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

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining the Koç Holding conference call and live webcast to present and discuss the second quarter 2022 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 Holdings. I have here with me our CFO, Mr. Polat Sen; our IR Coordinator, Nursel Ilgen; and our Finance Coordinator, Fatih Sertdemir, to go over the presentation and answer your questions during the Q&A session. I would like to note that our presentation and the Q&A session might contain forward-looking statements and assumptions based on our business environment as we see it today and might be changed -- they might be subject to change. Please remember, you can access the replay of the webcast on our website after the call. Now I would like to hand over to Mr. Polat Sen to start the presentation. At the end of the presentation, we will have a Q&A session. Mr. Polat Sen?

Thank you very much, Sinem. Welcome, everyone. Today, we are going to look at the highlights of the first half of this year. On Slide 3, you will see today's agenda. And let's start on Slide 4 with some key indicators for Koç Holdings. I am proud to say that we had a solid first half year, despite all the challenges that we had, the war between Russia and Ukraine and continuing problems in the supply chain accelerated inflationary pressures across the world. This led to significant rate hikes from central -- global central banks. Now there is an increased concern for a global recession scenario. Despite all the headwinds, real economic activity in Turkey remained relatively resilient in the second quarter. However, we started to observe a slowdown in the domestic demand on the hand -- on the other hand, export activities continued to be supportive. I believe we, as Koç Holding, have a proven track record of volatility. Our resilient, strong financials and intact fundamentals are the reflection of our diversified portfolio, agile management and prudent risk policies. We run stress tests, both at our subsidiaries and Koç Holding level and closely monitor the risk metrics and liquidity conditions. We encourage our companies to obtain additional liquidity from the markets whenever we observe the early signals of an approaching market volatility. In the first half, we preserved and even improved our conservative levels of liquidity, leverage and foreign exchange position. On the left, you can see sectoral breakdown of our diversified portfolio as of end of June. The major change versus the previous quarter is the increased share of finance segment from after 18% additional share purchase at Yapi Kredi. On the right, you can see the breakdown of our combined revenues. We are the largest exporting group in Turkey with our exports accounting around for 7% of Turkey's total exports. Therefore, 30% of our revenue is coming from international sales. If we also include Tüpras, which runs an FX-linked commodity business, 58% of our revenue is hard currency denominated. Moving on to Slide 5, you can see the evolution of our net cash in the first half of this year. At the end of the year, we had $275 million of net cash at the holding level. Considering our dividend income and other items, such as management fees, operating and financial expenses, currency conversion impact and purchase of additional 18% of Yapi Kredi Bank shares. Our net cash position at the end of June '22 became $127 million, including the Yapi Kredi Bank AT1 investment. On Slide 6, you can see the main pillars of our solid balance sheet. As you all know, prudent management has always been a key focus area in Koç Holding. As we have discussed, our net cash position stood at $127 million, including Yapi Kredi Bank AT1 investment. Around 90% of our $1.6 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 market volatility. In terms of our funding at Koç Holding level, the only debt we have to -- we have is the 2 Eurobonds outstanding as of end of June. We strictly apply and regularly monitor prudent risk management policies at each of our portfolio companies on a combined and -- on a combined basis. Looking at our liquidity metrics, on a combined basis, our current ratio is 1.2x, and our net financial debt-to-EBITDA, excluding the finance segment is at 1x. In terms of FX, we have a policy of keeping natural position, as you all know, and we remain well within our risk management rules. Now I'd like to hand over to Nursel to go over the details of our groups. Thank you. Nursel?

