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

Ladies and gentlemen, thank you for standing by. I am Gailey, your Chorus Call operator. Welcome, and thank you for joining the Coach Koc Holding conference call and live webcast to present and discuss the first quarter 2025 financial results. At this time, I would like to turn the conference over to Ms. Cansev Atak, IR Manager at Koc Holding. Ms. Atak, you may now proceed.

Welcome, and thank you for joining us today for Koc Holding First Quarter 2025 Earnings Call. This is Cansev, IR Manager of Coach Holding. I have here with me our CFO, Polat Sen; our IR Coordinator, Ilgen; 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 the first quarter financial results contains the company's unaudited 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. As a reminder, a replay of this webcast will be available on our website after the call. Now I would like to hand over the call to Polat to start the presentation. At the end of the presentation, we'll have a Q&A session. Polat?

Welcome, everyone. Let's move on to Slide 3. You will see today's agenda. I'd like to start by giving you a quick overview of our position in current environment. The first quarter of 2025 was mostly stable, both globally and in Turkey, although economic activity remained below desired levels. In Turkey, the inflationary policies continued, with demand staying modest and financial conditions remaining tight. Industrial production was weak. Globally, economic activity was also moderate. Towards the end of the quarter, volatility has increased in both global and Turkish financial markets. We expect to be resilient to the market volatility, thanks to our diversified portfolio, agile management, strong financials 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 portfolio as of end of March. 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. On a combined basis, in the first quarter of the year, around 34% of our revenues was generated from international sales. If we also include Tüpras, which is an FX-linked commodity business, approximately 48% of our revenues can be considered in hard currency. On Slide 6, you can see our dividend income and payments in nominal terms. So far this year, our dividend income was solid and amounted to approximately TRY 19.7 billion. This includes our dividends from our unlisted companies, but excludes potential dividends for the remainder of the year from some of our companies as per our past year's practices. Note that the most important -- the most -- that most of our dividend income is derived from companies with FX or FX-linked revenues. In 2025, we distributed TRY 17.4 billion dividend to our shareholders, corresponding to 4.5% dividend yield, higher than our historical averages. As a reminder, we managed to -- we manage our dividend payments considering our dividend income, investment opportunities and also our balance sheet management and risk principles, including our net cash position. Moving on to Slide 7, you can see the evolution of our net cash in the first quarter of this year. At the end of 2024, we had $911 million of net cash position at the holding level. Considering our dividend flow and other items such as management fees, operating and financial expenses and currency conversion impact, our net cash position at the end of March '25 reached almost USD 1.1 billion. As a separate note, we have -- we received dividends from our underlying companies and dividend payment from Koç Holding was also in April. Therefore, it wasn't included in the March end net cash calculation. Reflecting those, our adjusted net cash position has approximately become $835 million. On Slide 8, as of the end of March, you can see that around 58% of our net cash was held 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. On the debt side, at Koc Holding level, we paid down our Eurobond issued in 2019, which was the only debt we had in March this year. 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 our conservative levels. On a combined basis, our current ratio is 1.2x, and our net financial debt-to-EBITDA is at 1.3x. In terms of FX, we remain well within our risk management rules. Now I'd like to hand over to Ilgen to run through the sectoral developments in the first quarter. Thank you. Ilgen?

