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

Ladies and gentlemen, thank you for standing by. I am Vassilios, 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 2024 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; our IR Coordinator, Nursel; 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 the first half financial results contains the company's audited financial information prepared according to Turkish Accounting/Financial Reporting Standards by application of IAS 29 inflation accounting. 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'd like to hand over to Polat bey to start the presentation. At the end of the presentation, we'll have a Q&A session.

Thank you, Cansev. Welcome, everyone. I'd like to start by giving you a quick overview of our positioning in the current environment. This year, growth outlook, escalated geopolitical conflicts and tight financial conditions continue to be on the agenda of global markets. It appears that most developed economies have begun to observe the effects of their efforts to bring down inflation. Market expectations of low interest rates are intact, but the pace and the magnitude of Central Bank rate cuts is hard to predict. In Turkey, economic rebalancing and gradual normalization process continues and with the inflation downward trend since June. After a strong start to the year with a 5.7% year-on-year growth in the first quarter, economic activity shows signs of a slowdown. We observed that the monetary tightening and erosion in the purchasing power of the households affect domestic demand. We continue to closely monitor global and regional geopolitical developments. We are feeling the impact of the challenges in the financial market as well as the operating environment. To mitigate these developments, we have taken actions to reduce expenses and working capital needs. I believe at Koç Holding, we have proven a track record in successfully managing volatility. Our resilience and intact fundamentals are the reflection of our diversified portfolio structure, agile management and prudent risk policies. Let's start on Slide 5 with some key indicators of Koç Holding. On the left, you can see the sectoral breakdown of our diversified business portfolio as of end of June. 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 to -- for around 7% of Turkey's total exports. In terms of composition of our own revenues on a combined basis in the first half of the year, 30% comes from international sales. If you also include Tüpras, which is an FX-linked commodity business, approximately 47% of our revenues can be considered in hard currency. Moving to Slide 6. You can see the evolution of our net cash in 2024. By the end of '23, we had $795 million of net cash position, including Yapi Kredi AT1 investment at the holding level. In 2024, considering items such as dividend income from our underlying companies and dividend payment from Koç Holding, management fees, operating and financial expenses and currency conversion impact as well as the proceeds from the sale of Tat Gida shares and the cash outflow from the acquisition of 80% of Kemer Medical Center along with the -- with additional share purchases in Otokar and Tofas, our net cash position at the end of June '24 became $712 million. In the first half, our dividend income in nominal terms amounted to approximately TRY 23.7 billion, which is approximately $737 million, including dividends from our unlisted companies yet excluding potential dividends for the remainder of the year from some of our companies as per our past years' practices. Tüpras already announced second dividend totaling around TRY 4.8 billion, which is around $145 million for controlling share. On Slide 7, as of the end of June, you can see that around 99% of our $1.5 billion gross cash is in hard currency. At the holding standalone 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 '25. We strictly apply and regularly monitor our present risk management policies at each underlying company on a combined basis. In terms of liquidity, leverage and foreign exchange position, we preserve our conservative levels. On a combined basis, our current ratio is 1.2x. And our net financial debt to EBITDA, excluding the Finance segment, is at around 0.7x. In terms of FX, we remain well within our risk management rules. Now I'd like to hand it over to Nursel to go through sectoral development. Nursel?

