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

Ladies and gentlemen, thank you for standing by. I am Jota, your Chorus Call operator. Welcome, and thank you for joining the Koç Holding conference call and live webcast to present and discuss the first half 2021 financial results. At this time, I would like to turn the conference over to Ms. Sinem Baykaloz, IR Manager at Koç Holding. Ms. Baykaloz, you may now proceed.

Thank you. Welcome, and thank you for joining us today. This is Sinem, IR Manager of Koç Holding. I am here with me our IR Coordinator, Nursel Ilgen, to go over the presentation and answer your questions during the Q&A session. I would like to remind you that our presentation and the Q&A session might contain forward-looking statements including the effect of 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 of the webcast on our website. Now I would like to leave the floor to Nursel to present our first quarter results. At the end of the presentation, we will have a Q&A session.

Thank you, Sinem. Welcome, everyone. I would like to start by sharing that we feel deeply sorry about the pandemic, the wildfires and floods. In the first half of the year, pandemic continues to challenge our lives across the world. Recently, we have been shaken by the wildfires in the south and floods in the north, both have severely influenced our country. From the first day, we are working hard to do our part in the best way possible in communication with relevant ministries, municipalities and NGOs. We will do our best in the recovery process of the disasters. As always, we have full faith that we will overcome these in solidarity. Okay. On Slide 2, you'll see today's agenda. And let's start on Slide 4 with some key indicators for Koç Holding. We were able to deliver solid performance and proved our resilience 1 more time. Thanks to our diversified portfolio structure, agile management, strong financials and our prudent risk policies. On the left, you can see the sectoral breakdown of our diversified business portfolio as of the end of June. Business models of all companies were tested by a new set of risks have emerged, having different impacts on each business. Even under these challenging conditions, our portfolio projects resilience as we have and figuring diversification. Also, we have leading positions in the sectors where we operate. This allows us to maintain our strong pricing power. On the right, you can see the revenue breakdown. Diversification is not limited with factors, but also includes international positioning. We are the largest exporting group in Turkey, with our exports accounting for 7% of Turkey's total exports. In terms of the composition of our own revenues on a combined basis, 31% is coming from international sales as of the first half of 2021. If we also include Tüpras, which is an FX-linked commodity business, 50% of our revenues can be considered not sensitive to the domestic economy. Moving on to Slide 5. We maintained our strong liquidity. You can see the evolution of our net cash in the first half of this year. At the end of last year, we had $375 million net cash position at the Holding level. Considering our dividend income and other items such as management fees, operating and financial expenses, and currency conversion impact, our net cash position at the end of June 2021 became $455 million, including Yapi Kredi Bank's AT1 investment. On Slide 6, you can see the main pillars of our solid balance sheet. As we all know, prudent management has always been a key focus area. As we have just discussed, as of the end of June, our net cash position stood at $455 million, including Yapi Kredi Bank's AT1 investment. Around 80% of our $1.8 billion of gross cash is in hard currency. Keeping an efficient level of liquidity has always been our approach and it allows us to maintain our resilience. With our agile management, we sustained our healthy balance sheet despite the headwinds of the COVID-19 pandemic and market volatility. In terms of our at Koç Holding level, the only debt we have is the 2 Eurobonds outstanding as of the end of June. We strictly apply and regularly monitor our prudent risk management policies at each underlying company and on a combined basis. In terms of liquidity, leverage and FX position, we preserved and even improved our conservative levels. On a combined basis, our churn ratio is 1.3x and our net financial debt over EBITDA, excluding the finance segment, is at 1.4x. In terms of FX, we have a policy of keeping a neutral position as we remain well within our risk management rules. As the largest investment holding company in Turkey and being active in diversified sectors, we manage our balance sheet in a way to ensure that we always remain resilient against market volatility. Going forward, we'll continue to prioritize maintaining the solidity of our balance sheet, no matter how challenging the market conditions are. Now I would like to leave the floor to Sinem to discuss the sector development in the first half of 2021.

