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

Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome, and thank you for joining the Koc Holding conference call and live webcast to present and discuss the third quarter 2022 financial results. 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. Welcome, and thank you for joining us today. This is Sinem, IR Manager of Koc Holding. I have here with me our CFO, Mr. Polat Sen; our IR coordinator, Ms. Nursel Ilgen; our Finance Coordinator, Mr. Fatih Sertdemir; and our IR Manager, Ms. [indiscernible] 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 they might be subject to change. Please remember you can access a 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. Polat Sen?

Thank you, Sinem. Welcome, everyone. Thank you very much for attending our earnings call. So let's start with where we are going to see some key indicators of Koc Holding in Slide 4. I'm proud to share that we had a solid first 9 months despite all the challenges. Since our last webcast in August, we observed further deterioration in the global economic conditions. China's zero COIVD policy still affects the global supply chains. On the other hand, escalated geopolitical risks inevitably remain as significant challenges for the global economy. Now many countries have to deal with record high inflation and tight monetary policies. All this led to its change in scenery in which the global markets face the U.S. dollar strength against major currencies and increased global recession risk. In Turkey, economic activity started to show signs of slowdown in the third quarter, tight credit conditions and erosion in purchasing power of the households affected domestic demand. We also observed a slowdown in Turkey's exports, mainly due to downturn of the European economy since summer. I believe, as Koc Holding, we have proven a track record of successfully managing the volatility. Our resilience, strong financials and in tech fundamentals are the reflection of our diversified portfolio structure, agile management and prudent risk policies. On the left, you can see the sectoral breakdown of our diversified business portfolio at the end of September. The major change versus the previous quarter is our higher effective ownership in Tupras by around 3 points to 42.07% after the transfer of Entek shares to Tupras. As a reminder, in the second quarter, we purchased additional 18% shares of Yapi Kredi which explains the increased share of finance segment. On the right, you can see the revenue breakdown. Our portfolio diversification is not limited with sectors but also includes international positioning. We are the largest exporting group in Turkey with our exports accounting for around 7% of Turkey's total exports. In terms of the composition of our own revenues on a combined basis, 29% is coming from the international sales. It also includes Tupras, which is an FX-linked commodity business, approximately 56% of our revenues can be considered in hard currency. Moving on to Slide 5. You can see the evolution of our net cash in the first 9 months of this year. At the end of last year, we had $275 million of net cash position at the holding level. Considering our dividend income, dividend payments and other items such as management fees, operating and financial expenses and currency conversion impact and purchase of additional 18% Yapi Kredi shares, our net cash position at the end of third quarter became $104 million, including Yapi Kredi AT1 investment. Please note that we will receive the second dividend from ford Otosan amounting TRY 773 million, which is Koc Holding share in the fourth quarter. 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 here. In the third quarter, we preserved and even improved our conservative levels of liquidity, leverage and foreign exchange position. All of our TRY 1.3 billion gross cash is in hard currency, including the Yapi Kredi -- when we include the Yapi Kredi AT1, it's TRY 1.5 billion. Keeping an efficient level of liquidity has always been our approach, and it always allows us to maintain our resilience. With our agile management, we sustained our healthy balance sheet despite the headwinds of the market volatility. In terms of our funding at Koc Holding level, the only debt we have is the 2 eurobonds outstanding as of -- at the end of September. We strictly apply and regularly monitor our prudent risk management policies at each underlying company on a combined basis. On a combined basis, our current ratio is 1.2x, and our leverage is at 0.7x. In terms of FX, we have a policy of keeping a natural position, and we remain valid in our risk management rules. Now I'd like to hand over to Nursel for performances of our business.

