Tofas Türk Otomobil Fabrikasi Anonim Sirketi (TOASO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Poppy, your chorus call operator. Welcome, and thank you for joining the Tofas Turk Otomobil Fabrikasi AS Conference Call and Live Webcast to present and discuss the 9 months 2022 Financial Results. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Cengiz Eroldu, CEO; Mr. Fabrizio Renzi, CFO; and Mr. Mehmet Agyuz, CFA, Investor Relations Manager. Mr. Renzi, you may now proceed.

Good afternoon. Thank you, operator. Thank you all for joining our call. We're very pleased to announce the results achieved in the first 9 months of the year, which is the best result in the history of the company, in local currency, of course, but in also in our currency. Profit before tax amount to TRY 5 billion, more than doubled compared to the same period 2021. PBT margin stand at 12%, and this will be our target for the end of this year. This cash position and cash generation are improving significantly and will support the dividend distribution policy in the near future. Regarding the manufacturing operation, we have produced 60,000 units in the quarter 3 with a significant rebound compared to the same quarter 2021, thanks to a normalization in the material supply chain, but also thanks to our production flexibility and adaptability. In the local market, we consolidate our leadership position with a combined market share of 21.3% in the quarter 3, and we were able to improve our profitability, thanks to a strong price discipline. With 65,000 units sold, Egea remains the best-selling car in Turkey for the fifth consecutive year, and we're benefiting from the good success of hybrid and automatic version. Export shows a recovery in the quarter 3 in spite of the negative trend of the European market. Remarkable, our performance in the LCV segment with an increase of 26%, boosted by Fiorino in Europe and Doblo in the United States. Regarding export, I would like also to underline that our R&D center in Bursa is growing fast and is contributing to the most important project of Stellantis in Europe. About the future projects. As you maybe know, discussion on the future products are in progress between the main shareholders, reason why we prefer not to touch this point in our Q&A session. Regarding the prolongation of Doblo, the situation is different. We received the green light from the shareholders, and we are at the final stage of our feasibility study. Now I will give the floor to Mehmet for the full presentation, then we can take your question in the Q&A session.

