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

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the Koc Holding's Conference Call and Live Webcast to present and discuss the First Quarter 2026 Financial Results. At this time, I would like to turn the conference over to Mrs. Helin Celikbilek, IR Coordinator at Koc Holding. Mrs. Celikbilek, you may now proceed.

Welcome, and thank you for joining us today for Koc Holding's First Quarter 2026 Earnings Call. This is Helin, IR Coordinator of Koc Holding. And today, I'm joined by our CFO, Dogan Korkmaz; our Finance Coordinator, Ozge; our IR Manager, [indiscernible] Ismail, to take you through our presentation and answer questions during the Q&A session. Our presentation covers the company's unaudited financial results for the first quarter of 2026 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 this webcast will be available on our website following the call. There will be a Q&A session at the end of the call. With that, I'd like to hand the call to Dogan-Bey to begin the presentation.

Welcome, everyone. It's a pleasure to reconnect with you this time through our holding company. I'm very pleased to have taken on this role and to continue building on the strong foundations already in place. I look forward to meeting many of you in the period ahead. Now I would like to begin with a brief overview of the macroeconomic backdrop that defined our group's operating environment in this first quarter. And the year started on a relatively strong footing. However, beginning in March, geopolitical developments have introduced volatility and weakened the outlook, both globally and in Turkey. While the disinflationary economic program remains in place, tighter financial conditions and renewed inflationary pressures have emerged in this environment. The Central Bank has responded with a more restrictive stance supporting stability but increasing funding costs. Meanwhile, the real depreciation of Turkish lira continues to weigh on exporters' competitiveness. In this setting, we remain focused on disciplined execution and prudent risk management. At Koc Holding, we proudly marked a key milestone with 2026 as our centennial year. As Turkey's largest industrial land services group, generating around 7% of country's GDP, our diversified portfolio and strong balance sheet continue to underpin our resilience. This strength supported by disciplined execution is clearly reflected in our first quarter results. On Slide 5, we highlight key takeaways for the quarter. Our diversified portfolio spanning defensive and growth sectors supported performance in a mixed environment. Our solid net cash position provided financial flexibility alongside the distribution of 2025 dividends. At the same time, both Koc Holding and our subsidiaries continue to take strategic steps to unlock value across the group. As we show on Slide 6, our combined revenue exceeded TRY 1.2 trillion in the first quarter on a 7% year-on-year basis. Our combined profit before tax was up by approximately 66%, reaching to TRY 30 billion. On a consolidated basis, profit before tax more than doubled to reach TRY 21.8 billion. Our consolidated net income was TRY 522 million, significantly higher compared to last year's net loss. In the consolidated financials, a higher effective tax rate limits the translation of strong pretax performance into net income. Tax expenses this quarter are mainly driven by the bank, Tupras and Arcelik. The increase in the effective tax rate is primarily due to banking taxes calculated on nominal statements at a 30% rate, nondeductible inflation accounting adjustments in IFRS, particularly for companies with high monetary losses and rising deferred tax expenses following the end of inflation accounting in statutory financials. This quarter, finance segment was the largest contributor with TRY 2.8 billion, followed by the Automotive and Energy segments, each contributing approximately TRY 1.6 billion. These offset the dilutive impact of consumer durables and other segments. On Slide 8, the chart on the left presents the sectorial composition of our diversified portfolio's net asset value at quarter end. The Automotive segment accounts for 34%, followed by refining at 23% and finance at 19%. Our portfolio diversification extends beyond sectors to include international exposure. On a combined basis, 32% of our revenues from international sales in the first quarter. including hard currency index commodity businesses, approximately 47% of our revenues can be considered hard currency based. Moving on to Slide 9. At the holding level, we ended the first quarter with a net cash position of $969 million in TR it's TRY 43 billion. We received the TRY 18.8 billion as dividend income on a nominal basis and distributed TRY 18 billion in late March. Other cash inflows include the proceeds from the 2.1% share sale in Tupras by ABB in late March. Meanwhile, major cash outflow was our participation to the capital increases in a few of our businesses. On Slide 10, you can see the main pillars of our balance sheet. 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. Around 84% of net cash is in hard currency. After this natural hedge, we had a consolidated position of $159 million as of at the end of the quarter. On a combined basis, our current ratio is 1.16x and our net financial EBITDA times to EBITDA, excluding the finance segment, is at 1.5x. Subsequent to the quarter, we drew down the TRY 600 million club loan as previously disclosed. With that, I'll hand over to Helin to walk you through the key sectoral developments in the first quarter.

