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

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the Koç Holding conference call and live webcast to present and discuss the fourth quarter 2023 financial results. At this time, I would like to turn the conference over to Ms. Cansev Atak, IR Manager at Koç Holding. Ms. Atak, you may now proceed.

Welcome, and thank you for joining us today. This is Cansev, IR Manager of Koç Holding. I have here with me our CFO, Polat Sen; IR Coordinator, Nursel; our Finance Coordinator, Özge; and our IR Manager, Ismail, to go over the presentation and answer your questions during the Q&A session. Our presentation on 2023 year-end financial results contains the company's audited financial information prepared according to Turkish accounting/financial reporting standards by application of IAS 29 inflation accounting. In addition to these, to enable investors and analysts to conduct a full-fledged analysis, supplementary historical information for selected key performance indicators that contains unaudited financial information prepared for management's reporting purposes were provided. I'd 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 the replay of the webcast on our website after the call. Now I would like to hand over to Polat Bey to start the presentation. At the end of the presentation, we'll have a Q&A session. Polat Bey?

All right. Welcome, everyone. I'll start with Slide 5, with some key indicators for Koç Holding. I'm extremely happy to share that we have left behind the year when we achieved this very successful financial performance despite all the challenges. At Koç Holding, we have proven track record in successfully managing the volatility. Our resilient, solid financials and intact fundamentals are the reflection of our diversified portfolio structure, prudent management and sound business strategies. On the left, you can see the sectoral breakdown of our portfolio as of end of December. On the right, you can see the revenue breakdown. Our portfolio diversification is not limited to 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 revenues, on a combined basis, in 2023, 29% is coming from international sales. If we also include Tüpras, which is an FX-linked commodity business, approximately 50% of our revenues can be considered in hard currency. On Slide 6, you can see our dividend income and payments in nominal terms. In 2023, our dividend income amounted to approximately TRY 24 billion, which is approximately $1 billion, including dividends from our unlisted companies as well. Note that most of our dividend income is derived from the companies with FX or FX-linked revenues. As of today, all our listed companies announced their 2023 financial results and we are pleased to see their strong financial performance in another challenging year. Moving on to Slide 7. You can see the evolution of our net cash. At the end of 2022, we had $74 million net cash position at the holding level. In '23, our dividend income was solid and amounted approximately TRY 24 billion, considering our dividend income and other items such as management fees and operating financial expenses and currency conversion impact, as well as the proceeds from the 6.81% share sale of Yapi Kredi Bank to foreign institutional shareholders, our net cash position at the end of December reached to $795 million, including Yapi Kredi AT1 investment. Please note that the received proceeds of Yapi Kredi AT1 in January, this year, totaling $213 million, which is already included in our '23 year-end net cash calculation. As a separate note, in February '24, we received proceeds from the sale of 43.65% of Tat Gida shares totaling TRY 2.2 billion, which is not included in our 2023 year-end net cash calculation. As we have discussed, our net cash position as of end of December stood at $795 million, including Yapi Kredi AT1 investment. Note that Yapi Kredi called the AT1 in January this year, and it's included in our gross cash now. Around 96% of our $1.3 billion gross cash is in hard currency. At the holding stand-alone level, we like to keep some liquidity to serve as a war chest against volatility as well as firepower in case of investment opportunities. In terms of our funding at Koç Holding level, the only debt we have is the $750 million Eurobond, which is due in March '24. We strictly apply and regularly monitor our prudent risk management policies at each underlying company on a combined basis. In terms of liquidity, leverage and foreign exchange position, we preserved and even improved our conservative levels. On a combined basis, our current ratio is 1.3x, and our net financial debt to EBITDA, excluding the finance segment, is around 0.2x. In terms of FX, we remain well within our risk management rules. I'm very happy to share that our prudent management approach was validated by a recent rating upgrade as well. On January 19, Moody's raised our corporate rating from B3 to B2. Accordingly, Koç Holding's ratings are BB- by S&P, 2 notches above Turkey's sovereign rating, and B2 at Moody's, one notch above Turkey's sovereign rating. 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. Now I'd like to hand over to Nursel to go through the numbers in detail. Nursel?