Thank you, Polat bey. Okay. Let's move on to sectoral developments in the first 9 months of the year. I'll start with the energy and Tupras on Slide 8. The Energy segment's contribution to Koc Holding's consolidated net income is solid in the first 9 months, thanks to resilient domestic demand, robust crack margins and widening differentials despite sharp price in energy costs and malfunction in Izmit refinery group unit. The domestic demand for refined products maintained its resilience in the first 8 months of 2022. Jet fuel sales surged 45%, gasoline sales increased 15%, while diesel sales declined 6%. In the first 9 months, Tupras domestic and international sales volumes were up 9% and 26%, respectively, resulting in 13% higher total sales volume. Net refining margins reached record high levels driven by the historically high crack margins. Ongoing supply-demand imbalance, supply issues stemming from Russia-Ukraine war and increasing refining costs continue to keep mid-distillate crack margins up. These crack margin increase to about last 5 years' first 9-month average with robust demand excluding China. Post-pandemic demand recovery continues, and supply shortages exist with decreasing Russian exports to Europe. Similarly, jet fuel cracks increased to about its last 5 years' first 9-month average, supported by limited mid-distillate supply. Gasoline cracks were also strong with some softness in the third quarter, mainly due to lower demand in the U.S. during [ driving ] season with recession periods and improved inventory levels. In the first 9 months, Tupras overall net refining margin amounted to $14.9 per barrel versus $4.3 per barrel during the same period of last year, mainly due to better cracks, wider differentials and higher capacity utilization despite significant hikes in energy prices. Tupras capacity utilization rate reached 94% in the first 9 months despite substantial production in Izmit refinery group unit for 4 weeks. On the LPG side, total consumption decreased 5% due to a 14% decrease in cylinder, while demand for Autogas was down 4% in the first 8 months. Total sales volume of Aygaz, the leading player in the LPG sector was 3% lower in the first 9 months, mainly due to 14% decrease in cylinder sales. In Bangladesh, the LPG license was obtained as of August, which was required to start operations and accordingly, LP fitting activities began in August. Let's move to Slide 9 and discuss the developments in the auto segment. Our company sustained strong performance in the first 9 months of the year. Auto segment's contribution to consolidated net income was TRY 9 billion. The main drivers of this talent performance were favorable product mix, solid export contracts as well as OpEx control and pricing discipline despite softness in both domestic and export markets. In the first 9 months, we witnessed a 5% decrease in domestic auto sales, mainly due to accessibility issues for semiconductors, type credit conditions and erosion in purchasing power of the households. Compared to the first 9 months of last year, passenger car sales and light commercial vehicle sales decreased 8% and 2%, respectively, while heavy commercial vehicle sales were 24% up. In the first 9 months, our market share in the domestic market increased 3 percentage points to 28%, mainly on the back of market share gains of Tofas in the passenger car segment and Ford Otosan in the commercial vehicle segment. On the export side, in the European market, we saw 10% decrease in passenger car sales and 21% decrease in light commercial vehicle sales in the first 9 months. This weak performance was mainly due to ongoing supply chain disruptions impact on production at headwinds in the macro environment. Our group market share in the export increased 1 percentage point to 45% on the back of market share gains of both Ford Otoson and Tofas. In the first 9 months, Ford Otoson's export sales volume was 4% higher, that's for exports from Turkey; while Tofas witnessed 6% growth in its export volumes. Favorable product sales mix, pricing discipline and currency tailwinds due to weak Turkish lira supported total revenues of both Ford Otoson and Tofas. Ford Otoson's revenue growth was 143%. Tofas realized 115% growth in revenues. Export revenue growth was also strong for both companies. Ford Otoson registered 148% growth in export and international revenues, incorporating [ Kryolan ] consolidation for the first time, while it was 109% at Tofas. International revenues were supported by euro-based cost plus contracts, and in the case of Tofas also by take-or-pay. Total revenues of TurkTraktor, our tractor company, increased 82% in the first 9 months. TurkTraktor registered a strong performance in the export market with 10% increase in volumes and 104% increase in the revenues. Yet its sales volume in the domestic market was 21% down, whereas the domestic sales revenues booked an increase of 72% with the contribution from non-tractor business. Otokar, leading bus and defense company in our portfolio, booked a strong first 9 months Otokar's domestic revenues more than doubled and booked a 118% increase, while its international revenues were 79% up. Share of international revenues cost around 63% of total