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

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Koç Holding conference call and live webcast to present and discuss the third quarter 2025 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.

Thank you. Welcome, and thank you for joining us today for Coach Holdings Third Quarter and First 9 Months 2025 Earnings Call. This is Cansev, IR Manager of Koç Holding. I'm joined by our CFO, Polat Sen; our IR Coordinator, Helin; Finance Coordinator, Özge; and our IR Manager, Ismail, to take you through our presentation and answer your questions during the Q&A session. Our presentation covers the company's unaudited financial results for the 9 months of 2025 prepared in accordance with Turkish Accounting and Financial Reporting Standards, including the application of IAS 29 inflation accounting. Please note that our presentation and Q&A session may include forward-looking statements and assumptions based on the current business environment, which are subject to change. As a reminder, a replay of our webcast will be available on our website following the call. With that, I would now like to hand the call to Polat-Bey to begin the presentation. We'll take your questions at the end of the session. Polat-Bey?

Welcome, everyone. I would like to begin with a brief overview of our -- of the macroeconomic environment that has affected group performance. Global economic activity remained stable during the third quarter, though uncertainty and volatility perspective persisted. Economic activity in Europe was slightly stronger than expected, but remained weak overall. In Turkey, disinflation is progressing slowly. Inflation remained elevated throughout the third quarter and rose sharply in September. Meanwhile, policy measures under the disinflationary framework continued to weigh on the economy, particularly on producers. Domestic demand was broadly stable this quarter. Demand for automobiles was particularly strong, while industrial production remained subdued. The Central Bank maintained its strong Turkish lira policy. In July, the Central Bank began lowering its policy rate. Market interest rates declined alongside with the policy rate, but remained elevated. Consequently, despite a modest improvement in financing conditions, high input costs in FX terms and elevated borrowing costs continued to put pressure on producers. In this tough environment, we generated TRY 14.4 billion of net income on a consolidated basis in the first 9 months, up by 54% compared to the same period of last year. While the contribution from consumer durables and automotive segments was lower due to the challenging market conditions, stronger contribution of our energy operations, along with substantially lower monetary losses were influential in this performance. Looking at the third quarter, we delivered a net income of TRY 7.7 billion this year on a consolidated basis compared to the net loss of TRY 4.4 billion in the same period last year. Let's start on Slide 5 with some key indicators for Koç Holding. The chart on the left shows the sectoral breakdown of our diversified business portfolio as of end of September. Our portfolio diversification is not limited only to the sectors, but also includes international positioning. On a combined basis, we generated 31% of revenues from international sales in the first 9 months, including Tüpras, which operates as an FX-linked commodity business, roughly 46% of our revenues can be considered hard currency based. Moving on to Slide 6. You can see that we had a net cash position of -- sorry, $874 million at the holding level at the end of September. In the first 9 months, our dividend income in nominal terms amounted to approximately TRY 21.3 billion, including dividends from our unlisted companies, yet excluding dividends from the -- for the remainder of the year. Ford Otosan already announced the second dividend, which remains subject to its general assembly approval, assuming its approval and including the already received dividend from EYAS, our dividend income is expected to reach $805 million this year. On Slide 7, you can see the main pillars of our balance sheet. Around 68% of $874 million is in hard currency. To further strengthen our liquidity, in mid-October, we secured a 5-year club loan of $600 million at an annual interest rate of SOFR + 1.95%. With a 2.5-year grace period, the loan will be repaid in 6 equal and consecutive 6 monthly installments. The funding remains available for Koç Holding for 6 months. We strictly apply and regularly monitor our prudent risk management policies at each underlying company. And 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 1.4x, which is excluding the finance segment, of course. In terms of FX position, we remain well within our risk management rules. With that, I'll hand over to Helin to walk you through the key sectoral developments of the first 9 months. Helin?