Thank you, Polat Bey. Hello, everyone. I'll start with the sectoral developments in 2023. Let's start with Energy and Tüpras on Slide 11. The Energy segment's contribution to Koç Holding's consolidated net income is solid in 2023, with 36% share in our consolidated net income, thanks to historic average crack margins, wider differentials, lower energy costs and strong domestic demand despite extensive maintenance in the first half of the year. The domestic demand for refined products was strong. Jet fuel sales surged 17%; gasoline sales increased 24% and diesel sales grew 6% year-on-year. In 2023, Tüpras' domestic and international sales volume was up 2% and 5%, respectively, resulting in 2% year-on-year higher total sales volume. Looking at the refining margins. Tüpras overall net refining margin amounted to $16 per barrel, driven by strong cracks, wider differentials and lower energy costs despite weaker utilization in the first half of the year. The capacity utilization was around 87% in 2023, mainly due to the maintenances. On the LPG side, consumption was strong, increasing 14%, with auto gas growing 14% and cylinder 1%. Aygaz domestic retail sales volume was up 13%, and including wholesale as well as contribution from Bangladesh, total sales volume growth was 15% year-on-year in 2023. Let's move to Slide 12, I'll discuss the developments in the auto segment. Our auto company sustained a robust performance and the auto segment was the largest contributor to consolidated net income, with a 49% share in 2023. The main drivers of this performance were the all-time high domestic auto market, recovery in export markets, solid export contracts, OpEx control and pricing discipline. In 2023, we witnessed a 55% surge in domestic auto sales, reaching a record high of 1.28 million units. Our market share in the domestic market decreased around 4 percentage points to 25% compared to the previous year. On the export side, the European passenger car market grew 14%, and the large and medium commercial vehicle market realized 16% growth. Our group market share in the exports decreased 7 percentage points to 37%. In 2023, Ford Otosan export sales volume was 26% higher year-on-year, primarily supported by the volumes from Craiova plant. Tofas, on the other hand, witnessed 50% decrease in its export volumes due to expiry of Doblo contract at 2022 year-end. So strong domestic sales, pricing discipline as well as currency tailwinds supported total revenues of both Ford Otosan and Tofas. And export revenue growth was strong for Ford Otosan, including the contribution of Craiova, while it was down at Tofas, mainly due to discontinuation of Doblo production for export markets. TürkTraktör enjoys all-time high domestic tractor market and strong domestic sales, mainly due to subsidized agricultural loans at low interest rates. Otokar, our leading bus and defense company with a superior R&D capabilities and prosperous products, enjoyed new export contracts. Accordingly, the share of international revenues constituted around 73% of total revenues in 2023. On Slide 13, let's look at the Consumer Durables segment. Consumer Durables segment's performance was supported by stellar Turkey revenues as well as eased raw material costs, while softness in demand in main international markets were reflected on financials. Turkish white goods unit sales increased 14% year-on-year in 2023, while the export sales were weak and decreased 10%. Looking at Arçelik figures, Turkey revenues increased 23%, thanks to effective pricing and 12% increase in unit sales. On the other hand, international revenues, constituting 63% of the total revenue, decreased 10% mainly due to decrease in like-for-like sales. Arçelik managed to attain the key risk metrics at healthy levels, and the company's working capital-to-sales ratio was 24.2%. Leverage stayed at comfortable levels, with a net debt-to-EBITDA ratio of 2.7x, almost unchanged compared to 2022 year-end. Finally, let me also briefly talk about the Finance segment and the development of Yapi Kredi on Slide 14. The Finance segment's share to consolidate net income was 14% in 2023. Please note that in our consolidated financials, we used Yapi Kredi's inflation adjusted financials, which is affected by monetary loss due to the net monetary position of the bank. As a separate note, Yapi Kredi's contribution to Finance segment results may differ from the bank's IFRS results, mainly due to purchase price allocation adjustments regarding Koç Holding's additional share purchase transactions in February 2020. Here, by providing the main KPIs of the bank, I would like to switch to BRSA financials, as banks are example of inflation accounting for 2023. So last year, total pro forma cash loan growth was around 52% and total customer deposit growth was 55%. The bank's strategy to focus on small tickets in deposits continued, and the share of demand deposits in total customer deposits became 42%. Net fees and commissions reduced at a significant 142% growth year-on-year, while cost growth was 106% year-on-year. Net cumulative cost of risk including currency hedge was at 14 basis points, mainly due to robust collection performance. Conservative coverage levels were preserved and the total coverage was 4.4% on a consolidated basis. Yapi Kredi remains comfortable in terms of liquidity. Total liquidity coverage ratio of the bank stood at 160% as of end of December. In terms of capital, Yapi Kredi continued to operate with around 575 basis points buffer on its capital ratios compared to regulatory requirements. CAR and Q1 ratio stood at 16.9% and 15.3% by year-end, respectively. So if you move to Slide 15, I want to show the overall results of the group in 2023, incorporating all the segment trends we just discussed. Please note that all figures in this slide are inflation-adjusted due to the application of inflation accounting. Accordingly, on a combined basis, Koç Group registered TRY 206 billion in profit before tax and TRY 166 billion in net income. Consolidated net income was flattish year-on-year and amounted to TRY 72.2 billion. As a separate note, on Slide 22, you may find our financial performance without the application of IAS 29. Now on Slide 17, I would like to briefly talk about some of our unlisted companies as their performance in 2023 is worth discussing. I'll start with Otokoç, which makes the largest contribution to our NAV among the unlisted assets. It is Turkey's leading automotive retailing and car leasing company and #1 in secondhand car sales, with operations in 8 countries abroad. The company is Avis Budget Group's biggest licensee and its most important investment partner approach. On this slide, you can see the book values of our unlisted companies. I'll continue with Opet. And Opet operates with the goal of being the first choice of the consumer in the fuel distribution sector in Turkey through its expanding station network. In line with Tüpras' strategic transformation plan, Entek aims to expand in the fields of renewable energy not only in Turkey, but also abroad. Currently, around 77% of Entek's 492-megawatt total installed capacity is zero-carbon electricity. Token Financial Technologies is Turkey's leading payment system platform provider. Token also pursues business development activities abroad. I would like to also talk about WAT Mobility, established by our group companies, namely WAT, Opet, Otokoç and Entek. This company operates in the field of electric vehicle charging stations. The company has a target of rapid expansion throughout Turkey in terms of charging stations, which are critically important for electric vehicles. Finally, another unlisted company wholly-owned by Koç Holding is Koç Medical. The company was established with the inspiration of the ventilator project we fulfilled during the most challenging period of the pandemic. Koç Medical owns Koç Yasa Çok Yasa that set out with the idea of producing solutions for health needs with a blend of technology. And Koç Medical also owns Biçakçilar, a medical device company providing disposable and therapy medical devices, as well as operating room solutions. These 2 companies were merged at the end of last year. Now I would like to leave the floor to Polat Bey for concluding remarks. Polat Bey?

