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

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome and thank you for joining the Tofas Türk Otomobil Fabrikasi A.S. Conference Call and Live Webcast to present and discuss the 9-month 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.

Good afternoon. Thank you, operator. Thank you all for joining the call. Due to various headwinds, we closed the quarter below our expectation. Our financial performance was severely affected by multiple factors. The competition on the domestic market remained very high and at this stage, we cannot count on a [ favorable ] tax system to support our local production. After the discontinuation of Doblo in 2023 and Fiorino in July 2024, we are now handling an important product transaction. Because of that, in quarter 3, Egea was the only model locally produced available on the market. In addition to that, the negative effect of the hyperinflation has affected our PBT margin for more than 10% when we compare to an adjusted financial result. At this stage, we decided to revise further our PBT guidance that now stand at 5% plus for the current year. On the domestic market, with 11.9% market share, we are still the leader, keeping the second position, both in LCV and PC markets. Considering that we are in the middle of a big product transition, I believe that this 11.9% represent a solid base and a good starting point for the future. In the coming months, we can count on a new range of products. In 2025, we will start the commercialization of K0 on the local market. On top of that, we can fully exploit the potential of the new model launched by Stellantis and that the Stellantis is going to launch into 2025. Fiat 600 and Alpha Romeo Junior are already launched in the Turkey markets. But in 2025, we can also count on the new Grande -- new Panda and in the new Fiat in the C segment. All these products will be available with IC, hybrid and full electric technology. Regarding exports, we are below our expectation and the 3,000 units supported in the quarter 3 represent the bottom for our company. The year started pretty well with the good performance of Fiorino and Tipo. But due to the issue on the Algerian market, the quarter 3 was very low. Even for export, we can say that we are in a transition period and we are now focused on the launch of the K0 model on the European market that will support our performance in the coming quarters starting from Q4. Finally, the implementation of the strategic agreement signed in March 2023. Regarding the industrial part of the agreement, as we have announced yesterday evening, we have signed the manufacturing agreement of K0 with Stellantis, and the plan is to produce 1 million vehicles in the next 8 years for 4 different brands in multi-energy platform. The initial investment is in the range of $250 million. But this is only the first step of the new chapter of the industrial cooperation with Stellantis and we are already working on the feasibility study of additional projects. Regarding the consolidation of commercial activities of Stellantis, as you have read from our announcement, the process is still ongoing and the authority has invited us to integrate a list of the commitments already presented and we are going to work on this topic in the coming weeks. I will now give the floor to Mehmet for the full presentation, then we will be glad to answer your questions. Thank you.