Thank you very much, Nursel. We will start with Energy Enterprise on Slide 8. The Energy segment's contribution to Koç Holding consolidated net income turned to positive in the second quarter mainly due to inventory gains with further increase in crude oil prices as well as recovery in domestic demand, higher capacity utilization rates and a slight improvement in crack margins. Note that FX losses incurred in the first quarter were recovered by inventory gains in the second quarter through natural hedge mechanism. The domestic demand for refined products continued its gradual recovery in the first 5 months of 2021. Gasoline sales increased 14% year-over-year, diesel sales increased 10%, and jet fuel sales were up by 3%. In the first half, Tüpras domestic sales were up by 6% year-over-year, while international sales volume was 6% lower year-over-year, resulting in 3% higher total sales volume. When we look at the refining margins, we see $0.6 per barrel decline in the Med Complex margin to $0 per barrel in the first half of 2021, mainly due to lower crack margins. Gasoline cracks improved strongly and increased to above its 5-year average, stemming from higher demand and normalization in gasoline inventory. On the other hand, the recovery in diesel crack margins was limited as the substantial product inventories in the market could not be absorbed yet. In the second quarter of the year, a gradual improvement was observed in jet fuel demand, while the number of global flights that are still well below pre-pandemic levels continue to suppress jet fuel cracks. Meanwhile, Tüpras net refining margin was $3.3 per barrel higher than Med Complex margin, mainly due to crude selection ability of the company and inventory gains exclusion from the net margin. In the first half, Tüpras overall net refining margin amounted $3.3 per barrel versus $1.1 per barrel during the same period last year, mainly due to inventory gains and slightly better crack in the second quarter of 2021 compared to inventory losses last year. In the second quarter, Tüpras increased its capacity utilization rate to 91% with the completion of maintenance work at Izmit refinery from 65% in the first quarter, bringing the first half capacity utilization to 78%. In the light of the first half development, Tüpras revised its full year guidance range for the capacity utilization rate down by 5 percentage points to 85% to 90%, thus the production volume expectation was revised down by 1 million tons to a range of 25 million tons to 26 million tons. On the LPG side, consumption was flat in the first 5 months of 2021. Aygaz, the leading player in the LPG sector focused on profitability and its sales volume was up by 5% in the first half of 2021. Let's move to Slide 9 and discuss the developments in the auto segment. Domestic demand in auto sector continues to be strong despite all the headwinds, such as pandemic-related lockdowns and high interest rates. Sequential recovery in the export markets continued as well. Our companies continue to have a strong performance in the first half on the back of their agile business model. Let me highlight here that so far, none of our auto companies made some downward revision on their production guidance for this year. Auto segment continues to have the highest contribution to consolidated net income with TRY 2.4 billion. The main drivers of the solid performance were strong domestic market growth, improvement in export markets, favorable product mix, solid export contracts, as well as OpEx control and pricing discipline. On the back of this strong performance, consolidated net income of Auto segment served by a significant 166% year-over-year. In the first half, domestic auto sales showed a very strong performance and witnessed a significant 57% year-over-year growth, as the first quarter's substantial sales volume of slightly above 200,000 units replicated in the second quarter. Despite Turkish lira depreciation and increasing loan rates, consumers' appetite for vehicles was unremitting with the demand being pulled forward on the back of price hike expectations and concerns over accessibility due to semiconductor availability. Increase in e-commerce activities continued to be supportive in the first half. Our market share in domestic market was flattish at 25% compared to the previous quarter. On the export side, in the European market, the pace of recovery still lags behind Turkey, however, improvement continues. In the first half, the base effect kicked in and the European PC market registered a growth of 27% year-over-year, while it was 43% for the LCV market. On the other hand, PC registration in the EU remains around 23% lower versus the first half of 2019. However, for