Thank you, Nursel. On Slide 19, you will see the evolution of our net asset value discount. Our weekly average of NAV discount in '23 was approximately around 33% -- 31% compared to the long-term average discount of 12%. At Koç Holding, we benefit from our market proxy status, and we observed our NAV discount narrowing down when supported by sentiment and return of foreign investors. Considering approximately 90% of our NAV is composed of our listed assets, the share price performance of most of our listed companies recently is not wholly reflected in Koç Holding's share price. Besides, the increasing value of our unlisted companies is much higher compared to their book values, which is obvious in an inflationary environment. As discussed previously, Koç Holding's current discount level does not reflect its solid fundamentals and we observed a deeply disconnected valuation. We hope to converge back to our historical NAV discount levels, with better sentiment as reflected by a decrease in Turkey's 5-year CDS levels and higher share of foreign investors. In summary, our balance sheet is strong, with a solid net cash position and potential cash inflow going forward, and our portfolio structure and diversification ensures resilience against volatility. As the leading investment holding company in Turkey, we are focusing on managing our portfolio dynamically. In terms of acquisition, as part of Koç Holding's evaluations on growth opportunities, in the health care industry, we decided to purchase shares of Kemer Medical Center, a company operating in the private hospital sector under the Anatolia Hospitals hospital brand in Antalya. Accordingly, the share sale and purchase agreement has been signed for 80% of KMC's share capital. As we have disclosed to the public, the purchase price shall be determined based on an enterprise value of EUR 110 million, which will be subject to net debt and working capital adjustments. In terms of divestment, a key strategic decision has been executed regarding Koç Holding's portfolio, with the sale of our shares at our subsidiary, Tat Gida. At Koç Holding, we received $72 million as net proceeds for our 43.65% stake at Tat Gida. We believe in line with our approach of achieving growth by creating value and benefit for all stakeholders, we will continue to focus on value-accretive projects in Koç Holding via active portfolio management, and we will continue to create value for our country with our leading practices in the fields of environmental, social and governance. We have the potential to further diversify our positioning, both domestically and internationally, through our investments while sustaining an efficient level of liquidity. So I would like to thank you all for listening. So now we can open the floor for questions.

The first question is from the line of [ Bystrovia Yvgenia ] with Barclays.

Congrats on strong results. I was wondering what are your plans regarding the upcoming maturity of the Eurobond in 2025. Could you share any plans?

All right. Thank you very much. As you have pointed out, our Eurobond is around $750 million, and it will mature in March '25. As you know, we have a strong cash position today and we do not really have any considerations in terms of coming to the market now. So we would like to stay put a bit more to follow the market conditions. If we really see the right window of opportunity, which would be good for Koç Holding, we may take action. Otherwise, as of today, we have no plans, which is clearly stated as of today, for reissues of Eurobond. So I think that you are going to be hearing about this maybe in quarter 3, that would be a better timing to answer this question.

