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

Ladies and gentlemen, thank you for standing by. I am [ Gaily ], your Chorus Call operator. Welcome, and thank you for joining Tofas Türk Otomobil Fabrikasi AS Conference Call and Live Webcast to present and discuss the 9 months 2023 financial results. [Operator Instructions] 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 Agyüz, CFA and Investor Relations Manager. Mr. Renzi, you may now proceed.

Good afternoon. Thank you, operator. Thank you all for joining our call today. We are very pleased to announce the results achieved in the first 9 months of the year, which are once again the best ever in our currency of our company. In spite of some headwinds in the third quarter, we were able to consolidate our financial and commercial performance. Profit before tax amount to TRY 13.6 billion. That means almost 3x the results achieved in 2022. PBT margin stand at 19.8%, 7.8% up compared to the same period 2022. Thanks to our strong operating results and excellent financial gain, we decided to slightly increase our PBT guidance at 15%. With TRY 22 billion at the end of September, our cash position remains very solid, and we are in condition to self-finance the acquisition of Stellantis Turkey in the last quarter of the year. Regarding the manufacturing operation in the quarter 3, we have implemented our new production setup. We stopped LCB line to enable the preparatory activity for the new K0 model, reason why in August we have planned a long stoppage. At the same time, we have unified the production of Tipo in Fiorino in the passenger car line, implemented a third shift. In spite of rising competition and the production constraint we mentioned in the third quarter, the performance of the local market remains excellent, and we were able to keep our leadership position with a combined market share of 16.6%. In particular, in the PC segment, with a market share of 14.6%, we remain the leader with Egea best seller car for 7 years in a row. Remarkable also the contribution of the imported vehicles that account for 8% of our mix in the first 9 months. In the last quarter, we are planning to further increase the penetration of the imported cars and also the contribution of Alfa Romeo and [indiscernible] brands is becoming significant for our domestic business. In conclusion, we remain positive on the last quarter, and this is the reason why we have upgraded our guidance to 200,000, 205,000 units. Regarding exports, the contraction compared to 2022 was largely expected, and it is not a surprise due to the discontinuation of Doblo. In this context, it's very promising the performance of Tipo in the EMEA market, mainly Algeria. And at the moment, the EMEA region accounts for almost 40% of the total volumes exported. Anyway, regarding the export guidance, we decided to reduce the range to 60,000, 70,000 units. But on the other side, we increased the vehicle that's delivered to the local market. And as you can imagine, this reallocation will be beneficial for our profitability. Finally, regarding the strategic agreement announced on March 1. The parties continue to work hard. On 28th of July, we have announced the signature of the stock purchase agreement based on which Tofas will acquire 100% of shares of Stellantis Turkey. The closing of the transaction is expected within this year, and the effect of the consolidation will be visible in the first quarter 2024. In parallel, we are working on the finalization of the K0 contract. We are at the final stage of negotiation. But as I mentioned before, the preliminary activity for the introduction of this new model in Bursa plant are already ongoing. Now I will give the floor to Mehmet for the full presentation, then we can start our Q&A session.