Good afternoon and good morning, everybody. In the first 9 months of the year, Turkish motor vehicle production declined by around 7%, reaching to slightly above 1 million units. During this period, Tofas represented slightly below 12% of the sector with a production of 115,000 units. In terms of production mix, it was stable compared to previous year with 70% passenger car and the remainder in the LCV. In the first 9 months, our shipments declined by 30%, slightly below the production contraction, which was, broadly speaking, equally split between domestic and the export side and reached 133,000 units. In the third quarter alone, the shipment decline was 45%, mainly due to the decline in the exports business and due to -- this is mainly due to the product transition. As you know that the third quarter was the quarter that we produced only passenger car after the phaseout of MCV at the end of the second quarter of the year. In terms of shipment volumes by the business, the most notable change was in the domestic business, the LCV share increased by around 700 basis points to 37% of the shipments in the first 9 months of the year. Moving on to domestic markets. In the first 9 months, light vehicle demand in Turkey was flattish at 850,000 units. And despite the increase on the passenger car side, slight increase on the PC side, the decline on the LCV demand, which was down around 8% resulting around flattish demand in the first 9 months of the year. In the third quarter, specifically, the trend was similar to the second quarter and the light vehicle demand was down around 10%, which was both equally split between the passenger car and the LCV side. When we look at the monthly evolution. As you can see, the strong sales demand momentum, especially in the first quarter of the year, which was driven by tax exempt sales to the stable season, lost momentum in the remainder of the year. At Tofas, our domestic performance was weaker than the underlying demand in the local market and we shipped 104,000 units, which was 29% less than the previous year. And this was mainly due to lower shipments on the passenger car side, whereas our LCV shipments was close to the performance of the local market. In the first 9 months, Fiat brand maintained the market leadership, albeit the lower market share of slightly below 12%. And the year-over-year decline was mainly due to elevated competition in the local market, which has been the phenomenon of this year with the new entrants to the market as observed from that -- the share of the imports increased by 600 basis points compared to the previous year and also a lack of revision in the special consumption tax bracket, lessened our local producer advantage. And lastly, phaseout of the LCV production portfolio impacted our total light vehicle market share. In the first 9 months, light vehicle market share of Stellantis Turkiye, stood at 28%, which is 800 basis points lower compared to the previous year. On the LCV side, we were able to maintain our second position in the market with 22.4% market share. And this is a remarkable performance considering the phaseout of our MCV production at the end of second quarter of the year. Good performance of the imported vehicles supported this market share in the first 9 months. On the passenger car side, Fiat brand moved down to second position in the market with 9.2% market share due to the reasons I mentioned previously. And overall passenger car market share of the brands under Stellantis umbrella reached slightly below 25% during this period. Moving on to export business. In the first 9 months, demand in European market was on the PC side, stable compared to the previous year. And Spain and Italy stood out with good performances during this period. On the other hand, LCV demand was stronger, which -- the registrations was up close to 8% compared to the previous year. And all the main markets showed resilient demand during this period. At Tofas, although due to the transition, our export volumes are -- the correlation between European demand, our export volumes was much lower during this period. And we registered 33% decline in our total export shipments, which was slightly below 29,000 units. And the performance of the PC and LCV was similar. And as we mentioned previously, the -- with the phaseout of MCV production as well as the import vehicle ban at one of our key export markets in the MENA region were the main drivers of this performance. As you can see, monthly evolution of our export volumes in the third quarter alone, we shipped a very low number of exports due to the fact that the phaseout of the Fiorino and in the third quarter on the production of the -- our passenger car model. In terms of regional breakdown for our export business, MENA constitutes our biggest market, although the numbers are low and not very representative for Tofas on a sustainable basis. MENA constitutes 39% of our export shipments, whereas our second biggest market was Italy, which constituted 36% of our export volumes. When we move to the -- our shipment volumes by the model. On the left-hand side, you can see our export shipments and we shipped around 14,000 less and the main driver of this is lower passenger car shipments. And on the domestic front, we shipped 42,000 less with 105,000 units. And here, also the main contributor to this is the performance of passenger car, Egea, due to the lessened local producer advantage. So all in all, our total shipment was 133,000 units in the first 9 months, which is 56,000 less compared to previous years. Moving on to financial performance. 30% decline in our shipments resulted in a similar decline on our top line. And our EBITDA was TRY 8.5 billion, which was down around 60%. And on the PBT side, due to the inflation accounting and our high net monetary position, the decline was higher at 72%. And we reached a PBT of TRY 4.9 billion. You can see the snapshot of our P&L here. And due to the operating leverage as well as the inflation accounting effect due to our balance sheet structure, the 31% decline result in a much higher decline in our PBT and the net profit. Our balance sheet, as of the end of September, we have a very strong balance sheet with [ TRY 21 billion ] cash and cash equivalents at the end of the quarter, which was down compared to the end of the year due to [ TRY 10 billion ] of dividend payment. In the first 9 months, we spent EUR 65 million of CapEx and bulk of which was constituted from our ongoing investments for the K0, which stood at EUR 45 million year-to-date. Moving on to outlook. Considering this strong light vehicle demand year-to-date, we decided to slightly increase our guidance from 1 million units for the local market to 1.08 million units by around 8%. And in parallel, we are also slightly raising our local domestic retail sales by around 4% to 135,000 units in the midrange. And given the product transition that we are slightly reducing our exports by around 5,000 units to 40,000 units. And in parallel to this revision, we are reducing our production volume to 140,000 units from 150,000 units. We maintained our investment outlook at EUR 150 million, given our expectation of high spending in the fourth quarter of the year. And with the year-to-date performance on the PBT margin, we decided to slightly reduce our expectation to plus 5% for the full year. This concludes our presentation, and we are happy to take your questions. Operator?

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

I have 3 questions. First one is on K0. And how much production would be reasonable to assume next year? And how might it be divided as domestic and export and can you please provide any color on this one? And second, you have mentioned that there could be some new lines emerging following the K0. I mean, could you provide some details on these potential lines? Should we interpret this as an indication of a possible small, for example, light commercial vehicle model that could replace the Fiorino in the next few years? And finally, do you anticipate that any delays or a potential lack of agreement in the merger of this Stellantis distribution assets could also affect your future product lines?