There are no further audio questions at this time, and we will now move to our webcast questions. The first webcast question comes from [ Samarth Agrawal ] with Citi, and I quote: "Thanks for the quick presentation. I have a few questions. So first question, on macro, particularly the recent rating upgrade for Turkey. Wanted to understand your thoughts on the current macroeconomic landscape and the expected pace of normalization? And a related question, what are the implications for credit rating at Koç Holding and impact on cost of financing?" That's the first question.

All right. I'd like to answer one by one. So the new economy management led by [ Mr. Mehmet Sincak ], advocates a return to orthodox rating policies, as we all know. They have undertaken substantial measures in transitioning towards conventional economic policies. We have more -- much more visibility compared to almost a year ago, but the beneficial outcomes of these actions are yet to come. We see gradual normalization since June last year. In line with the market, we expect around 40% to 45% inflation by the end of '24, on the condition that conventional economic policies remain. The monetary tightening still continues. So -- and it seems like after the elections, we are going to see more effect on that, which may result some demand contraction in the domestic market. So this inflation looks like it's going to take some more time, but it seems like it's a tough target to achieve, and there is no room for error. But so far, I have to say that the precautions, which is taken, looks correct to us. So we can move on to the second. Maybe I will move on. Sorry, I missed the last part of the question. The -- I understand this normalization phase is it's going to take time. It's like we expected, I have to say. And in terms of credit rating, we already have an upgrade in Moody's, and if things continue in the right direction, most probably we are going to see more of those throughout this process. And as of today, you can see, I mean, the impact on cost of financing for Turkish corporates compared to 3 months ago or 6 months ago, we already see the positive effects. If the policies continue to go like that, I would expect a better cost of financing throughout the end of the year. Let's move on to the second question.

Second question, and I quote: "What are your thoughts around domestic demand outlook for 2024, particularly against backdrop of, a, strong 2023 base effects for 2023, versus b, slowing inflation expectations?"

Yes. In 2023, the consumer demand was very strong in Turkey. The growth figures were even better than our expectations for some sectors in our companies, especially in the auto and consumer durable sectors, where we have revised our guidance upwards. In '23, we saw all-time high car sales in Turkey, with almost 1.3 million car sales which is 55% year-on-year, higher than '22. And then for the tractor market, we see the same actually very high level of sales. White goods also enjoys around 14% year-on-year growth in Turkey. This year, the pace of economic growth is expected to decelerate due to mainly this monetary tightening and also which is going to be resulting rising loan and deposit rates as well as some restrictions on individual loan growth. There is a possibility that vehicle purchases related to preserving value may choose other investment options, still, it is not anticipated that there will be a sudden halt or a significant downturn. In '24, guidance of our companies reflect different dynamics for sectors, and they expect some normalization this year, yet we had a very strong start to the year as well. In the first 2 months of '24, domestic auto market already grew by almost 40% year-on-year. That is ahead of our initial expectations. And for the tractor market, the realization was 2%-plus, despite the higher loan rates. On the domestic white goods, sales was around 22% year-on-year higher in January '24. So looking at the guidance of our underlying companies, you can see that the announced flattish or decrease in the domestic market. We will be covering the development very closely. And if needed, our companies will be updating their guidance as well.

Moving on, and I quote again: "Could you provide an update around your current investment pipeline?"

We have a solid net cash position at the holding level. So there may be opportunities in the market, and we are -- we need to be ready for any possible acquisition in the future. We have been very active in portfolio activity this year. Health care is an area that we have been looking for some time. This year, we have been -- we have acquired 2 companies, Bicakcilar and Anatolia Hospitals. There may be some more opportunities in the future. So we want to be ready when the time comes. So our appetite is still there and -- but there's nothing concrete at this stage that I can share with you today. Currently, we have a very strong balance sheet and very strong cash position. So for all of our companies, I always say that this is a portfolio company, as long as there is the right offer or a fair buyer for any of our assets, we should be considering. But as of today, there is nothing like that. And we are actively managing our portfolio, and we will keep on doing like that. And we are restrategizing our options in all of the sectors that we are working in right now. So any asset could be a candidate for disposal. And also any assets could be a target for us as of today. When the time comes, if there's anything concrete, we will always share with the market along with the expectations.

I continue to quote: "And following the divestment of Tat Gida, do you have further realizations in pipeline or for other assets?"

I've already answered this question in my previous answer, so we can move on.

"What are your thoughts around dividend income outlook for 2024? Do you expect 2023 dividend levels to be sustainable?"