Thank you. Good afternoon and good morning, everybody. Thanks for joining our call. In the first 9 months, Turk Automotive Production grew by around 4% to 962,000 units, whereas there was a slight improvement in the production standpoint in the third quarter, which production grew by 11% in the third quarter alone. During this time period, Tofas has performed better than the overall industry, which the production volumes grew by 12%, reaching 287,000 units. And also in the third quarter, with slight easing in the supply conditions, our production has -- growth has accelerated to 69% to 68,000 units in the third quarter. In terms of production mix, we produced 52% passenger car and 48% light commercial vehicle, which has shifted slightly towards the paver of SCV compared to the same period of last year. In terms of total shipment units, our shipment growth was parallel to our production growth, which grew by 8%, reaching to 186,000 units. In the third quarter alone, the shipment growth has accelerated to slightly below 50%, reaching to 65,000 units. And this acceleration must balance between domestic and export volumes. And the main driver is, as I mentioned, slight improvement in the supply disruptions as well as our production flexibility to be able to meet the demand of the market. In terms of our shipment volumes by business, the most notable change has been observed in our export business, which has been the phenomena for the last couple of quarters, in which 69% of our export shipments were LCV. This suggests an increase of around 11 percentage points higher in the mix towards LTV. Moving on to domestic markets. In the first 9 months, domestic light vehicle market declined by around 7% to reaching to 520,000 units. And this was mainly driven by 8% decline in the passenger car demand to slightly below 400,000 units, whereas as LCV demand fared relatively better, which only contracted by 2% to 121,000 units. This chart depicts that actually is a reflection of availability and demand supply of the market rather than demand. This situation has continued the same like the last 3, 4 quarters. But also, I should stress that affordability also on the financing side has been -- becoming challenging. Tofas, in light vehicle local markets, we outperform to market, notably with 8% growth in our total shipments with slightly below 100,000 units, whereas the main outperformance comes from our best-selling model Egea, which grew by 10%, reaching to 67,000 units. Also, despite the aging vehicle portfolio in our LCV segment, our SCV shipments also outperformed the market with around 3% growth, reaching to 32,000 units. This is a similar pattern as we see the underlying, the monthly shipments for our volumes versus the market. The only thing here is that last in July and August, there was a shift in our -- maintenance of our factory, which was brought to July from the regular August period last year. So, this distorted some figures, but the important part is the strong growth in September, which was aided by increasing production tempo. In passenger car markets, Fiat brand continued is leadership with 16.2% market share, which is significantly above the second player. Also, this suggested 290 basis points improvement compared to last year. And the main driver of that is also a strong momentum in our passenger car market share, specifically in the third quarter also, which reached 19.3%, which is more than 600 basis points better compared to last year and also 180 basis points better compared to the last quarter. This is thanks to a growing penetration of our expanded vehicle portfolio in our passenger cars. As you can -- you would remember that we introduced the crossover and the hybrid versions of our passenger car in the second quarter of the year. In light commercial vehicle market, we had a 26.7% market share. We maintain our #2 position, but our market share actually improved compared to last year by around 110 basis points. The main factors for this performance are as a local producer, we have an improved competitive position and also better availability despite that 2 of our models in the LTV segment are coming to the end of their current life cycle. So, in total, Fiat brands enjoyed its market leadership with a widening gap against the closest competitor with 18.6% market share, which is more than 600 basis points higher compared to the closest competitor. And also, there is an improvement on a year-over-year basis with 260 basis points in our -- in Fiat market share. In third quarter, Fiat market share stood at 21.3%, which is also more than 400 and 200 basis points higher year-over-year and Q-on-Q basis. Including the premium brands, our imported brands despite that there are still available to challenges for our imported vehicles., Tofas market share expanded by 250 basis points and stood at 19% in the first 9 months of the year. So, when we look at the all brands under Stellantis' umbrella, namely [Foreign Language], the market share reached to more than [ 31% ] in the first 9 months, which is 300 basis points higher. And it shows a strong indicator that after the completion of the merger of the local businesses here, as you know, we are operating as separate at the moment. It shows the increasing market cloud of these brands and potential to further increase market share under 1 roof. Moving on to export business. In the first 9 months, demand in PC and both SCV markets are -- continue to be driven by availability and the supply. And in the first 9 months, passenger car situations were down 10%, although there are some signs that -- recovery signs that in the last 2 months of the quarter, the registrations returned to growth with around 10% growth in September. SCV market has suffered more in terms of availability. And in the first 8 months of the year, SCV shipments were down around 23% due to the supply chain issues. In the -- among the markets, Italy seem to fare relatively better, which contracted around 11% compared to the last year. Tofas also like in local market, our export volumes also outperformed the demand -- underlying demand at our core markets. We grew our export volumes by 6%, reaching to 87,000 units. And the main driver of this is our strong performance in the SCV segment, which grew by 26%, reaching to close to 60,000 units. And this is mainly thanks to strong penetration of Doblo to North American markets and also sustained performance of our MCV, smaller LCV model in European markets. And also, I should mention that there are lower production constraints in LTV production versus passenger car, which has suffered around 21% contraction in the first 9 months of the year. The monthly evolution of our export shipments. And you can see the bright spot here is in September, we had attained with 14,000 units of export shipments, which has been the highest monthly figure year-to-date. In terms of our end markets for our export business, Italy remains our most important market, taking the lion's share in the pie chart with 29% of export shipments. However, the biggest change was observed in North America whose share increased to 22%, more than doubling compared to the same period of last year. Also, MENA region, which its share has been increasing in the past couple of years. Its share has declined by around 600 basis points to 10% of our export business, but this is mainly due to some of the regulatory hurdles at one of the core markets in many regions, which we expect to improve next year, and we expect the increase of the MENA region share in this pie chart to continued upward trends. In terms of our shipment module, shipment volumes by model, on the left-hand side, we shipped almost 5,000 units more export volumes, as you can see. And the main driver is the Ram ProMaster City, essentially the Doblo for North American Market and also MCV, which both of them almost doubled compared to last year. On the passenger car side, we lost around 700 units compared to last year, and this is mainly due to the production constraints related to the supply chain as well as some regulatory hurdles at some of our core markets in the MENA region. For Doblo, it performed pretty much in line with the registration in the market which contracted by around 7,600 units. In local markets, we continue to perform quite strong and we shipped more than 9,000 units more at almost 99,000 units in the first 9 months. And the main enabler is our flagship product, Egea, which we shipped more than 9 -- 6600 units. And you can see the sustained performance of Sedan in the crossover model here also and fueling our performs quite strongly. Doblo, despite its -- almost end of its life cycle, it's declined in parallel to the market decline. And also on the imported vehicles, even though it's not a big portion of our domestic sales, we suffered more on the availability issues. However, we are encouraged to see that with the recent launches with [indiscernible] and some other premium brands. We are seeing an increasing momentum, and we expect it to continue to grow for the rest of the year as well as for next year. So, all in all, we shipped almost 14,000 units more with a total shipment of 186,000 units in the first 9 months of the year. Moving on to financial performance. In the first 9 months, 8% growth in shipments translated into 115% growth in the revenue. And this is thanks to healthy pricing in the local market, reflecting the cost increase of vehicle lira as well as higher input costs and also higher Euro Turkish rates supported our export revenues. This growth has translated into better growth in our profitability metrics and profit before tax, which is our main KPI, has grown by almost 140% reaching to slightly above TRY 5 billion. In terms of revenue breakdown, you can see there is a significant acceleration in our revenue growth, which almost tripled compared to last year, reaching to a turn level of TRY 16 billion in the third quarter. And it's a balanced growth between domestic and export business. And as a result, in the first 9 months, our turnover reached to slightly above TRY 42 billion, which is 115% higher compared to the same period of last year. In terms of profitability, as most of you have witnessed that there's an improving trend in our margins across the board. And this quarter is no exception to that. All our profitability metrics has been improving on a year-over-year basis. And this is mainly due to strong execution in the local markets with good pricing as well as our adaptability to the market conditions in a much healthier rate. And this largely more than offset the pressure from higher input costs. Our net profit in the first 9 months grew by almost 150%, reaching to slightly above TRY 5 billion. This is higher than our PBT. In third quarter, specifically we attained a net income margin of 12.9%, which is more than 250 basis points better, which is TRY 2.6 billion, and which was also higher than consensus expectations. The main reason because of the deviation between PBT and net income was a onetime tax gain, which we recorded this quarter. This also further boosted our net income margin. This snapshot of our P&L. As you can see, the strong growth in the top line has been translated into very strong profitability metrics. As of September end, we have a very strong balance sheet. And we have a net cash position. During this -- since the year-end, our cash and cash equivalents more than doubled to TRY 8.6 billion despite the fact that we distributed around TRY 3 billion dividends in the first quarter of the year. One of -- aside from the strong profitability, one of the drivers of this is also our focus on net working capital management, which has been also on an improving sense, which also supports our cash and cash equivalents position and puts us in a good position for next year. Our financial position remains quite solid and shows a significant improvement compared to the same period of last year as well as last quarter, which stands at around slightly below EUR 300 million. And you can see the improvement in net working capital here, which stands at around minus EUR 30 million. Also, this shows a notable improvement compared to the previous period. Moving on to investments. In the first 9 months, we spent EUR 34 million, bulk of which was constituted from our upgrade project for our passenger car family, which has been completed in the first half of the year. Moving on to outlook. Given that we have only 2 months left in the year and strong performance in the local market, we decided to slightly revise our guidance. And now we are looking for local market volumes of 750,000 to 775,000 units. And in -- for local retail sales of Tofas, we are upping our low end of our guidance by 5,000 units to 145,000 to 155,000 units. Also, for the exports looking at the year-to-date performance, we are also narrowing our export volume guidance and upping the low end of our guidance by similar to local market by 5,000 units, reaching 215,000 to 125,000 units. With this -- this increases the low end of our production volume guidance by 10,000 units, and we are expecting 255,000 to 275,000 units of production for the full year. Looking at the year-to-date CapEx we had incurred and also some of the efficiencies as well as the planned CapEx spending, we are also reducing our CapEx expectation by around EUR 30 million. Now we are expecting EUR 50 million of CapEx for the full year. With that, this concludes my remarks, and we would be very happy to take your questions.