Thank you. Let's begin with the energy sector on Slide 12. The Energy segment's contribution to our consolidated net income in the first quarter was substantially higher at TRY 1.6 billion compared to TRY 100 million in the same period of last year. Refining operations navigated a highly volatile quarter with geopolitical tensions, tightening global supply balances and driving sharp movements in crude prices and boosting crack margins. The demand in Turkey grew by 2.4% in the first 2 months of the year, driven by the 13% increase in gasoline and 6% in jet fuel demand, while diesel demand remained flat. Within this landscape, Tupras delivered strong operational performance with record high first quarter utilization of 95% higher production volumes supported value generation. This translated into robust financial performance and a strong balance sheet, reinforcing overall financial resilience. Net refining margin of Tupras reached $9.4 per barrel, well above its guidance range of $6 to $7. However, the company maintains its guidance given the ongoing global uncertainties impacting the sector. On the LPG side, domestic demand remained soft in the first 2 months of the year with total consumption declining by 5% year-on-year. Despite the weak market environment, Aygaz achieved 5% year-on-year growth in domestic retail sales volume. And including wholesale and operations in Bangladesh, total sales volume increased by 2% in the first quarter. And during this period, Aygaz further strengthened its position in Turkey, reaching a market share of 27.3%. Let's move to Slide 13 and discuss the developments in the Automotive segment. Automotive operations faced a tough quarter with lower volumes, a more competitive market environment, pressure on export profitability and rising cost dynamics. The domestic automotive market contracted by 4% year-on-year, mainly reflecting a high base and calendar effects. Weaker consumer sentiment and rising macroeconomic and geopolitical uncertainties weighed on demand and slowed fleet renewals. Despite these headwinds, we maintained strong positioning, both domestically and in export markets, supported by disciplined execution. Ford Otosan accounted for 33% of Turkey's total vehicle production and 75% of commercial vehicle output, while Tofas contributed around 11%. Our combined share in the domestic market reached 34%, up by 5 percentage points since year-end. On the export side, the European passenger car, which is EU plus United Kingdom, grew by 4%, while the commercial vehicle market expanded by 3%. Against this backdrop, our group's export share increased by 6 percentage points to 49%. Ford Otosan's export sales volume remained broadly flat at 140,000, accounting for Turkey 41% of total vehicle exports. And during the quarter, Ford Otosan announced the acquisition of Koc Finance, which is a group consumer finance company to centralize its financing, aiming to enhance sales support and efficiency through integrated solutions. Meanwhile, Tofas export volume increased by 155% year-on-year, driven primarily by a tripling of K0 model exports following the launch of the combi version in the last -- in late last year. The company continues to progress on the K9 model with production scheduled for September, while also advancing preparations to unveil a new passenger car model. TürkTraktör revenues declined 40% year-on-year, primarily reflecting a sharp 68% drop in domestic tractor sales volume, partially offset by a 14% increase in exports. The domestic tractor market contracted by 59% in the first quarter, primarily due to constrained financing conditions. Despite this challenging backdrop, TürkTraktör strengthened its competitive position, increasing market share by 6.3 percentage points to 44.7% over the past 3 months. Otokar, our leading bus and defense company, recorded 8% year-on-year decline in revenue, mainly due to the netting of compensation related to the Romania contract. Following the completion of 194 vehicle deliveries in Q4, the company delivered a further 82 vehicles in the first quarter as part of this contract. The backlog stood at EUR 671 million at the end of the quarter, and this supports its medium-term visibility. In late April, Otokar signed an SPA to acquire Romania -- sorry, Romania-based defense company, Automecanica, subject to closing. On Slide 14, let's look at the Consumer Durables segment. In the first quarter of 2026, Turkey's white goods market remained subdued with demand constrained by pricing pressures and an unfavorable product mix despite some promotional support. White goods unit sales declined by 10% year-on-year, while exports fell 23% amid soft external demand. In this environment, Arcelik's domestic revenues contracted by 12%, reflecting an unfavorable product mix and pricing headwinds, while internal revenues, which account for 66% of total declined by 7%. Despite top line pressure, proactive procurement initiatives and disciplined execution supported Arcelik's margin improvement, both sequentially and year-on-year. In April, Arcelik divested its 60% shareholding in Arcelik Hitachi JV to Hitachi in line with its portfolio optimization strategy. This transaction remains subject to closing. Arcelik remains confident in the long-term growth potential of Asia and will continue its operations across India, Pakistan and Bangladesh. Lastly, a few words on finance segment with a particular focus on Yapi Kredi on Slide 15. The Finance segment turned strongly accretive, supported by robust revenue growth, margin expansion and strong trading income, marking a clear shift from its past 3-year dilutive impact. Before I go into the details, a reminder that the references to Yapi Kredi's KPIs are based on its consolidated BRSA financials, consistent with the bank's disclosures where banks remain exempt from inflation accounting. In the first quarter, Yapi Kredi's net profit in BRSA financials increased 78% year-on-year, driving the return on tangible equity to 31.5%. Revenue growth was supported by solid core banking income and strong trading gains. Net interest margin expanded by 56 basis points quarterly to 3.2%, underpinned by widening loan deposit spreads and effective balance sheet management. Fee and commission income remains solid, supported by diversification. Fee generation continued to provide a strong natural hedge covering around 90% of the bank's operating expenses. At the same time, Yapi Kredi maintained cost discipline while committing to further efficiency gains through data analytics and AI-driven cost optimization initiatives. On asset quality, Yapi Kredi maintained a stable performance despite challenging macro environment. Net NPL inflows declined 13% quarter-on-quarter, while total coverage improved further to around 4%, reflecting the bank's continued prudent provisioning approach. Cost of risk stood at 176 basis points, in line with guidance. The bank's diversified loan portfolio, low SME exposure and conservative staging framework continue to support asset quality metrics. So the bank preserved its capital strength, supported by internal capital generation, its consolidated capital adequacy ratio was 14.1% and CET1 ratio at 9.7%, positioning the bank well against potential market volatility. In the first quarter, Yapi Kredi also strengthened its presence in the fintech universe. They finalized the establishment of a dedicated crypto trading platform company and announced their decision to establish a payment institution that will operate in the payment services area. On Slide 16, which is our last slide, you see a snapshot of our first quarter group financial performance on a segment basis. To recap of what we already touched in the first few slides is on a combined basis, we registered TRY 1.2 trillion in revenues on a 7% increase and TRY 37.9 billion in operating profit on a 33% growth year-on-year. Our consolidated net income after noncontrolling interest, as always, is at TRY 500 million, but substantially higher compared to last year's losses, mainly on the back of improvement at the operating profit level. Thank you for listening, and now we can open the floor for your questions.

The first question is from Maksim Nekrasov from Citi.