the LCV, the registrations seem to have almost caught up with the pre-pandemic levels. In the first half, our group market share in the export increased 5 percentage points year-over-year to 41%, thanks to the fact that Tofas was able to maintain production schedule with only 2 weeks suspension, which is a minor disruption compared to other automotive manufacturers. In the first half, Ford Otosan's export sales volume was 31% higher, while Tofas witnessed 33% increase in its export volumes. Strong demand in the domestic market, sales mix as well as currency tailwinds supported total sales revenues of both, Ford Otosan and Tofas, and they increased by 77% and 87% year-over-year, respectively. Domestic revenue growth was robust for both companies, on the back of strong volume growth, favorable product mix and pricing discipline. Tofas registered 68% growth in the export market, while it was 72% at Ford Otosan. International revenues were supported by Euro-based cost-plus contracts, and in the case of Tofas, also by take-or-pay. On the back of better-than-expected domestic market, Tofas revised its 2021 guidance. Accordingly, expectations for the domestic light vehicle market is lifted by 100,000 units to 800,000 to 850,000 units. Similarly, Tofas domestic retail sales are lifted by 15,000 units to 135,000 to 150,000 units. On the other side, the upper end of the export volume guidance has slightly reduced. Production volume expectation is raised to 280,000 to 300,000 units despite issues in the supply of some parts. Also, Ford Otosan revised its CapEx expectations to EUR 375 million to EUR 425 million without any impact on the product launch state. TurkTraktor, our tractor company, had a solid start to the year in the first half of the year. The increase in -- in the first half of the year, the increase in Ziraat bank's loan rates did not cause a meaningful interruption in the ongoing positive momentum in domestic tractor demand and TurkTraktor's domestic sales volume surged 144% year-over-year. During this period, the company's export volume was up by 31%. Stellar growth in the domestic revenues, together with 74% increase in international sales, TurkTraktor's total revenues grew 156% year-over-year. The company's net income increased by close to 4-fold to TRY 608 million. Otokar, our leading bus and defense company, with superior R&D capabilities and prosperous products, also enjoyed a very strong start to the year. In the first half, Otokar's domestic revenues increased 149% year-over-year, and international revenues grew 37% year-over-year, while the share of international revenues constituted 64% of total revenues. Overall, total revenues increased 64% year-over-year, while the net income increased almost 130% year-over-year to close to TRY 400 million. On Slide 10, let's look at the Consumer Durables segment. As is the case of auto sales, Consumer Durables segment also had an outstanding first half on the back of strong demand in both domestic and export markets. The segment's contribution to consolidated net income was up by more than 3x year-over-year to TRY 685 million. Stellar performance was driven by strong domestic and international revenues, as well as currency tailwinds despite higher raw material prices. Turkish white goods registered 27% year-over-year growth in the first half, while the export market increased 47%. Increased vaccination and continued high demand from customers were supported in the international market performance in the second quarter. Looking at Arçelik figures, domestic revenues increased by 58% year-over-year with 36% year-over-year growth in unit sales. Similarly, international revenues constituting 2/3 of total increased by 88% year-over-year, with almost equal contribution of FX impact and higher unit sales. Looking at the key risk metrics, Arçelik managed to attain healthy levels. The company's working capital to sales ratio was flattish at 27.4%. Leverage stayed at comfortable levels with a net debt-to-EBITDA ratio of 1.54x. If we include the cash outflow from the acquisition and Whirlpool's cash on the balance sheet, net debt-to-EBITDA ratio becomes 2x. During the quarter, Arçelik issued the first corporate green bonds amounting EUR 350 million with 5-year maturity and 3% annual interest. Regarding 2021 expectations, Arçelik revised guidance, canceling in the impact of the Hitachi and Whirlpool acquisitions. Revenue growth is expected to be around 50% in TL terms on the back of around 35% increase in international revenues in FX, while domestic revenues is foreseen to grow by around 30% year-over-year. EBITDA margin expectation for this year is around 11%. Finally, let me also briefly talk about the Finance