Tofas Türk Otomobil Fabrikasi Anonim Sirketi (TOASO) 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 Tofaş Türk Otomobil Fabrikası A.Ş. Conference Call and Live Webcast to present and discuss the first half 2024 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, Investor Relations Manager. Mr. Renzi, you may now proceed.

Thank you, operator. Good afternoon. Thank you all for joining the call. We closed the semester below our expectation, mainly because of the weak performance realized in the quarter 2. Our financial performance was severely affected by the contraction of the margin due to the strong competition, in particular coming from the new Chinese brands, combined with spends in campaign to clean vehicles not compliant with GSR regulation. On top of that, the absence of tangible fiscal advantage for local passenger car due to the missed revision of the special consumption tax bracket does not create a favorable context in this critical period. Last but not least, the negative effect of the hyperinflation that on the first semester was particularly high due to the high monetary and cash position. At this stage, we decided to lower our PBT guidance to 6%-8% for the current year, that is for Tofaş a year of transition. Of course, we are not happy with these results, but we are looking forward, and we remain focused on the main target of the year, that is to finalize and execute the strategic agreement with Stellantis. On the domestic market, with a 12.3% market share, we are still a leader in a market that is changing quickly and with the newcomers now at the top of the ranking. In the PC segment, Egea continued to perform well. But in the coming months, we need to fully exploit the potential of new imported models launched by Stellantis such as Fiat 600, Alfa Romeo Junior and very soon, Panda full electric. In the LCV segment, we performed well in H1, thanks to Fiorino able to fill the gap created by locally produced Doblo. After 17 years of production, Fiorino was phased out. But on the other side, we are planning to launch a new generation of LCV in Bursa starting with K0 in Q4. Regarding export. In H1, the volumes are in line with expectation with an increased weight of the quota commercialized in the MENA region. For the H2, we see some risk coming from the weak demand of European market and also some technical issue related to the export to Algeria, reason why we decided to lower our guidance. Even for experts, we can say that we are in a transition period, and we are now focused on the launch of the new generation of commercial vehicle in Q4. Regarding the new vehicles, the refurbishment of the LCV line in Bursa is at the final stage. And technically, the Bursa plant will be able to start the production of the new model in quarter 4. Finally, the strategic agreement for the acquisition of Stellantis Turkey. As we have already disclosed, we are waiting for the final approval of the transaction by the competition authority. We provide the authority with all the requested data and information and we remain confident that the process will be concluded positively. Now I will give the floor to Mehmet for the presentation, and then we can take your questions.