Thank you, Polat Sen. Okay. Let's move on to sector development in the first half of the year. As usual, we'll start with Energy and Tüpras on Slide 8. The Energy segment's contribution to Koç Holding consolidated net income was solid in the first half, thanks to strong domestic demand, robustifying margins and higher capacity translation despite sharp price and energy costs. The domestic demand for refined products remained strong in the first 5 months of this year. Jet fuel sales surged 58%, gasoline sales increased 34%, while diesel sales declined 1%. In the first half, Tüpras domestic and international sales volumes were up 14% and 35%, respectively, resulting in 16% higher total sales volume. Net refining margins reached record high levels driven by the historically high crack margins. Med Complex margin increased $7.1 per barrel from 0 in the first half of 2021. Ongoing postpandemic demand recovery and supply issues stemming from Russia-Ukraine war resulted in record high [ mid-diesel cracks ]. Diesel crack margin increased to above its last 5 years' first half average with seasonally high demand, while postpandemic demand recovery continues and supply shortages exist with decreasing Russian exports to Europe. Similarly, jet fuel cracks increased above its last 5 years first half average, supported by limited mixes of supply as well as ongoing recovery in the number of global flights. Gasoline cracks were also strong with the ongoing demand in driving season and higher feedstock cost. In the first half, Tüpras overall net refining margin amounted $13 per barrel compared to $3.3 per barrel during the same period of last year, mainly due to better cracks, wider differentials, inventory gains and higher capacity utilization despite hikes in energy prices. Tüpras capacity utilization reached 92% in the first half. In line of the ongoing strength of the cracks, Tüpras regards its 2022 net refining margin guidance to $13 to $14 per barrel from $8 to $9 per barrel. On the LPG side, total consumption decreased slightly due to a 13% decrease in cylinder, while demand for auto gas slightly increased 2% year-on-year in the first 5 months. Total sales volume of Aygaz, the leading player in the LPG sector, was 1% up in the first half despite a 17% decrease in cylinder sales. Okay. Let's move on to Slide 9 and discuss the developments in the auto segment. Our companies sustained the strong performance in the first half of the year. Auto segment's contribution to consolidate net income was TRY 5.2 billion. The main drivers of this robust performance were favorable product mix, solid export contracts as well as OpEx control and pricing discipline despite softness in domestic and export markets. In the first half, we witnessed 9% decrease in domestic auto sales, mainly due to accessibility issues for the semiconductor. Compared to the first half of last year, passenger car sales and light commercial vehicle sales decreased 10% and 6%, respectively, while heavy commercial vehicle sales were 3% up. In the first half, our market share in the domestic market increased 2 percentage points to 27%. That was mainly on the back of market share gains of Tofas in the PC and commercial vehicle segments and market share gains of Ford Otosan in the commercial vehicle segment. On the export side, in the European market, we saw a 14% decrease in PC sales and 24% decrease in LCV sales in the first half. The [ suite performance ] was mainly due to ongoing supply chain disruptions impact on production and headwinds in the macro environment. Our group market share in the export increased 3 percentage points year-on-year to 45% on the back of market share gains of Ford Otosan. In the first half, Ford Otosan export sales volume was 19% higher, while Tofas business, 7% decrease in its export volumes. Favorable product sales mix, pricing discipline and currency tailwinds due to weak Turkish lira supported total revenues of both Ford Otosan and Tofas. Export revenue growth was strong for both companies. International revenues were supported by euro-based cost-plus contracts, and in the case of Tofas, also by take-or-pay. Total revenues of TürkTraktör, our tractor company, increased 59% in the first half. TürkTraktör registered a strong performance in the export market with 9% increase in volumes and 91% increase in the revenues. Its sales volume in domestic market was 25% down and the domestic sales revenue booked an increase of 46%. In light of these developments in the first half, Ford Otosan decreased its export sales and production expectations for this year. Tofas, on the other hand, increased its domestic sales volume expectations. In light of distribution, Tofas also increased its retail sales and production volume expectation while decreasing its export sales for the full year. TürkTraktör now expects a higher CapEx for the full year. As of -- the details of the company's guidance can be reached on Page 22 of this presentation. And I'm leaving the details for the -- for Page -- for Slide 22. I'll also talk to Otokar, the leading bus in the trans company in our portfolio very briefly. Otokar also booked a very strong first half. Domestic revenues more than doubled, while information revenues were 88% up and the share of international revenues consist around 61% of total revenues, and total revenue growth was 96% in the first half. Moving on to Slide 10, let's look at the Consumer Durables segment. Consumer Durables segment's contribution to consolidated net income was up 10%. Revenue growth continues to be strong and contribution of new required operations were supportive. However, increased cost due to global challenges was reflected on the margin. Turkish white goods sales decreased 8% in the first half, while the export markets increased 1%. In the domestic market, despite weak wholesale units, [ which ] was quite strong in the same period, mainly due to consumers' expectations of further hikes in product prices. Let's dive deeper into Arçelik numbers. In the first half, domestic revenues increased 91%, thanks to effective pricing despite a 12% decrease in unit sales. Similarly, international revenues, which constitutes around 70% of total revenue, increased 135% on the back of inorganic growth, FX impact and organic growth. Looking at the key metrics, Arçelik managed to attain healthy levels. The company's working capital for sales ratio became 28.3%. Leverage also stated comfortable levels despite share buyback and increase in working capital funding. Regarding 2022 expectations, consolidated revenue growth expectation is regard upwards, from more than 80% to more than 90% on solid positioning in the domestic market and performance in international markets. And in order to reflect higher costs, Arçelik divides its EBITDA guidance -- EBITDA margin guidance to around 10% from around 10.5% before. Finally, let me also briefly talk about the Finance segment and developments just quickly on Slide 11. The Finance