segment and the development of Yapi Kredi on Slide 11. The Finance segment's contribution to consolidated net income was up by 83% year-over-year and the share in consolidated net income was realized at TRY 1.6 billion. Yapi Kredi managed to increase its profitability while the bank preserved its prudent approach in provisioning. According to BRSA financials, Yapi Kredi's net income increased 46% year-over-year to TRY 3.1 billion in the first half, while return on tangible equity was realized at 15.4%, marking an increase of 3.3 percentage points year-over-year. Cost growth was below average inflation at 16% year-over-year. Net fees and commissions registered a significant across-the-board improvements with 31% growth year-over-year. However, core revenues came slightly down by 3% year-over-year on the back of the decrease in net interest income and higher swap costs. Accordingly, the bank now expects NIM, excluding CPI linkers, to contract by around 50 bps versus previous expectation of around 30 bps contraction and fees are expected to grow at mid-20s versus previous mid-teens expectation by year-end. In the first half, the growth continues to be Turkish lira driven in both loans and deposits. Total loan growth was 13% year-to-date and customer deposits growth was 14% year-to-date. The bank's strategy to focus on value-added segments such as Turkish lira small ticket and demand deposits continued. Share of retail loans further increased to 52% in total FX adjusted cash loans, while the share of demand deposits in total customer deposits reached 37%. The Turkish lira growth expectation for Yapi Kredi was increased to low 20s from high teens range. The cumulative cost of risk, including currency hedge was at 60 bps, while the reported cost of risk was 128 bps, mainly due to limited inflows, strength in collections and front-loaded provisions. The bank writes down its net cost of risk expectation by 50 bps to 150 -- to less than 150 bps. Conservative coverage levels preserved across all stages and the total coverage was 7.2% on a consolidated basis. Net NPL inflows continued to be negative in the quarter on the back of strong collection performance. Yapi Kredi remains comfortable in terms of liquidity. Total liquidity coverage ratio of the bank stands at 157% as of the end of first half. In terms of capital, Yapi Kredi has adopted the IRB approach in its capital calculation, and in doing so, became the first bank in Turkey. On the back of internal capital generation capacity, and the positive contribution of IRB transition, bank continued to operate with above 4 percentage point buffers on its capital ratios compared to the regulatory requirements. CAR and Tier 1 ratio stood at 16.2% and 13.8% by June end, respectively, without considering the forbearance measures. In the second quarter, the bank successfully renewed its syndication with a 103% rollover ratio and linked this syndication to sustainable funding. Now I will leave the floor to Nursel.

Thank you, Sinem. If you move to Slide 12, we'll walk you through the overall results of the group, incorporating all of the segment trends Sinem just discussed. On a combined basis, Koç Group registered TRY 211 billion in revenues, TRY 13.4 billion in profit before tax and TRY 12.3 billion in net income. Consolidated net income amounted to TRY 5.3 billion with a 20% year-over-year growth despite TRY 3.4 billion of one-off income related to the Yapi Kredi Bank transaction in February 2020. On Slide 14, I would like to briefly talk about some of our unlisted companies as they are catching performance in the first half of 2021 is worth discussing. Let me start with Otokoç. Otokoç, looking at the financial performance of the company, as in the case of all other auto companies in our portfolio, it had a stronger first half than initial expectations despite the lockdowns in May. High interest rates increased the appetite for budget-friendly secondhand vehicles in Turkey. In the first half of this year, Otokoç maintained its leading position among corporate brands and secondhand vehicles. In addition, currency tailwinds on international operations were supported as a company having operations in 9 different countries. Thus, Otokoç slightly improved its EBITDA margin to 21% and realized a significant jump in its book value to nearly TRY 3 billion in the first half. As the largest unlisted company in our portfolio, Otokoç represents around 5% of our NAV as of the end of June. Moving on to Opet, our fuel distribution company, in the first half of this year, the company benefited from domestic demand recovery and enjoyed a positive EBITDA, supported by inventory gains with a book value of TRY 2.9 billion. Opet operates with the