revenues. Overall, total revenue growth was 92% in the first 9 months. In light of the recent developments, our auto companies updated their 2022 guidance. For the details, please see Slide 20 of the presentation. I'm moving on to Slide 10 to look at the Consumer Durables segment. Consumer Durables segment contribution to consolidated net income was flattish at around TRY 1 billion. Revenue growth continued to be strong, and contribution of new railcard operations was supportive. However, increased cost due to global challenges was reflected on margins. Turkish white goods sales decreased 5% in the first 9 months, while the export markets were flat. In the third quarter, we observed flattish unit sales in the wholesale market, while retail was weaker, mainly due to consumers' changing spending priorities and decreasing purchasing power. Let's dive deeper into Arcelik. In the first 9 months, domestic revenues increased 90%, thanks to effective pricing despite a 10% decrease in unit sales. Similarly, international revenues, constituting 70% of the total increased 116% on the back of FX impact, inorganic growth and also organic growth. As a separate note, in the first 8 months of this year, Beko captured the market leadership position in Europe with a higher market share. Looking at the key risk metrics, Arcelik managed to attain healthy levels. The company's working capital to sales ratio became 26.3% and leverage stated comfortable levels, thanks to strong cash generation in the third quarter with a net debt-to-EBITDA ratio of 2.7x. Regarding 2022 expectations, Turkey revenue growth expectation is revised upwards from around 70% to more than 70% on solid positioning in the domestic markets. In order to reflect softness in demand and high inflation, Arcelik revised its EBITDA margin guidance to around 9.5% from around 10% before. Finally, let me also briefly talk about the Finance segment and the development of Yapi Kredi on Slide 11. The Finance segment was once again the largest contributor to consolidated net income with TRY 20.8 billion. Yapi Kredi recorded an outstanding core revenue evolution on the back of strong margin expansion and better fee performance. NIM improved 438 basis points year-to-date, while the bank's ability to leverage its digital capabilities led to a fee growth of 86%. Operating expenses were contained at 93% in an inflationary environment. Accordingly, the bank's net income reached TRY 35.3 billion in the first 9 months. Return on tangible equity above 55% in the same period. Turkish [ reservable ] growth continues in both loans and deposits. In the first 9 months, the bank recorded above sector growth in strategic areas and booked a TL loan growth of 59% year-to-date. Growth in customer franchise supported the funding base and TL customer deposits growth was 109% year-to-date. The bank's strategy to focus on value-added segments such as TL small ticket lending and sticky individual demand deposits continued. Net cumulative cost of risk, including currency hedge was at 91 basis points. Conservative coverage levels were preserved across all stages and the total coverage was 5.5% on a consolidated basis. Yapi Kredi also remains comfortable in terms of liquidity. Total liquidity coverage ratio of the bank stands at 163% as of the end of September. And in terms of capital, Yapi Kredi continued to operate with more than 560 basis points buffers on its capital ratio compared to regulatory requirements with around 520 basis points contribution from internal capital generation. Car and Tier 1 ratios stood at 17.6% and 15.5% by September end respectively. Yapi Kredi revised up its TL loan growth and P&L guidance while keeping the net cost of risk guidance at a conservative level. For the details, again, please see Slide 20 for 2022 guidance. If we move to Slide 12, I'll walk you through the overall results of the group, incorporating all of the segment's chance we just discussed. On a combined basis, Koc Group registered TRY 986 billion in revenues, TRY 96.8 billion in profit before tax and TRY 83.7 billion in net income. Consolidated net income amounted to TRY 42 billion with 346% year-on-year growth. This concludes my part. Now I would like to leave the floor to Polat bey for concluding remarks. Polat bey.

Thank you, Nursel. On Slide 14, you'll see the evolution of net asset value discount, which we believe to be a more given our strong fundamentals that we have just discussed. Although we maintained our strong financial profile and prudent approach with a track record of solid liquidity, our NAV discount has been widening significantly. Unfortunately, Koc Holding's current NAV discount and 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 and at Koc Holding via active portfolio management, we believe that all our 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 9 months 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 the market conditions are. I'd like to thank you all. We can move on to the Q&A session. I understand there are no questions.

Yes. At this time, we do not have any questions.

All right. Thank you very much. I mean that's -- I think, we were clear enough so that we didn't get any questions. Thank you very much, and have a nice weekend.