Good afternoon, and good morning, everybody. In the first half of the year, Turkish automotive industry registered by around 4% growth and with a total production of 707,000 units. During this period, Tofaş' production constitutes around 13.4% of the industry with a total production of 95,000 units. In terms of production mix, 2/3 of the production was passenger car and the remainder was LCV. In the first half, total shipments was parallel to the production and it contracted by 23% to 101,000 units. And this was mainly due to weak shipments in the domestic side, which contracted by 28%, whereas the contraction in the export side was much more milder at 5%. In the second quarter, the contraction in the shipments were 38%, and this was evenly distributed between domestic and the export shipments. In terms of our shipment volumes by business, the most notable change was observed in the domestic business, our -- the LCV share increased by around 9 percentage points to 38% of the domestic shipments. In total shipment volumes, 38% was from LCV and the remainder was from the PC segment. Moving on to domestic markets. Despite the tightening cycle and the worsening economic conditions for the consumer, light vehicle demand was able to register 4% growth, reaching to 580,000 units. And this was mainly due to passenger car shipments, which grew by 8% to 463,000 units, whereas LCV demand was lower by around 9% and reached 115,000 units. The main enabler of this performance was a couple of drivers. Number one, at the beginning of the year, tax-exempt sales to disabled citizens in the -- especially in the first couple of months of the year was quite robust, given the very high inflation level last year and also heavy sales campaigns, especially accelerated in the second quarter by the automotive companies ahead of the safety regulations, GSR-II-B, to be able to deplete their inventory before the deadline of July 7. In the first half, Tofaş in the local markets underperformed local markets and registered 30% decline in the total shipment, with total shipments of 73,000 units. Our performance at the LCV side was similar to the market, which was down by 11%, whereas passenger car shipments contraction was more severe at 38%, reaching to 46,000 units. Moving on to domestic market conditions and the market share in the first half. Fiat brand was able to maintain the market leadership position in the combined light vehicle markets with a 12.3% market share. This is lower compared to last year due to heightened competition, especially in the passenger car market, with the new entrants especially from the Asian producer. And also, given the very high inflation levels, there hasn't been any adjustment in the special consumption tax record for almost 2 years now. So this essentially reduces our local producer advantage as our vehicles tend to be in the 60% SCT range, whereas now we are competing at 80% SCT, already reducing our pricing advantage. In the first half, the brands under Stellantis' umbrella, their market share was slightly above 28%. Nevertheless, it was down around 11 percentage points versus last year. In passenger car markets, Fiat brand moved down to a second position with a market share of 9.4% versus 16.3% in the same period of last year. And the brands under Stellantis' umbrella market share stood at 25.3%, which is also 12 percentage points lower compared to the prior year. At the LCV market, we were able to defend our position with the #2 position in the market and 23.9% market share, which is slightly lower compared to the previous year. This was quite a successful performance given the phaseout of Doblo, very strong performance of the MCV as well as better availability and good penetration of the imported vehicles were the main drivers of this performance. For the models under -- for the brands under Stellantis' umbrella, LCV market share stood at slightly above 40%, slightly -- around 600 basis points lower compared to the prior year. Moving on to export business. Overall, in the first half, demand was quite buoyant in the European markets, where passenger car registrations grew by 5%. And this was mainly enabled by the hybrid registrations which were up by 22%. Especially after the expiry of incentives, full electric vehicle demand start to weaken, but nevertheless, hybrid registrations were quite robust, supporting the underlying registrations in the European passenger car market. LCV market conditions were even more robust with 13% growth in the registrations and all the main markets registered robust performance in the first half of the year. At Tofaş, even though our export performance is now less correlated with the underlying demand in the Europe, our export shipments were down by around 5%, and we shipped 26,000 units. And despite 5% growth in our passenger car shipments, thanks to strong penetration to the MENA region, especially in the first quarter of the year, the phaseout of Doblo to the North American market results in 18% contraction in our LCV shipments, which was slightly below 10,000 units in the first half of the year. This shows the monthly evolution of our export shipments. As you can see, in the first 4 months, we had a strong recovery in our export shipments. But nevertheless, in the last 2 months of the quarter, we registered declines in our export shipments due to the temporary regulatory hurdles at our main export destination in MENA region. This shows the regional breakdown of our exports. Although the export figures are quite low at 26,000 units, minor changes makes a big difference, but 2 of our main markets remain MENA, which constitutes 42% of our export shipments and the second-biggest market remains Italy with 36% of our export shipments. Moving on to our shipment volumes by the model. On the lefthand side, our export business, essentially, we shipped 1,300 less exports with 26,000 units. And the main driver, you can see is the phaseout of Doblo to North America Ram ProMaster City. Other than that, our passenger car and the MCV performed in line with the prior year. On the righthand side, we shipped 29,000 units less in the domestic market. And the main driver of this is our best-selling vehicle passenger car, Egea, 8 years in a row, we shipped 25,000 units less, whereas despite this, it's probably the last quarter is the commercial vehicle, Fiorino, registered a robust 20,000 units of sales in the first half of the year. And I should mention that the Doblo, which seems to -- the volumes were down more than 1/2. In the first half of last year, Doblo shipments were our own production, whereas in the first half of this year, it is imported Doblo, and the number is quite good especially for an imported vehicle. So all in all, we shipped 30,000 units less with 101,000 units in the first half of the year. Moving on to our financial performance. In a nutshell, we shipped 23% less vehicles, which translates into a 21% decline in our top line, whereas the contraction in the EBITDA was higher with 39% decline and TRY 7.6 billion due to the pricing pressure in the local market pressuring the gross margin and translation to the EBITDA margin. Whereas higher contraction in the profit before tax reached 65% versus last year at TRY 4 billion due to -- mainly due to the application of inflation accounting which is due to our high monetary position in anticipation of the closure of the merger. We recorded high monetary losses, as probably you have seen in our P&L and pressured our profit before tax. This shows the snapshot of our P&L in the first half, so essentially 21% decline in the revenues flow through to the bottom line due to the operational leverage at a higher rate, whereas I can say gross margin and the EBITDA margin decline is the more indicative of our operational performance, whereas operating margin and PBT margin is additionally pressured by the application of inflationary accounting. This shows the second quarter performance also, which 42% decline in our revenues results in a higher pressure in the bottom line. This is a snapshot of our balance sheet. Our cash position declined by TRY 12 billion, still at a quite healthy level of TRY 18.5 billion. Note that we distributed around TRY 10 billion of dividends in the first half of the year. And the remainder was due to worsening in the net working capital due to weak domestic market condition. It put pressure on the cash flow of the company. For CapEx, we spent EUR 43 million in the first half, a bulk of which constitutes from our ongoing investments for our upcoming commercial vehicle, K0. EUR 27 million was spent on this project, whereas most of the remainder was made to our passenger car, Egea, in the first half. Moving on to outlook. Considering higher than our expected light vehicle demand in the first half of the year, which was around slightly below 600,000 units, we decided to increase our local market expectation by around 10% to 900,000 to 1.1 million units. Given our first half performance, we decided to reduce our local sales expectation by 20,000 units to 120,000 to 140,000 units. And also on the export side, to take into account the unexpected temporary regulatory issue at our export market, we decided to be conservative and reduce our export shipments by around 20,000 units, and now we are expecting 40,000 to 50,000 units of exports in the 2024. And in line with these revisions, we are reducing our production volume expectation by around 30,000 units. And now we are projecting 140,000 to 160,000 units for this year. And given the slightly lower than anticipated CapEx spending, but I should mention that our plans for the new generation vehicles remain on track, we are reducing our EUR 200 million CapEx assumption by EUR 50 million to EUR 150 million. And also looking at 6.6% PBT margin we registered in the first half due to the higher-than-expected pressure from the inflation side due to the slight delay in the acquisition of Stellantis Turkey as well as uninspiring local market conditions, we decided to reduce our PBT margin guidance to 6% to 8% for this year. And this concludes our remarks and we are happy to take your questions. Operator?