segment was once again the largest contributor to consolidated net income with TRY 10.6 billion. It quickly recorded a strong top line performance on the back of continued improvements in its net interest margin and fees. Its fundamentals remain intact. According to BRSA financials, the bank's net income more than quadrupled year-on-year to TRY 19.2 billion in the first half. Return on tangible equity was 50% in the same period. Net fees and commissions reduced a significant 76% growth, supported by the increasing number of transactions and digitalization. Cost growth was below inflation at 7% year-on-year. As a result, the bank continued to improve its [ job with ] further rising to 144% in the first half. Turkish lira-driven growth continued in both loans and deposits. In the first half, total loan growth was 27% year-to-date and total customer deposit growth was 25% year-to-date. The bank's strategy to focus on value-added segments such as Turkish lira small ticket lending and sticky individual demand deposits continues. Share of retail loans increased to 58% in total effective adjusted cash loans, while the share of demand deposits in total customer deposits became 42%. Net cumulative cost of risk, including currency hedge was at 92 basis points. Convertible coverage levels were preserved across all stages and the total coverage was 5.7% on a consolidated basis. Yapi Kredi remains profitable in terms of liquidity. And looking at the total liquidity coverage ratio of the bank, it stands at 152% as of the end of June. And in terms of capital, Yapi Kredi continue to operate with more than 470 basis points buffers on capital ratios compared to regulatory requirements with close to 350 basis points contribution from internal capital generation. Capital adequacy ratio and Tier 1 ratio stood at 16.7% and 14.6% [ by June and -- respectively ]. Okay. If we move to Slide 12, I will walk you through the overall results of the group, incorporating all of the segment [ tranche we've ] just discussed. On a combined basis, Koç Group registered TRY 582 billion in revenues, TRY 52.3 billion in profit before tax and TRY 46.1 billion in net income. Consolidated net income amounted to TRY 22.2 billion. I would like to note that the minority interest of the finance segment decreased in the second quarter after the additional 18% share purchase of Yapi Kredi Bank. On Slide 14, I would like to briefly talk about some of our unlisted companies. I'll start with Entek. As we have shared with you in April, we have evaluated that Entek is perfectly balanced within 2 price strategic goals with its current installed renewable capacity and growth plans. Within the scope of the strategic transition plan, Tüpras aims to reach a zero-carbon electricity generation portfolio of approximately 1 gigawatt by 2030. In addition to the alignment of Tüpras coal targets with Entek's current portfolio and growth targets, we also took into account the potential synergy opportunities between the 2, considering that both companies are engaging production in the energy sector. We also aim to create value by using IGDAS existing equity in power on capacity while focusing especially on international RPG investments and other business areas such as cargo distribution instead of using resources for Entek. In this context, we evaluated that the most suitable positioning of Entek for achieving strategic goals between the Koç Group would be under Tüpras. Accordingly, Koç Holding will transfer Entek shares to Tüpras and become an indirect shareholder in Entek through a higher stake in Tüpras. Similarly, Aygaz will spin off Entek and reduce its capital. And in return, Aygaz shareholders will receive Tüpras shares for each canceled Aygaz share. Tüpras will increase its capital and anticipate the new shares to Koç Holding and shareholders of Aygaz and become the owner of Entek. Consequently, Koç Holding's effective ownership at Tüpras to be taken into account in the NAV calculation will increase to 42.0 -- sorry, 42.07% from 39.27% upon the completion of the transaction. Koç Holding, Tüpras and Aygaz will have extraordinary general assemblies due to this transaction on the 25th of August. We think that this transaction will support the long-term sustainable value generation of Koç Holding to its shareholders and any added value that may occur in Energy group companies, it will also affect the results of Koç Holding. Moving on to Opet, the fuel distributor. Opet has 18.8% market share in by-products and 24.2% in black products as of end of May. Thanks to its well-established dealer network, Opet [ operates between -- more of ] being the first choice of the consumer in the fuel distribution sector in Turkey through its expanding station network. Otokoç, it's made the largest contribution to our NAV amongst the unlisted assets, as you know. And it is Turkey's leading auto retailing and car leasing company and #1 company in second hand sales. The strong appetite for budget friendly, secondhand vehicles in Turkey continue to be supportive for Otokoç. And the company is [ obviously this groups' ] biggest licensee and it is the most important investment partner [ abroad ]. All in all, Otokoç improved its total revenue by 88% in the first half to TRY 15.1 billion and booked an EBITDA margin of 19%. Its book value increased 93% year-on-year to TRY 7 billion as of the end of the first half. Now I would like to talk about Sendeo. Sendeo is keeping up with the fast-growing e-commerce and cargo distribution businesses and benefits from Aygaz' existing dealer network, facility infrastructure and home delivery experience. The company reached 81 cities in the first quarter, and the company achieved a distribution of around 45,000 packages in July 2022 through its 8 transfer centers and 5 distribution warehouses. And as disclosed earlier, Sendeo targeted a total of $60 million investment until 2025. Now I would also like to briefly talk about a newly founded company, which is WAT Mobility. As you may remember, we repositioned WAT and bought it from Arçelik to have a direct ownership. WAT is engaged in the production and sales of engines, engine components, power transmission equipment and also service systems and is a very good example of synergy creation among the portfolio companies. In the light of our strategic priorities, WAT, together with Opet, Otokoç and Entek, established a new company called WAT Mobility. And that company called WAT Mobility will operate in a field of electric vehicle charging stations. We are really excited to enter this business. And this company has a target of rapid expansion throughout Turkey in terms of charging stations and -- which are also of critical importance for electric vehicles. In this regard, the company aims to leverage the strong dealer and service network of the Koç Group companies across Turkey and its expansion strategy. I would like to leave the floor to Polat Sen for some closing remarks. Polat Sen?