Thank you, Polat bey. Welcome, everyone. Let's move on to sector development in the first half of 2024. We'll start with Energy on Slide 9. The Energy segment's contribution to Koç Holding's consolidated net income was strong in the first half of the year mainly supported with higher sales and lower energy expenses despite narrower differentials and softer crack margins year-on-year in addition to RUP periodic maintenance. The domestic demand for refined products remained steady in the first 5 months of 2024. Gasoline sales surged 17%. Jet fuel sales [indiscernible]. Diesel sales remained flat year-on-year. In the first half, Tüpras international sales volume was up 59%, while domestic sales were 3% down, resulting in 9% year-on-year higher total sales volume. Looking at the crack margins, Tüpras weighted average crack margin amounted to $12.9 per barrel. Even though cracks are below the high levels of the previous year's first half, they remain above 5-year averages. Tüpras capacity utilization rate was 88% in the first half due to operational efficiency even at the time when group maintenance was ongoing. On the LPG side, in the first 5 months, consumption was weak, decreasing 8%. Aygaz domestic retail sales volume was down 10%. And including wholesale as well as the contribution from Bangladesh, total sales volume decline was 9% in the first half. Let's move to Slide 10 and discuss the developments in the Auto segment. The Auto segment was the largest contributor to consolidated net income in the first half. The main drivers of this performance were pull-forward domestic demand, solid export contracts despite heightened competition in the domestic market and lower pricing ability with sales campaigns and increased vehicle availability. In the first half of the year, we saw 3% growth in domestic auto sales, thanks to a strong start to the year with 24% year-on-year growth through the first quarter. Take the [indiscernible] of disabled citizens, pull-forward domestic demand in the pre-election period and sales campaigns ahead of general safety regulations were the main drivers of demand. There was around 5% year-on-year decrease in the second quarter of the year due to headwinds such as increase in borrowing costs and the decline in purchasing power as well as high base year impact. Our market share in the domestic market for the first half of the year decreased around 7 percentage points to 21% compared to the same period of the previous year mainly due to fierce competition, especially in passenger cars. On the export side, the European passenger car market grew 5%. And the light and medium commercial vehicle markets realized 13% growth. Our group market share in the exports remained flat at 37%. In the first half of the year, Ford Otosan export sales volume was 3% higher year-on-year while Tofas -- while its exports from Turkey decreased 2%. Tofas witnessed a 5% decrease in its export volumes mainly due to lower shipment sample in the second quarter. Weak volumes in Turkey and exports combined with a challenging pricing environment, especially through the second quarter of the year, impacted financial performances of both Ford Otosan and Tofas. TürkTraktör recorded a 9% decrease in revenues due to 5% lower volumes owing to the business in export markets. The domestic tractor market was down 20% in the first half in an environment of increasing interest rates. Otokar, our leading parts and defense company, realized 5% year-on-year growth in revenues. And the share of international revenues constitutes around 65% of total revenues in the first half. On Slide 11, let's look at the Consumer Durables segment. The segment performance was affected by strong demand in Turkey with some normalization in the second quarter and weak international markets as well as challenging pricing conditions and increasing raw material costs in addition to costs associated with production transformation. The completion of the Whirlpool transactions at the beginning of the second quarter contributed to revenues but diluted the margin. The Turkish market unit sales increased 11% in the first half, while the export sales decreased 4%. Looking at Arçelik figures, Turkey revenues increased 8%, thanks to both unit sales growth and price increases. On the other hand, international revenues, constituting 64% of the total, increased 18% primarily due to inorganic growth stemming from Whirlpool's contribution starting from the second quarter. Arçelik managed to retain the key risk metrics at healthy levels. The company's working capital-to-sales ratio was around 22%. Likewise, leverage stayed at comfortable levels with a net debt-to-EBITDA ratio of around 3.5x. Finally, let me also briefly talk about the Finance segment and the development of equity on Slide 12. The Finance segment's contribution to our net income was negative in the first half of the year. Please note that in our consolidated financials, we use 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's results may differ from the bank's IFRS results mainly due to purchase price allocation adjustments regarding Koç Holding's additional share purchase transactions back in February 2020. Here, we are providing the main KPIs of the bank. I would like to switch to BRSA financials as banks are exempt from inflation accounting for 2024. In the first half of the year, total performing cash loan growth was around 29%, and total customer deposit growth was 17%. The bank's strategy to focus on small ticket in deposits continued, and the share of demand deposits in total customer deposits became 43%. Despite ongoing loan repricing, increasing cost of TL deposits in the sector resulted in a narrower TL loan-to-deposit spread in the first half of the year. Net fees and commissions registered a significant 173% growth, while gross growth was 78% year-on-year. As a result, the fee coverage of operating cost ratio was realized as high as 100%. During the period, whilst with the contribution of the strong collection performance, net cumulative cost of risk included currency hedge book at negative 3 basis points in the first 6 months of the year. Conservative coverage levels were preserved as total coverage was 3.3% on a consolidated basis. Yapi Kredi preserved its strength in capital and liquidity ratios. The FX liquidity coverage ratio was 557%, while the total liquidity coverage ratio was realized at 141%. In terms of capital, Yapi Kredi continue to operate with 280 basis point buffer on its CET1 capital ratio compared to regulatory requirements. With the additional Tier 1 issues of $500 million in April, the adjusted CAR and Tier 1 ratios stood at 14.3% and 11.9%, respectively. Now I would like to leave the floor to Polat bey.