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

I have two questions, if I can. And the first one is about your margin guidance. I mean what are the drivers for the expectation of margin required in the second half of year versus the second quarter? Because I can see a much different sales volume expected for the second half of year according to your guidance. And the second question is about the new project. How much production will be reasonable to assume in 2025 for this model? And do you think that as production normalizes, you may also generate around 10% PBT margin? Or is your guidance downgrade a structural downgrade?

Hanzade, so about the PBT margin, as you know, usually, we are very conservative to -- we like to be conservative on the guidance. This new guidance, 6% to 8%, I don't want to say that it's optimistic, but imply a certain assumption, I would say, positive assumption. So first of all, better condition in the market in terms of competitiveness, in particular coming from the Chinese brands. Second, we expect a lower impact from the hyperinflation for 2 reasons. So downtrend of the inflation on one side and on the other side, lower net monetary position. So basically on this assumption, we believe that we can keep this level from 6% to 8% that, by the way, is what we realized in the first half. So also taking into consideration that in the second quarter, we encounter many headwinds at the same time. For example, the regulatory step related to GCR also created a big problem in terms of profitability because we were forced to clean the stock. So these are the reasons why we believe that this 6% to 8% is still achievable in the second half. About the new projects. Of course, as you know -- Cengiz, do you want to...