Afternoon and good morning, everybody. In the first 9 months, the Turkish automotive production increased by around 12% producing by around 1.1 million units. Tofas production was around 174,000 units during this period, which was down compared to the previous period. In the third quarter, due to the production constraints and the long maintenance activity, our production was down around 25% and reached to 51,000 units. In terms of production mix, passenger car production has increased its share with the phaseout of Doblo and reached 72% of our production versus around 52% during the same period of last year. In terms of shipments. We shipped around 2% higher compared to last year at 190,000 units in the first 9 months of the year. And very strong shipments in the local business, which was up around 50% were largely offset by lower export volumes, which was down at the amount due to the product mix. In the third quarter alone, our shipments were down around 10% and similar-wise our domestic shipments was strong at 20% growth, whereas export shipments were down around 48% compared to the same period of last year. In terms of shipment mix, the most notable change was observed in our export business due to discontinuation of mainly Doblo to North America market. Now LCV business comprises around 33% of our export business, which is down almost double levels of last year. Moving on to domestic markets. In the first 9 months, domestic markets light vehicle demand was quite robust and -- which grew by around 65%, reaching to 858,000 units. And as you can see, third quarter light vehicle demand remained robust with a growth of 85%, actually showing a slight acceleration compared to the second quarter growth level of 56%. The growth in the first 9 months was broadly even the balance between light commercial vehicle and the passenger car sales, which is PC were up by around 67%, reaching to 667,000 units. Whereas, LCV shipments were also strong at 57% growth, reaching to 191,000 units, which are way above the historical ranges in the recent past. You can see the monthly evolution here. And you can see in -- especially since March, the light vehicle sales reaching about 100,000 level threshold. And in May, June, July period these were very strong months, historical high months, even if you consider seasonality. Whereas, you can see in August and September, there's a slight slowdown and sequentially in the third quarter, the market seems to slow down a little bit, but still well above the historical ranges. And this is partly due to the after elections by new economy management team, implementation of more orthodox policies by raising interest rates by the Central Bank, which actually curved a little bit under investment demand for the automotive vehicles as a result of better alternatives with higher deposit rates as well as less credit availability for consumption. At Tofas, we shipped 48% higher in the local markets, which our shipments reached a historical high figure of 147,000 units in the first 9 months. And passenger car shipments were more strong at 53% growth. And LCV shipments were slightly lower due to the change in our product mix. The monthly evolution of our domestic retail shipments are showing a similar pattern to the overall light vehicle market, except only in August, our shipments were lower compared to the previous year due to the long closure period as well as the strong demand in the market, which kept our ability to build inventory before the closure. In terms of market share, Fiat brand maintained the market leadership with 14.6% market share, still remarkably above the closest competition, which has been the case since the second half of 2022. Our market share retreated by around 160 basis points to 14.6%, and this is mainly due to the production constraints at our plant related with the refurbishment for -- to make the plants ready for the next investment cycle as well as improving availability of imported vehicles during strong demand period. Egea model, since its launch in 2015, it has maintained its market leadership. Now this is the eighth year in a row. While our imported business -- import business is also doing very well. Whereas, we have seen 6-fold and 3-fold increases in our Alfa Romeo and Maserati sales, respectively. For the -- when we look at the other brands under Stellantis umbrella, they have been performing also quite strongly year-to-date with passenger car market share of all brands under Stellantis umbrella improved by 470 basis points, reaching to slightly below 34% in the first 9 months. In terms of market share, we maintained our #2 position with 23.7% market share with a slight retreat compared to the previous year due to the normalization as expected with our limited product offering in this segment. Whereas, brands under Stellantis umbrella continue to perform very strongly. And the total market share was up by 520 basis points, reaching to 43.5% in the first 9 months. So in total market share, we maintain our distant market leadership with 16.6% market share compared to the close competition of 10.4% despite around 200 basis points decline in our market share. Including premium brands, Tofas market share was down similarly at 210 basis points and standing at around slightly below 17% in the first 9 months. And Stellantis market share was up by around 450 basis points during this period and reached slightly below 36% in the first 9 months. Moving on to export business. In the first 9 months, demand in the European passenger car markets remained strong with a 17% year-over-year recovery. Despite this recovery, demand in the European markets remains around 20% below the prepandemic levels that's observed in 2019. LCV registrations, the data is not available at the moment, but it continues to perform well, which was up around 13% in the first 6 months of the year. Our export shipments were down around 51%, and we shipped 42,400 units in the first 9 months. On a positive note, our passenger car shipments showed a growth trajectory with 4% growth compared to around 18% contraction in the first half of the year. And this is due to mainly thanks to strong penetration of our Egea model to MENA region, which we expect to continue for the remainder of the year. This is the monthly evolution of our export volumes, which is showing a similar pattern also due to the base effect and the product mix. In terms of regional breakdown of our export business. MENA now constitutes the biggest portion of our export business, which is now 39% of our shipments to this region. And Italy is the #2 biggest region that we are -- the country we are exporting to 36%. And we expect a strong momentum in the MENA region to continue in the coming period. In terms of our shipment volumes by model. On the left-hand side, you could see we shipped 45,000 units less exports. And the main driver of this decline is you can see Doblo and the RAM Promaster City which is we shipped around 40,000 units less compared to last year. On the right-hand side, we shipped 48,500 units more domestic business and which reached 147,000 units. And the main driver of this increases are strong performance of the Egea, which we shipped 31,000 units more. Fiorino, despite is almost at its late cycle of its lifetime, it doubled the volumes with 26,000 units. Also, our import vehicle business performed quite strongly, which almost quadrupled its volumes now constituting around 8% of our local business. All in all, we shipped 3,500 units more in total with a total shipment of close to 190,000 units in the first 9 months of the year. Moving on to financial performance. 2% shipment growth translated into 64% top line growth in the first 9 months, and the delta being due to the depreciation of Turkish lira as well as good pricing in the local market. EBITDA growth of 72%, which reached TRY 12 billion is parallel to the revenue growth. Whereas, profit before tax, our main KPI, grew by 171% reaching to a record high level of TRY 13.6 billion. The composition of our revenue growth was mainly due to the growth in our domestic business, which grew by 152% in the first 9 months compensating the 32% slide in our export business, which translates into 64% consolidated growth in the first 9 months of the year. In terms of profitability, as you can see, across the board, we have shown improvement from gross margin to the PBT margin significantly compared to the previous period. And this is mainly due to good performance in the local markets and higher local business mix in our total revenues and also increasing financial income on the back of our growing cash pile on our balance sheet as well as higher interest rates. Our net profit showed a similar performance to our PBT, except we paid taxes this period versus much more taxes this period compared to the previous year and our bottom line surged by around 150%, reaching to TRY 12.5 billion in the first 9 months of the year. You can see the snapshot of our P&L here and strong growth at the top line translates into even stronger performance that are other items in the -- to the bottom line due to operating leverage of -- as well as very efficient cost management during this period despite the pressure from the higher input costs in a quite high inflationary period. Moving on to our balance sheet. Our balance sheet as of September remains very strong. We generated our cash position increase by TRY 9.6 billion with a cash position of TRY 21.5 billion despite that we distributed around TRY 3 billion of dividends. And on the receivable side, despite higher activity, we managed that quite well, which was flat compared to year-end. And as a result, our shareholder equity grew by almost TRY 10 billion, standing at TRY 21 billion compared to the year-end. Our financial position remains solid, which -- with a net financial position of EUR 686 million as of the end of third quarter. And despite some increase in our net working capital, it remains at a negligible level compared to our turnover with EUR 32 million of net working capital at the end of the quarter. Moving on to CapEx. In the first 9 months, we spent EUR 30 billion and half of which was structured due to the refurbishment at our plant for the new investment cycle. And also the remainder was for the passenger car investment. Moving on to outlook. On the back of very strong year-to-date light vehicle market in Turkey, we decided to raise our local market outlook by around 12% to 1.1 million to 1.15 million units. With this, we are also raising our local market shipment guidance by around 5,000 units to 195,000 to 205,000 units. With that, we are also reallocating some from export to the local, and we are reducing our export shipments by around 10,000 units to 60,000 to 70,000 units. And we are maintaining our production volume almost the same to 240,000 to 250,000 units for the year. Due to the year-to-date slow investments, we are also reducing our CapEx guidance by EUR 25 million to EUR 100 million. I should note that it is also an accounting issue with the acceptance of the receipts, although our committed figure is much higher than this. And given the strong profitability we had, we decided to raise our PBT margin guidance from plus 14% to plus 15%. This marks the end of the presentation, and we would be happy to take your questions. Operator?