goal of being the first charge of the consumer in the fuel distribution sector in Turkey through its expanding station network. The company has a total of 1,777 stations across Turkey as of the end of June. Opet has a total market share of 17.1%. And the breakdown is 17.3% in white products and 9.5% in black products as of the end of May. In the first half -- and moving on to Entek. In the first half of the year, Entek's revenue and EBITDA was impacted by low hydrology as expected. In line with the strategic priority to invest in renewable energy, Entek recently closed the deal with STEAG regarding the acquisition of a 60-megawatt wind power plant in August. As of today, total installed capacity of Entek reached 436 megawatts with the addition of its first wind power plant. Entek generates electricity through 800 electric power plants with total capacity of 264 megawatts and one 112-megawatt natural gas combined cycle power plant. Entek aims to become an integrated and leading energy market player. With this vision, the company constantly chases the opportunities both in Turkey and in the international markets. The final company that I would like to discuss on this slide is Aykargo. As you all know, Aykargo was originally an in-house entrepreneurial project and was officially founded by Aygaz in August 2020, to keep up with the fast-growing e-commerce and cargo distribution businesses, benefiting from Aygaz existing dealer network, facility infrastructure and also home delivery experience. Aykargo is primarily planning to focus on B2C segment, which is expected to increase its portion in cargo sector in largest growing e-commerce. The company aims to reach 81 cities in Turkey in 2022. As disclosed earlier, a total of $75 million of capital will be injected in Aykargo in 5 years. In the beginning of August this year, 45% of the shares of Aykargo was transferred to Koç Holding at $16 million. Koç Holding and Aygaz will participate in the capital increases of Aykargo up to TRY 110 million this year, this is only for 2021, in the ratio of the shareholding in Aykargo, which is 45% for Koç Holding corresponding to TRY 50 million this year. Finally, on Slide 16, you will see the evolution of the net asset value discount, which we believe to be unwarranted, given our strong fundamentals that we have just discussed. Although we maintain our strong financial profile and prudent approach with a track record of sound liquidity, our NAV discount widened significantly. The volatility in the operating environment has been reflected on the markets. In some cases, the impacts have been more elevated than warranted, especially given the solid balance sheet of our companies. Koç Holding's current NAV discount and the discount to its listed assets that make up around 85% of our NAV do not reflect the strength of our fundamentals and our solid balance sheet. As discussed previously, we are not happy with this deeply disconnected valuation. Accordingly, we have been analyzing potential for buybacks from time to time. And in our latest assessment, we decided to initiate it to take a more proactive stance. We are pleased to see the positive market reaction to the news. We are an investment holding company, and we try to deploy the capital in the best interests of our stakeholders. As you can see in our first half results, we preserve our comfortable liquidity position, and we would like to utilize our cash for investments, which support the generation of long-term value. So far, total size of the buyback program represents -- sorry, total size of the buyback program that we have announced at the beginning of July represents 5% of our free float equal to 1.4% of our capital. The decision on the size of the program was taken considering several factors, including, but not limited, to sustaining a healthy dividend payout as well as ensuring meaningful free float in order to maintain Koç Holding's place in various indices. We can use full or part of the funds, this and the timing will depend on market conditions. So far, we bought 200,000 shares, corresponding to 0.008% of our capital. So this concludes our presentation, and I would like to thank you all for listening. Now we can open the floor for questions.

Ladies and gentlemen, there are no questions at this time. I will now turn the conference over to management for any closing comments.

Thank you. Thank you, everyone. Before closing, I would like to extend our appreciation one more time to all participants. Moreover, if you have any further questions, you can always get back to us by phone or by e-mail. As a reminder, our presentation and replay of this conference can be found on our website together with the transcript. Goodbye.