Thank you, Nursel. On Slide 16, you'll see the evolution of net debt to value discounts, which we believe to be unwarranted given our strong fundamentals that we have just discussed. Although we maintained our strong financial profile and prudent approach with a track record of sound liquidity, our NAV discount has been widening significantly. Unfortunately, Koç Holding's current NAV discount and the discount to its listed assets do not reflect the strength of our fundamentals. As discussed previously, we are not happy with this deeply disconnected valuation. Yet, we will continue to focus on value-accretive projects at Koç Holding via active portfolio management. We closely follow the megatrends in the world, such as climate change, techceleration, consumer transformation and disruption of changing demographics. We do believe that all our large-scale strategic initiatives and investments in line with our global growth vision will further reinforce our position and be reflected to our share performance once the external factors, related headwinds settle down. As the largest investment 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. Our performance in the first half is a testament to the resilience of our diversified portfolio supported by our prudent management approach. Going forward, we will continue to prioritize maintaining the solidity of our balance sheet, no matter how challenging market conditions are. Our meticulous management of liquidity in such difficult times will let us to be more prepared to act upon opportunities and make us even stronger in long term when markets normalize. So I would like to thank all of you for listening, and we can open the floor for questions-and-answer session.

The first question is from the line of [ Zakivitz Daniel ] with Barclays.

I just have a question about your Eurobond maturity next year. Obviously, you're in a good position to just repay that out of cash if you wanted to. But have you thought about refinancing that Eurobond? Or is there a certain interest rate or yield at which you would be interested in doing a refinancing?

Thank you very much for the question. Obviously, it's a very volatile environment that we are living in right now. If the Eurobond redemption would be today, I would have said that you just pay it out. But to be honest with you, it's really not easy to foresee what's going to happen in the next 6 to 9 months period. And now that we see the CDS of Turkey is going down a bit, we are hopeful about the future. But as you have rightly pointed out, we do not need to refinance our Eurobond because we don't really -- I'm just assuming that we are not going to need for any investment or something until that time. We are -- we can pay it off, and we don't think that we would be financing ourselves in tough market conditions if -- when we are approaching to the end of our Eurobond.

There are no audio questions at this time, we will now proceed with our webcast questions. The first webcast question comes from the line of -- actually, comes from our webcast participant, Cem Unal with Goldman Sachs. And I quote, With Tüpras moving to net cash position, what is your expectation regarding potential dividend income from Tüpras for the next year?