Thank you. Let's begin with the energy sector on Slide 9. The Energy segment's contribution to Koç Holdings consolidated net income was strong in the first 9 months, mainly supported by favorable crack margins, capturing strong demand, high utilization and improved white product yield despite continued narrowing of differentials and elevated energy expenses year-on-year. The domestic demand for refined products grew around 5% in the first 8 months. Gasoline and jet fuel demand was up by 17% and 12%, respectively, and diesel demand was resilient at 17.5 million tonnes. Tüpras delivered a strong third quarter performance with improved margins. Capacity utilization was around 100%, surpassing the global capacity utilization rate during the quarter. Mid-distillate crack margins were higher, driven by strong demand and low utilization due to higher-than-expected maintenances. Accordingly, net refining margin of Tüpras reached $9.7 per barrel, bringing the 9-month average to $6.5 per barrel. Given this solid performance and strong margin environment, Tüpras revised its net refining margin guidance range upwards to $6.5 per barrel for 2025. As to the volumes, Tüpras' domestic sales in the first 9 months was almost flat year-on-year, including the international sales, Tüpras total sales volume was down by 4% at nearly 22 million tonnes. Tüpras continues to hold its sales volume guidance of around 30 million tonnes for the whole year. On the LPG side, in the first 8 months, consumption remained weak, decreasing 6% year-on-year. Aygaz domestic retail sales volume was down 2% and including the wholesale as well as the contribution from Bangladesh operations, total sales volume was slightly up by 1% in the first 9 months. During this period, Aygaz maintained its market leader position in Turkey with a total market share of 26.2%. Let's move to Slide 10 and discuss the developments in the Auto segment. The Auto segment remains the highest contributor to net income, albeit with a significant year-over-year decline in the first 9 months. Despite solid volume growth, profitability in this segment declined mainly due to an intense competitive pricing environment, composition of sales and higher cost of goods sold amid inflationary pressures. The domestic automotive market grew by 9% to reach 955,000 units in the first 9 months. The strong volume growth was mainly driven by an intense competitive environment, volatility in inflation and exchange rate expectations and pull forward demand ahead of the announced taxation increase. While our total share in the domestic market through the first 9 months stood at 27%, September figure of 34% truly reflects our scale post Tofas–Stellantis Turkey merger. On the export side, the European passenger car market grew modestly by 1%, whereas the commercial vehicle market declined by 9%, reflecting ongoing economic pressures and last year's high base. Our group market share in the exports increased 5 percentage points to 42%. In the first 9 months, Ford Otosan's export sales volume increased by 13%, representing 38% of Turkey's total vehicle exports. Meanwhile, Tofas witnessed a 5% decrease in its export volumes, mainly due to the decline in its PC exports. Tofas expects an acceleration in volume with the introduction of combi variant later this year and the kicking of exports to North America in 2026 under the amended K0 production contract. Another key development on the Tofas front was the signing of a manufacturing agreement with Stellantis in September to produce K9 light commercial vehicle model in multi-energy platforms for Citroen, Fiat, Opel and Peugeot brands. Total production is expected to reach 660,000 units between the third quarter of next year and the fourth quarter of 2034. This will be backed by an investment of [ EUR 250 million ]. Additionally, Tofas will continue to manufacture Tipo and Egea model in its Bursa plant until the end of June 2026. TürkTraktör revenues declined 41% year-over-year, mainly driven by a contraction at a similar rate in tractor sales volume, reflecting continued weakness in both domestic and international markets. The domestic tractor market continued to contract and was down 36% in the first 9 months amid challenging market conditions. And regardless, TürkTraktör has maintained its market leadership in Turkey for 18 consecutive years, remaining farmers' top choice. Otokar, our leading bus and defense company, sorry, registered 8% revenue growth year-on-year, 61% of which was from international sales. Defense vehicle revenue rose to 17%, up from nearly 10% a year ago. Otokar holds a solid backlog of EUR 857 million in armed vehicle orders, where the majority is 4x4 project in Romania. In September, Otokar signed a 3-year production agreement with Daimler Buses to manufacture Mercedes-Benz [ Citaro ] at its Sakarya factory starting from September 2026. This new collaboration is another strategic move for Otokar to boost production efficiency and reinforce its global standing. On Slide 11, let's look at the Consumer Durables segment. Consumer Durables segment performance was adversely affected by soft demand driven by a challenging market environment throughout the 9 months. White goods unit sales in Turkey contracted by 6% year-on-year in the first 9 months, largely attributable to high interest rates, limitations on monthly installments and diminishing disposable household income. Exports also declined by 8% during the same period due to weak demand and challenging competitive environment. Looking at Arçelik's performance, Turkey revenues declined by 9% in the first 9 months in an unfavorable pricing environment and product mix despite a moderate demand in the third quarter. International revenues constituting 67% of the total also declined 4%, but Arçelik preserved its market leadership in its European markets despite underperformance. And further, Arçelik delivered margin improvement with easing raw material costs, favorable euro-dollar parity and the ongoing restructuring efforts during this period. Arçelik's adjusted leverage came down at 4.2x on the back of improved operational cash flow and the company anticipates further improvement through the year -- end of the year. Lastly, a few words on the finance segment with a particular focus on Yapi Kredi on Slide 12. The finance segment's contribution to our bottom line was negative TRY 1.4 billion in the first 9 months of the year, which significantly improved compared to negative TRY 28.3 billion in the same period last year. As mentioned during our calls, we consolidate Yapi Kredi's inflation adjusted financials. Accordingly, their bottom line is impacted by monetary losses given their net monetary position, although this year at a much lower amount compared to the same period of last year. 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 our additional share purchase transaction in February 2020. In this presentation, references to Yapi Kredi's KPIs are based on its BRSA financials, where banks remain exempt from inflation accounting. In the first 9 months, total performing cash loan growth was around 34% and total customer deposits growth was around 32% on a year-on-year basis. The bank maintained its leadership position in Turkish lira demand deposits among private banks at the end of September with a 17% market share. With the reintroduction of rate cuts and solid asset liability management, swap adjusted net interest margin widened by 130 basis points year-to-date, bringing the cumulative level to nearly 2%. Loan deposit contribution to NIM was at 3.9%. For the full year, Yapi Kredi expects to deliver a minimum 200 basis points net interest margin improvement. Net fee and commission income growth was robust at 50% year-on-year with operating costs rising at around similar levels. Accordingly, operating costs were almost fully covered by fees at 97%. On the asset quality, maintaining prudent provisioning despite improving NPL inflows, total coverage stood at 3.7% in the first 9 months. Net cumulative cost of risk, including currency hedge was at 163 basis points, well within guidance range. Yapi Kredi preserved its strength in capital and liquidity ratios. The FX liquidity coverage ratio was 308%, while the total liquidity coverage ratio stood at 125%. On the capital side, the consolidated capital adequacy ratio stood at 13.9% and the Tier 1 ratio stood at 11.7%, which excludes the contribution from temporary regulations, and these levels were comfortably above the regulatory level. Yapi Kredi's successful completion of a $600 million additional Tier 1 issuance in September is also worth highlighting. And including this, Yapi Kredi secured approximately $4.7 billion of funding from international markets in the first 9 months. During this period, Yapi Kredi tangible return on equity stood at 23.7%, in line with its guidance of mid-20s and the return on assets was at 1.7%. With that, I'd like to hand the floor back to Polat-Bey.