[Operator Instructions] The first question comes from the line of Demirtas, Cemal with Ata Invest.

My first question is possibly the question to be asked by everybody, and sorry for that in advance. I would like to understand what's the -- what might be the expectation regarding the Stellantis. Do you have any timeline for that or anything you can share for the future as we are approaching to the end of the year? That's my first question. And the second question is the market conditions. I think you are gaining market share. But overall, the market's expectations, you had a little bit cut the market growth expectations, not a significant figure, but still a little bit down. I would like to understand the financing conditions in the markets currently, the interest rates and the financing environment, how do you see the impact on the demand side? And could you mention also about the available side?

I don't want to disappoint you, but as I mentioned in my introduction speech, we cannot comment about the new projects, new products. For sure, you have read the reports of the interview of [ Mr. Tavares ] at the Paris Auto Show. And I believe it's clear enough, we don't want to comment further. Okay. I don't know, Cengiz, if you want to add.

Regarding the second question, the local market last month and financing issue, what we are seeing financing a problem for corporate customers, not for retail customers because in the market for the retail customers, we don't see any issue regarding availability of loans from the -- both public and private banks. So that part is working. What is not working is the financing of corporate customers. So unfortunately, here there is also a good customer base. They want to renew their cars, but they are not able to find the -- with financing in the market. So, this can impact also last 2 months of the year because, as you know, always November and December are the high sales months and mainly the demand is coming from the corporate customers who want to use also the depreciation and so on. So, for this season as a market, we can have some problems. From our perspective, what we see, we are not so much linked with the market conditions. We have a certain target of sales quantity. So, we will follow whatever the market will be. We'll continue in our direction because we are -- I think with the existing product range, we are out of the market. And we don't see a problem for the Fiat brand in the last coming 2 months. Material availability point of view, as Fiat Tofas we had better visibility in August, September and October. We have visibility for November, but frankly for a moment, I cannot comment on December. So unfortunately, the problems are still ongoing, but we'll try to do our best, until now we succeed. We are seeing also from our production and the local market numbers. The Fiat brand is one of the most availability brand in the Turkish market. So, I hope we will end the year with good numbers. We have this potential, and we will see how we will manage. So, we can face also some problems, but we are confident that we will do better than the others.

[Operator Instructions] The next question comes from the line of Kilickiran, Hanzade with JPMorgan.

I have a question about your North American Doblo exports. Are these contract -- I mean, are these exports also on take-or-pay contracts. And how do you see 2023 trends? You previously said that it will be similar to Doblo sales? I mean you will offset the loss from the European market through North American sales, but given the weakness across the globe in consumer products. So, I just wonder how do you see the trend for 2023? And it's very important, whether it is on take-or-pay contract or it's a normal contract.