This is Cengiz speaking. So thank you Fabrizio for your explanation regarding the margin guidance. For the new project, we are working on a project capacity of 150,000 per year. Of course, in 2025, there will be also certain ramp-up issues for different markets and so on. What can I say for the moment is that the production installed capacity will be 150,000, but we don't have yet a budget for 2025. So we need more time in order to define what can be forecast of 2025 as a production. Thank you.

Can you also, I mean, comment around this margin guidance downgrade? This is not -- I understand this was a structural downgrade, but do you also expect it to go back to around 10% levels in 2025 when the production normalizes?

But this is mainly will be directed also from the inflation level in the country because as you are reading also from financials, so we have a heavy impact of inflation. And in the first 6 months, the inflation rates were very high. And according to the central bank program, so this will help us if the central bank and the government will succeed to reduce the inflation. So that will make more normalized financial statements for the company. So if the -- we will see 1 digit inflation number in the coming year, so we can deliver better margins, of course.

Just to clarify. So as inflation declines, you assume monetary losses to decline as well, so this is going to help your PBT margin, is it?

Sorry, could you please repeat your question? We couldn't understand.

So I mean, as inflation declines, I mean, as disinflation starts in Turkey, you also expect your monetary losses to decline, helping PBT margin. So that way, will we see a normalization in PBT margin?

Of course, yes. Yes, you are right.

The next question comes from the line of Demirtas, Cemal with Ata Invest.

My first question is rather technical about your monetary loss recorded in first and second quarters. And when I look into your details of your balance sheet, I see that your monetary assets are lower than your monetary liabilities. And normally, we should have expected monetary gain in your balance over the quarters. Could you maybe elaborate that to give the reason behind that, the negative or monetary loss you recorded [indiscernible] balance, is there any off-balance item effect on your numbers? That's my first question. And the second question is about the exports side, you revised down. And maybe it's the first time I see that you revised down your -- the market share estimates while you are increasing still the market. So you mentioned some details, but could you further elaborate the reasons behind those downward revisions? And where might -- where should we see the sustainable margins going forward in this new normalization stage? And could you consider the inflation declining or the possible do you expect some margin normalization at a higher level or at current levels?