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

Congratulations for good results. My question is about the domestic market. So far, you have impressive performance and the market has been growing. After the latest interest rate hikes, do you see any initial signal of slowdown? Maybe -- not maybe this year, but for 2024, could you further elaborate how the supplier demand conditions and maybe from the leasing side or the individual buying, how do you see the trend? That's my first question. And the second question is about the inflation accounting issue. Did you have a chance to elaborate how the impact will be on your company? Any -- just in color about the potential impact or do you expect it to be implemented? That's my second question.

Good afternoon. This is Cengiz speaking. Thank you for the question. So regarding the local market situation, of course, we are seeing signal of a certain level of slowdown, which is clear. So now from the pull market, we are patching to the push market. So this will be the last quarter of this year and also in 2024, our expectation is to be not anymore into the pull market, but market will be a push on. So of course, this will increase the competitiveness in the market. But as Mehmet explained, for this year, we are not expecting any important slowdown in the market size after the numbers till September and also October seems will be around 90,000, 95,000 of market. So with this tempo, our forecast is around 1,150 or more market for this year. For the next year is not easy to make a forecast. But of course, until the elections we are waiting some improvement in the market conditions. Until March, the market will be, I think, high. And -- but after the elections, we will see how will be the situation of the exchange rate also will be important to understand the market. But actually, we are not waiting also huge drop in 2024 compared to 2023 because we are -- I am also hearing some rumors talking about 30% reduction in 2024. We are not so pessimistic for the next year. Regarding the inflation accounting. This application will be valid at the beginning of the next year. [indiscernible] statutory side, of course, not for the IFRS. So according to our knowledge is today and our -- we are preparing our system in order to be ready for the application. Thank you.

And maybe as a follow-up the question about the exports plans, Cengiz bhai. Do you think all after the agreement with Stellantis, are all process going as you expected or the market is very eager to see the new project and the Stellantis? Do you think everything is just as planned? Or do you experience any slowdown, for instance, the competition boards or others? I know that in the past, you have conviction. But just to remind, everything goes as planned or should we expect things are going on time, just a check?

According to my knowledge and my expectation, the activities are on track, so are going as we planned. So of course, for the export now, we are facing a transition period between the existing range and the future range for this season, this year and next year, we will see some, let's say, moderate numbers in the export volumes, but we have the plans for the future, and we will disclose when we'll be ready and confident about the future plans.

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

I have a question regarding your FX position. What is the main driver behind the FX losses in this quarter despite you had the long FX position at the time when Turkish lira depreciated? It's very difficult for me to understand this FX position in the third quarter? And how should we think about your FX base going forward? Because as your domestic volume is -- I mean, the domestic revenue share will increase, you will have lower receivables in FX, but payables are still in dollar terms. So I think you will start running short FX position. So I just wonder how you are going to manage the short FX position out of the export side?

But first of all, Hanzade, we are very careful with the FX position of the company. So we have some clear rules and we are following those. But in our financials, of course, some of the impacts we are seeing at the financial front, but some impacts we are seeing at operative level. For this reason probably looks like we have some FX loss, but in fact we are not having any position overall. Because our -- in fact, we have the -- our position is a balance between the cash that we are carrying in hard currency. Our hard currency payables, hard currency trade payables and hedge accounting application, as you know. So in this environment, we are not carrying any important long or short position.