Thank you, Polat. Let's start with the Energy sector on Slide 10. The Energy segment bottom line performance in the first quarter was adversely impacted by lower crack margins despite the quarter-on-quarter improvement and narrower crude differentials compared to the same period last year. The domestic demand for refined products grew around 4% in the first 2 months of the year. Gasoline sales surged 18%, jet fuel sales increased 7%, and diesel sales grew 2% year-on-year. In the first quarter, Tüpras domestic sales volume declined by 9%, while international sales volume was down by 6%, resulting in an overall 8% decrease in total sales volume compared to the same period of last year. Looking at the crack margins, Tüpras net refining margin stood at $4.1 per barrel in the first quarter. Crack margins continued to normalize and yet remained above pre-COVID levels, maintaining a healthy spread over operating costs, supported by solid demand and improved market dynamics. Tüpras operated at 83% capacity utilization in the first quarter. Following major maintenance activities completed in 2023 and 2024, its white product yield reached 84% in the first quarter of this year, the highest level since the first quarter of 2021. On the LPG side, consumption was weak, decreasing 6% year-on-year in the first 2 months. Aygaz domestic retail sales volume was down 3%. And including wholesale as well as the contribution from Bangladesh, total sales volume of Aygaz was up by 9% year-on-year in the first quarter. In the first 2 months of the year, Aygaz market share for cylinder gas and Autogas were 41.7% and 22.4%, respectively. Aygaz maintained its leadership position in both segments with a total market share of 25.5%. Let's move to Slide 11 and discuss the developments in the Auto segment. The Auto segment was the largest contributor to our bottom line in the first quarter. However, on a year-on-year basis, it also recorded the steepest decline as both Turkey and Europe experienced softer demand due to the challenging macroeconomic environment and the ongoing uncertainties. In the first quarter, we saw a 7% decrease in domestic Auto sales volume. This was mainly due to the high base effect of last year that was boosted by, a, the impact of general safety regulation; b, an upward revision in the price [ cap ] for special consumption tax exemptions applicable to disabled citizens; and c, heightened consumer activity in the pre-election period. This was also due to tight liquidity in the current interest rate environment. Our market share in Turkey decreased around 5 percentage points to 16% compared to the same period of last year, mainly due to fierce competition, especially in passenger cars. On the export side, the European passenger car market decreased by 1% and the commercial vehicle market realized a 12% decline. Our group market share in the exports retreated around 2 percentage points to 40%. In the first quarter, Ford Otosan export sales volume was 4% lower year-on-year, while Tofas witnessed 61% decrease in its export volumes, mainly due to phaseout of MCV and import restrictions in the Algerian market. To summarize, negative impacts of lower domestic profitability due to competitive domestic market in terms of pricing and product variety and lower export profitability due to lower export volumes impacted the first quarter financial performance of both Ford Otosan and Tofas. TürkTraktör reported a 44% year-over-year decline in revenues, primarily driven by a 44% contraction in tractor sales, reflecting weakness in both domestic and international markets. The domestic tractor market contracted 38% in the first quarter, impacted by tight monetary policy measures aimed at controlling inflation and even for subsidized agricultural loans, which created a more challenging operating environment for the sector. Otokar, our leading bus and defense company, recorded 18% year-on-year growth in revenues, and the share of international revenues constituted around 53% of its total revenues in the first quarter. Otokar holds a backlog of over EUR 900 million in armored vehicle orders. The majority of this backlog is 4x4 projects in Romania. And in April, Otokar has taken a further step towards fulfilling this obligation by signing a JV agreement to manufacture these vehicles in Romania. On Slide 12, let's look at the Consumer Durables segment. Consumer Durables segment performance was also adversely affected by soft demand in the ongoing challenging market environment. White goods unit sales in Turkey contracted by 15% year-on-year in the first 2 months, largely attributable to the high base of comparison. Export sales also softened, decreasing by 6% over the same period. Looking at Arçelik figures, Turkey revenues decreased 12% year-on-year on the back of lower demand. Meanwhile, international revenues constituting 66% of the total, increased 25% year-over-year, and this was primarily due to the inorganic growth stemming from Whirlpool's contribution. As to the key metrics, Arçelik working capital to sales ratio improved further, reaching 20.2%. The depreciation of Turkish lira and weaker EBITDA resulted in a higher leverage with a net debt-to-EBITDA ratio rising to [ 5.1x ] compared to 3.8x at the year-end. Adjusting for the monetary gain on inventories, net debt-to-EBITDA ratio would have been [ 4.06 ] for Arçelik. Last but not least, let me also briefly talk about finance segment, mainly Yapi Kredi, on Slide 13. For our consolidated financials, we take Yapi Kredi's inflation-adjusted financial statements, which is affected by monetary loss due to the net monetary position of the bank. And on a separate note, Yapi Kredi's contribution to finance segment results may differ from bank's IFRS results, and this is mainly due to purchase price allocation adjustments regarding Koc Holdings additional share purchase transaction in February 2020. In this presentation, when providing the main KPIs of the bank, I'll refer to its BRSA financials as banks are exempt from inflation accounting for 2025. In the first quarter of the year, on a year-on-year basis, total performing cash loan growth was around 28% and total customer deposits growth was 25%. The bank's strategy to focus on small tickets in deposits continued, and the share of demand deposits in total customer deposits became at 44%. Sustained yield enhancement continued through optimizing the cost of funding via the strength in demand deposits and pricing agility, along with selective lending and pricing amidst the declining interest rate environment during the first quarter. As a result, the TL loan deposit spread widened by 315 basis points in the quarter compared to the previous quarter. Swap adjusted net interest margin increased to 2.09%, mainly driven by strong TL spread widening despite a lower CPI linker contribution. Net fees and commissions registered a solid 44% growth year-on-year, while operating costs increased by 53%. Fee coverage of operating cost ratio was realized as high as 91%. All in all, Yapi Kredi achieved 23.4% return on average tangible equity in the first quarter. Net cumulative cost of risk, including currency hedge, was 178 bps, given front-loaded provisions in order to build precautionary buffers, despite strong collections during the quarter. Conservative coverage levels were preserved, and the total coverage was 3.6% on a consolidated basis. Yapi Kredi remains comfortable in terms of liquidity. The FX liquidity coverage ratio was 282%, while the total liquidity coverage ratio of the bank was realized at 132% as at the end of March. In terms of capital, Yapi Kredi continued to operate with 262 bps buffer on its CET1 ratio compared to regulatory requirements. The CAR and Tier 1 ratios continue to remain comfortably above regulatory levels at 14.4% and 11.7%, respectively. I'd like to leave the floor back to Polat for concluding remarks.

