividends again this year?