On Slide 13, I'll walk you through the overall results of the group in the first half of the year, incorporating all the segment trends just -- we have just discussed. Please note that all the figures in this slide are inflation-adjusted due to the application of inflation accounting. Accordingly, on a combined basis, Koç Group registered TRY 32.2 billion in profit before tax and TRY 13.4 billion in net income. Consolidated net income amounted to TRY 1.6 billion predominantly suppressed by monetary losses. Moving to Slide 14, you can see our second quarter results. In the first half, we faced monetary losses in our companies that have high monetary net position -- net asset positions, especially in Yapi Kredi Bank. As a reminder, Yapi Kredi already reported its half financials according to BRSA, and banks are exempt from inflation accounting. But we must consolidate the bank applying inflation accounting, which results in monetary losses. In -- on Slide 16, I'd like to briefly talk about some of our unlisted companies. Otokoç makes the largest contribution to our NAV among the unlisted assets. It's Turkey leading automotive retailing and car leasing company and #1 in secondhand sales and with operations in 8 countries abroad. The company is Avis Budget Group's biggest licensee and its most important investment partner abroad. Opet is our -- is a significant player in the fuel distribution sector in Turkey with a total of 1,873 stations. As of the end of June, electrical vehicle charging units are available at 135 Opet stations. In line with Tüpras' strategic transformation plan, Entek aims to expand in the field of renewable energy, not only in Turkey but also abroad. Currently, 77% of Entek's 492 megawatts total installed capacity is 0 carbon electricity. In June, Entek successfully completed a share purchase agreement for the solar power plant in Europe that can reach a capacity of 214 megawatts. Token Financial Technologies is Turkey leading payment system platform provider. Token also pursues business development activities abroad. Finally, another unlisted company wholly owned by Koç Holding is Bilkom. The company is one of the leading distributors of information and communication technologies, distributing products of leading global brands directly and indirectly to over 4,000 different sales points. And Bilkom is ranked around 123rd in Fortune Turkey 500 list. And they are the #1 distributor of tablets and portable computers in Turkey in the last 3 years in a row. If we move to Slide 18, you will see the evolution of net asset value discount. Our weekly average net asset value discount so far in 2024 has been approximately 21%, comparatively better than the 31% average NAV discount in 2023. At Koç Holding, we benefit from our market proxy status. And we observed our NAV discount narrowing down to low teens during the second quarter when supported by the sentiment as reflected by the decrease of Turkey's 5-year CDS levels. In summary, as the Koç Group, we have continued to create value with our robust financials, diversified portfolio, extensive supply chain, exemplary environmental, social and corporate governance practices and our effective risk management policies. As always, we have been diligently assessing profitable and sustainable growth opportunities and pursuing our investments with unyielding determination. We have the potential to further diversify our positioning, both domestically and internationally, through our investments while sustaining an efficient level of liquidity. Our balance sheet is strong, and our portfolio structure and diversification ensure resilience against volatility. Thank you for listening now. We can open the floor for the questions-and-answer session.

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

I have 3 questions, if I can. The first one is that about the consumption trend. So how do you see the trend shaping in the remainder of the year? And do you expect similar trends to continue into 2025 because we start to observe major slowdown in your companies? And I wonder about -- if this may continue into 2025? And second, I mean, do you expect any change in substrates payout ratios after the introduction of hyperinflationary accounting, given that most companies are keen to reduce the cash position and also lower inventory levels as they are penalized on the income statement? And the third question is about the Other segment. There's a substantial net losses impacting your consolidated net income here. What's causing this big fluctuation under the Other segment? Can you please explain it? And is this going to reverse in the second half of the year?