On Slide 13, I'll walk you through the overall results of the group in the first 9 months of the year, incorporating all the segment trends that we have just discussed. On a combined basis, Koç Group registered TRY 3.2 trillion of revenues, TRY 77 billion in profit before tax and TRY 41.5 billion in net income. As highlighted in our second quarter call, the first 9 months financials of last year include the provisional accounting for the recognition of Whirlpool EMEA and Whirlpool MENA acquisitions in accordance with IFRS 3 business combinations following their closing in April '24. The actual figure was finalized at year-end financials. Same reporting standard requires a restatement to 9 months '24 financial statements to reflect the actual final figure. The impact of this adjustment is an additional gain of TRY 9.8 billion at the consolidated net income level for last year. We believe excluding this one-off item enables for a like-for-like comparison of our underlying performance in 2025. Accordingly, excluding this one-off, our combined profit before tax and net income growth in the first 9 months would have been 30% and 73%, respectively, higher. These figures are noted on the right-hand side of the slide. Our consolidated net income after the noncontrolling interest, the growth in the first 9 months was 54%. Excluding this one-off item I just discussed, the first 9 months of last year would have resulted in a net loss, further underscoring the strength of our performance in '25 despite the challenging environment. Moving on to Slide 14. You can see our third quarter results with consolidated net income substantially improving to TRY 7.7 billion, as I highlighted at the beginning of the call. On Slide 16, you will see the evolution of the net asset value discount as Koç Holding deleveraged our market proxy status, which positions us as a key reflection of overall market dynamics. Accordingly, our NAV discount has narrowed in periods of improved investor sentiment. In the first 9 months of '25, the VP average NAV discount was wider at 34% when compared to the long term of 14%. We believe that the current level of discount is unjustified and does not fully reflect the strength of our underlying operations. In summary, in the first 9 months with a disciplined focus on balance sheet strength and profitability, we continue to generate value through a diversified and balanced portfolio designed to withstand market volatility. Thank you for listening now. We can open the floor for questions.