Thank you, Ilgen. On Slide 14, I'll walk you through the overall results of the group in the first quarter of the year, incorporating all the segment trends that we have just discussed. Please note that all figures in this slide are inflation adjusted. Accordingly, on a combined basis, Koç Group registered TRY 13.8 billion in profit before tax and TRY 946 million in net income. On a consolidated level, net loss amounted to TRY 1.4 billion. In the first quarter, we registered monetary losses in our companies that have high monetary asset positions like Tofas, Tüpras and Koç Holding as well as Yapi Kredi in its inflation-adjusted financials. As a reminder, Yapi Kredi already reported its 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. Note that our company's net cash positions and hence, monetary assets, were high at the end of March ahead of the dividend payments in April, which led to an additional burden in terms of monetary loss. And yet, due to lower inflation and changes in our company's net monetary asset positions, the net monetary loss position improved over -- improved compared to the same period of last year. On Slide 16, you will see the evolution of net asset value discount. As Koç Holding, we benefit from our market proxy status, and we observed our NAV discount narrowing down when supported by sentiment. However, our weekly average NAV discount in the first quarter of the year was approximately 30% compared to the long-term average discount of 13%. We believe that such discount is unwarranted and it doesn't reflect the strength of our fundamentals. In summary, we continue to manage our balance sheet and liquidity with the same discipline and to create value with our diversified and balanced portfolio that provides resilience against market volatility. Let me say a few words on our recent announcement, Tofas Stellantis deal. As Koc Group, we have carried out strong investments to support our target of creating long-term value. Tofas' strategic acquisition of the commercial operations of Stellantis brands in Turkey under the roof of Tofas and new vehicle -- light vehicle investment, combined with Tofas' production volume, export performance and R&D capabilities; is taking the company to new heights in the automotive industry. As one of the leading automotive companies in Turkey, Tofas will further expand its goals and strengthen its credentials with this new investment. The agreement is yet another confirmation of Koc Group's and our partners' strong commitment to Turkey. I would like to thank you for listening. We can now open the floor for questions.

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

Polat, congratulations for your new post. I have two -- three questions. The first one is that do you consider any share buyback in order to reduce the NAV discount, which already reached the highest levels of the past 10 years actually? Because I can see that you are now trading at around [ 36% ] discount, and this is a big discount. So I don't know if the holding is planning to act and reduce this discount. Second one is, how do you see the impact of, I mean, tariff wars or policies on your companies? Which companies will be the most sensitive to rising tariffs and their indirect relation on consumer sentiment, raw material costs and et cetera? And finally, is it possible to comment about Otokoç as well? Because I think -- I don't know if you've highlighted. I think I missed it if you did, I do apologize for it.