Okay. I'll start with the consumption trends outlook and the payout ratios, and Nursel is going to answer the last question. They're actually just checking it right now. On the consumption trends, because of this monetary tightening, we were expecting some contraction in demand, especially in the domestic market. And we see that almost in all areas, not only in one sector. But it is really hard to predict 2025 from now. But it seems like the next 2 quarters is going to be continuing in a similar pace. Of course, the policies of the government, the economic policies are going to be decided for that, how 2025 is going to be shaped. But the amount of contraction that we've seen in the market right now is not worrying too much in domestic market. We also see some contraction in the export markets, especially on the automotive side in Europe, which is our main market and also in the white goods as well, this is the same situation. So we see some slowdown in the market. But I think that this is going to be coming back in 2025. On the payout ratios about the inflation accounting, inflation, most of the effect that we see for inflation accounting is noncash. So actually, when we are paying out dividends, what we are looking at normally is our cash level and the expected cash out, especially about our CapEx needs in the coming years, let me say. So the inflation accounting is not really -- it's kind of a decider for us to change our payout ratios. We will keep on looking at the future cash trends and our healthy condition. So in the meantime, we do not really think of any change on our payout policies. The last question, I'm going to hand over to Nursel maybe.

Okay. Thank you, Polat bey. Well, the Other segment is mainly composed of the holding standalone. The net cash position because of the -- we are carrying more than $700 million of net cash at the holding standalone level in the first half of the year, and the majority of the cash is held in dollars. And the exchange rates are not -- they were flattish compared to the level of inflation, which was around 25% in the first half, which resulted in monetary losses at the holding company level, which was the main reason for this negative bottom line for the Other segment. It cannot be fully mitigated by the interest or FX gains in the first half. That was the main reason.

The next question comes from the line of Bystrova, Evgeniya with Barclays.

I just have a couple of questions. So my first question, which is we just have seen the news about Moody's withdrawn rating. As far as I understand, it was your kind of ask to do so. So could you please explain why did you make this decision, and what it means for your potential maybe coming to the market in the near future? And my second question is regarding potential maybe investment interest in the future. We have seen a lot of talks about EV manufacturing facilities in Turkey. So would you consider resuming maybe your project, EV project with Ford that was postponed?

Okay. For the Moody's decision, it was purely a commercial decision from our side. So it was the issue between -- we already have S&P, and Moody's is rating us, and we decided to make some changes. So in the future, we do not really expect to see only one credit rating agency. We are going to have one more besides that one. So if you can think about this change as a replacement, which we needed some refreshment especially in the point of view, let me say. On the EV manufacturing facility question, actually, you meant, I guess, the battery manufacturing rather than EV because we already have an EV production plan, a vehicle program on Ford side and also on Tofas side as well. On the battery side, we do not have -- I mean we have postponed the decision. We did not revisit the decision yet because we do not see enough. We are closely monitoring the market how it is going and when this is going to be needed, then we are going to revisit our decision once again with our partners. But right now, it's not that time.

Yes, I meant battery. Sorry for that. And in terms of your bond issuance bonds or refinancing, how do you view the situation at the moment?

In terms of financing, you mean?

Yes. Yes. Do you plan to refinance the bonds within new issuance? Or are you comfortable with your cash position to go...

As you know, our gross cash is almost $1.5 billion, close to. And we have $750 million outstanding Eurobond coming up on March '25. Most probably, when the time comes and if the window is still advantageous for us, we are going to consider, once again, if we are going to reissue Eurobond. I do not know what the amount is going to be at that time, but we still did not make a concrete decision on that yet. We will start thinking about this maybe the last quarter, and maybe the first quarter of next year is going to be a better time if we really see a good window to reissue a Eurobond.

Okay. Understood. Maybe one last follow-up, given that one of your portfolio companies, Ford, debuted on the bond market this year. And it seems like there was a window of issuance opportunities in Turkey in the last couple of months. Do you maybe expect any other of your portfolio companies potentially debuting on the market?