First, I would like to answer to the second one because first one is very technical, but I like to talk about the hyperinflation calculation and the impact and so on. But first of all, on the export side, now the company is passing from a transition period because -- transition period. So we made a phaseout of Doblo in 2023. And starting from this month, we also stopped producing Fiorino. So those are -- those were the 2 important elements of Tofaş exports. Now hopefully, we are also working for new commercial projects, starting from 2025 will give us possibility to recover and come back to the past year's numbers. For the second half, we are only Tipo version to export in our end. And unfortunately, also I might say in the MENA markets, in the different markets, there's different regulatory issues. So one of the important markets for us was Algeria, but the government decided to stop importation of new cars. For this reason, we are facing a problem on the Tipo exports side. So because our range is not suitable, so much suitable for the West European market, so that's the problem that we are facing and unfortunately, the Egypt and Algeria and Morocco, which are the important MENA markets, are facing some regulatory problems. So this is what's happening on our export side. But this is a problem for the second half of 2024. And hopefully, as I said, with the new commercial project, this should be overcome. On the local market side, we are accepting to lose market share. And as you know, we lost also our competitive advantage on the special consumption tax because compared last year, we benefited from the special consumption tax brackets advantage. And mostly, we sold our cars with 50% of special consumption tax. But due to the higher inflation, we increased the prices and the brackets remain at the historical values. And now we are not seeing any adjustment, although we convinced government to put additional taxes on for the Chinese importation. That will help us in the second part of the year because we will see lowering Chinese competition in Turkey after this 40% additional taxes, but all local producers, mainly Tofaş, has lost the competitive advantage compared to 2023. And unfortunately, also personally, I don't make any adjustment on this because also governments want to calm down the economy. So probably, they will keep this level until end of the year when we will see the numbers and how we will end up after we can continue to discuss with the government. So accepting losing the market share means that also we don't want to enter so much price competition. Of course, we are not 100% out of the price competition, but we are also trying to balance between the profitability and the market share. Our main issue, of course, is the production capacity and saturation of this capacity. So you are seeing also from our numbers, we are working in the unsaturated levels with the plant. So this is also impacting our impact of our fixed cost. So this is also the resulting from the lower sales. But as I said, we're always trying to balance profitability and production because for us, the market share is not the first priority. We are looking and taking care also our margins. So this is what I can say regarding local market. Your first question, impact of the hyperinflation on the financials. First of all, that is not only monetary items, it is on nonmonetary items because there I would say that monetary items can protect their self against inflation. So for example, if you have a certain Turkish lira money in your bank account, you are getting interest. And if this interest is lower than inflation, you are losing. If higher than inflation, you are making money. So -- but in our case, we are the important industrial company, and we have an important equity. So in the industrial company, the balance sheet's impact of the hyperinflation is coming from mainly the difference between the equity value and the fixed asset and inventory values. So in the Tofaş case, this equity is much higher than the fixed assets and inventories. So we can add also deferred tax assets on this. So for this reason, due to the disposition in our balance sheet, we are generating, unfortunately, monetary loss and we will continue to generate monetary loss because I repeat but -- I will repeat, but our equity is bigger than our fixed asset and inventory because we are at the end of the -- our investments. So we have a very low level of fixed asset than the normal one. So for this reason, we are, let's say, at the unprotected situation. When the company will continue to invest, then we will see balancing this. So when our fixed asset will increase and total of fixed asset plus inventory will be equal or, let's say, close to equity, then we will see no impact on the financials of Tofaş, which is company now in this direction. Now we are already entered and we will continue as our guidance also you are seeing. We are going to invest EUR 150 million and we will continue also in 2025. So we are entering into the upfront unbalanced situation of hyperinflation through balanced levels of hyperinflation. For this reason, we will see better margin, as I tried to explain also to Hanzade. So better margins and less impact of the hyperinflation in Tofaş.

And regarding the Competition Board, we have been asking that question many times, and I understand you that you are giving the same answers. And I want to point out that I called the Competition Board today just to understand the process to see the other. I didn't specifically Tofaş, but I just mentioned that how long this process And they -- I see that apart from me, many investors even investors, maybe the individual investors or maybe some others are calling them. So they even though don't want to hear about this case. That's the comment I'm just making. At least, I can say that the investors, especially are whenever -- we know that this year is going to be weak, I understand. But we think about the strategic perspective of -- and you do better than us and you know for many long years, but I just want to highlight that. I don't have any question about this Competition Board anymore, anything, but at least I understand that everybody is trying to just say that when you are going to finish it. And of course, they are the public servants, I can say. But on the other side, it's the public company, so they need to care of it. If -- And you mentioned that you prepared everything ready. So they should answer it as soon as possible, but I just want to make a comment that there's the public just support or anything that is not going to accelerate the process, but at least I just want to point out that they are receiving many calls from many people related to that. That means that everybody is worried and they care about this company's prospects not only as an investor or as just a company, I just want to point out this maybe personal anecdotal issue.

Thank you for your comment. When I also are having a contact with the competition authority guys, I'm also hearing the same because they are also following Instagram and they have also the personal Twitter account and so on. They are also claiming to me that everybody is writing to them because there is also individual investors now they are following the issue and so on. But probably also, we should understand this. At the Competition Board side, there is a lot of cases, so I don't know what is their order, how they are managing and so on. But I think there is also overloaded activity at the Competition Board side. So this is -- I think we should understand. Okay. Thank you.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Renzi for any closing comments. Thank you.

Thank you, operator. Thank you all for the participation. I wish you a good day, a good summer break.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.