The first question is from the line of Nekrasov, Maksim with Citi.

I have a few questions. So the first one, more of a technical on the financial segment. And maybe if you could clarify the impact on the third quarter because it looked like that Yapi Kredi was -- had a pretty strong net profit before inflation accounting in the third quarter and whether you would expect the impact on consolidated numbers from the financial segment to kind of normalize to what the company has been reporting. Yes, maybe just a little bit more clarity on how we basically should tie up what they report and the impact on Koç.

Okay. Of course, Maksim, we have -- I mean, Yapi Kredi, as you rightly suggested, is not using IFRS inflation accounting. While we are consolidating, we have to. So the inflation adjusted numbers, I'm just looking at my colleagues right now so that they can help me with the numbers are significantly lower due to the inflationary environment in Turkey. I think the first 9 months inflation was north of 25%. So that is impacted. You can see in the performances across the segments that the finance sector is net income is TRY 1.6 billion negative. So consolidated -- it's a consolidated net loss on the finance side when you come to the inflation accounting. So there is an important amount of difference there.

And would you expect this difference to somewhat normalize if inflation goes down?

Of course, if inflation -- when the inflation accounting is not going to be mandatory anymore, which the earliest possibility looks like according to the IFRS, it's like '27 -- 2027. We are not going to see any difference between those numbers.

Just on the NAV discount, right, as you present as we can also calculate the discount closer to 40%, right, which is very close to historical lows. So I wonder if you would consider any tools to try to improve it, for example, like a buyback program, anything on the table at the moment?

Yes, you're right. It's historically is very close to the historical lowest level, as you rightly suggested. Right now, we think that this is mainly due to the country's situation rather than Koç Holding itself because we see that our balance sheet is quite strong. But unfortunately, the foreign interest on equities in Turkey is still very limited, especially on the long-term funds. So this is mainly affecting companies like Koç Holding, which is seen as a proxy to Turkey. So therefore, even if we do anything, we don't think that it's a sustainable way to keep this NAV discount at a higher level. So therefore, there's no plans right now to really make a move like that.

That's very clear. And just the very final question on -- it's more of a traditional question on the portfolio, whether you would plan to make more adjustments or maybe specific segments you plan to add or to exit. So anything -- any color on that?