Thank you for your question. I will take the first question and maybe the last one then for the new projects, I will have Cengiz to add some comments. For the K0 production in 2025, okay, as we already declared in one of the previous meetings, the peak and the capacity installed for this vehicle is 150,000 units. This is the -- what we have declared so far. Of course, in 2025, we cannot reach this level because there is a ramp-up activity ongoing. Also, don't forget that we are going to launch in next year also additional version of this model. So the actual start of production is only part of the global program. So EUR 150 million will be the peak but next year, we can assume no more than EUR 100 million or in this range. About the split between export and local, at this stage, we cannot disclose because we are still -- it's a bit early to speak about 2025. What I can say at this stage is that the major part of the volumes will be for exports. And this is the -- your question about K0. For the delay for the approval of the transaction of the competition authority, let me come back to the agreement 2023. As you remember, this agreement was composed in 2 parts. So there was a commercial agreement with the aim to consolidate the operation -- commercial operation of Tofas and Stellantis Turkiye. And there was also an industrial agreement with the aim to start to allocate, to start reduction of K0. So at the beginning, this was a single package but now we can say that due to the postponement of the decision of the competition authority, we are proceeding separately. So as you have seen yesterday from the finalization of the agreement of K0, now we can say that there are 2 separate projects. So there is no delay for the industrial part of the agreement. So the start of production, commercialization of K0 is in line with the program. So no delay for the industrial part of the agreement. When it comes to the commercial part and the consolidation of the commercial operation in Turkey, of course, we will suffer a delay. So as you know, the merger will allow Tofas to reach some optimization, some efficiency in the field of transportation, network, organization and so on. So we can say that no delay -- no effect for the industrial part, for the commercial part, of course, we are postponing our projects and there is, of course, an effect on us. For the new projects, I will give the stage to Cengiz even though we are in a very preliminary phase of the potential additional projects.

In fact, most probably we discussed all in the last meeting. So you know the capacity of Tofas. So there is an important production capacity. And the K0 investment will fulfill almost 1/3 or something higher than 1/3 of capacity usage. So and then naturally, we should look for the additional cars in order to fulfill better the -- our capacity. So this is the management's main job, to saturate the plan we are working on this direction. But of course, now we cannot disclose any project because not mature yet.

So I just want to make it clear. So when you say new product lines, you don't mean that extension of the K0 related lines, right? I mean, it could be -- I mean, your plan is to develop something completely different then?

Yes, because K0 is already done and we will continue for years. And also K0 kind of products are [ immortal ] because in the market always there will be need for this size of commercial vehicles. So I hope K0 will continue in Tofas for a long, long years.

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

Thank you for the presentation. My first question is related to your EBITDA margin, we see very low EBITDA margin in third quarter. And I would like to understand the impact of inflation accounting on your numbers. Could you just say that it's related to the pressure on the EBITDA, could be related to the currency plus inflation difference or some impacts from the inflation account. And I would like to understand that because when you look at below the operating line, we see some monetary gain in this quarter. So it looks like something offsets each other. So that's my first question. And could you give maybe the inflation accounting figure or some color to see where we are heavy to. That's my first question. And the second question is about Stellantis, the competition Board's decision. It's like a interim decision. But after the recent developments, are you given any reasonings on those issues? So are you communicated on those things? And what do you think at this moment? I know it's a hard thing to make a comment. But at least, are you communicated related to the details of the reasons they say they need additional -- they require any additional issues?

The answer to your first question, of course, the high inflation accounting applications impacting not only balance sheet, but also P&L item of all companies including Tofas, also in our margin levels due to that Tofas is impacting negatively from the inflation adjustments. We are seeing also impact on our EBITDA margin levels. So certainly, we're still waiting the detailed questionnaire from the Turkish Competition Authority, now because there is well-defined process. Now first step, we should prepare our defense and discuss with them. But for a moment, I am not able to answer to your question because I don't have any detailed questionnaire coming from the competition authority. What else [indiscernible]

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I'll pass the floor over to Mr. Renzi for any closing comments.

Thank you, operator. So I would like to thank all the participants for the interest and the questions. So I wish a good evening.

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