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

Ladies and gentlemen, thank you for standing by. I am Geli, 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 2025 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. Ahmet Tasangil, CFO; and Mr. Mehmet Agyuz, CFA, Investor Relations Manager. Mr. Tasangil, you may now proceed.

Thank you, Geli. Good afternoon and good morning. Thank you all for joining our call. In a moment, Mehmet Agyuz, our Head of Investor Relations, will take you through the details of our results for the 9 months of 2025. But before that, I would like to provide some highlights for the results. In the third quarter, our profit before tax more than doubled compared to the previous year, thanks to the inclusion of Stellantis Turkiye operations and the low base year effect. In Q3, domestic light vehicle demand sustained its strong momentum with a year-on-year growth of 18%. Thanks to the strong year-to-date performance, we revised up our full year local light vehicle demand outlook from the range of 1.1 million to 1.2 million units to the range of 1.3 million to 1.4 million units, marking 3 consecutive years of demand over 1 million units in Turkey. Integration of Stellantis Turkiye and exploiting synergies remain key focus areas for us in order to generate additional value. This asset has been performing well as we maintain our distant domestic market leadership with 26.4% share in the 9 months of 2025. Production tempo at our plant was impacted by regular maintenance halt in August, while export volumes were somewhat impacted by the ramp-up of our K0 model. We anticipate notable acceleration next year with the launch of our K0 combi model late this year. Following the closure of Stellantis Turkiye transaction in Q2, the midterm visibility of Tofas has continued to improve in Q3, thanks to various contracts signed with Stellantis. First and foremost, we are very excited that [ Tipo ] is coming back to our plant with an annual production capacity of 100,000 units starting in Q3 of next year. In addition to Fiat brand, we will also be producing for Citroen, Peugeot and Opel brands with approximately 80% allocation to be on the domestic market. As the only locally-produced model in this segment, we are confident about the solid competitive position in the local market. Secondly, we extended the production of Egea until the end of next year. Last but not least, we are able to diversify the export markets of K0 with an export contract for the North America market. Export volumes to this region is expected to constitute about 1/4 of the total production volume of K0 throughout its life cycle. As a final note, excluding our consumer finance operations, we are in net industrial cash position as of September 2025. This will provide us flexibility to fund new growth projects. I will now give the floor to Mehmet for the rest of the presentation, then we will be glad to answer your questions. Thank you.

Hi. Good afternoon, and good morning, everybody. Thank you for joining our call. In the first 9 months, the Turkish motor vehicle production increased by 3%, reached to slightly above 1 million units. Tofas production constituted around 9% of the industry production with slightly below 90,000 units, suggesting around 22% decline compared to the prior year. When we look at third quarter alone, our production recovered significantly on a year-over-year basis from the low base as well as the ramp-up of K0, suggesting close to 50% increase at 30,000 units. As you can see on the right-hand side of the chart, you can see a continued sequential increase in our production in the last 5 quarters, whereas in the third quarter, there was a slight decline sequentially due to the usual maintenance work at our plant in August. In terms of production mix, LCV production has continued to increase, now constituting 39% of our production compared to 30%, thanks to the ramp-up of K0 production, which started at the end of last year. Moving on to domestic market. In third quarter, domestic demand remains quite strong, similar to the first half of the year and grew by 18%, reaching to around 320,000 units. The growth on the passenger car side was stronger at 20%, whereas LCV growth was also healthy at 9%. This growth brought the market year-to-date growth to 9%, reaching to 928,000 units. In fact, with the October data announced this morning, light vehicle demand exceeded 1 million units in the first 10 months of the year. And considering the strong seasonality in the fourth quarter, it is on pace to exceed 1.3 million level, which is another record level, which has been above 1 million units 3 years in a row. For this 9% growth, the distribution among passenger car and LCV was similar with 10% growth on the passenger car side and 6% growth on the light commercial vehicle side. In terms of monthly evolution of the domestic light vehicle market, as you see on a monthly basis, the demand has been breaking new records every month. And the main driver of this strong demand is, number one, the wealth effect due to higher gold prices. As you know that the Turkish citizen has a good amount of gold savings, unregistered gold savings, which creates a significant wealth effect as well as relatively high deposit rates, which also offers real yields in the last 2 years. And between inflation and Turkish lira depreciation against euro, there has been more affordable prices in real terms and consumers are taking advantage of this in the first 9 months of the year. Moving on to Tofas market position in the local market in the first 9 months. Tofas by far leads the market with 26.4% market share in the first 9 months. And on the left-hand side on the chart, you can see except Fiat brand, which is going through a product transition with the phase-out of the production models and phase-in of the ramp-up of the new models, the other brands all performed better than the prior year, all capturing notable market share in the market despite the elevated competitive landscape. On the LCV market share side, the performance was more impressive with a market share of 44.1%, which is 280 basis points better than the prior year and similar to the total light vehicle market share, except Fiat brands due to the phase-out of Fiorino in the middle of last year, which observed a market share decline, the other brand has gained significant market share compared to the prior year. In terms of passenger car market share, it stood at 22% compared to 24.5% in the prior year. And the story is similar here due to the aging of Egea, Fiat brand receded in the market share, whereas other brands performed slightly better or flattish market share compared to the prior year. Moving on to export business. In the first 9 months, we shipped 27,000 units of export volumes, which is around 1,300 less compared to the prior year. Significant growth on the LCV exports, which we shipped 55% more due to the -- with the ramp-up of the K0 model. This was offset by limited passenger car shipments in the first 9 months of the year due to the life cycle of the products. In terms of monthly evolution of our export volumes, after the first 4 months, you could see that on a monthly basis, our export volumes has started to show growth. And this is thanks to the ramp-up of production as well as base effect, and we expect this trend to continue in the coming months as well as next year. In terms of regional breakdown of our exports, in the first 9 months, France constituted the biggest export market with around 30% of our volumes, followed by Italy and Germany and Spain, which -- essentially, Europe constituted more than 90% of our export volumes, and this is due to the K0 contract, which is an export-oriented product, mainly tilted towards Europe. Moving on to our shipment volumes by model and brands. On the left-hand side, on the export business, we shipped around 1,300 units less at 27,000 units of exports. And the main driver is that the decline in the Tipo shipment and also the phaseout of Fiorino was more or less offset by the ramp-up of K0 in the first half -- in the first 9 months of the year. On the right-hand side, thanks to the inclusion of Stellantis Turkiye starting from May, we shipped 80,000 units more in the local market with a total shipment of 185,000 units. And you could see the 5-month contribution of the brands that we acquired. And the other more remarkable increase was observed in the other segment, which mainly consists of Fiat commercial vehicle portfolio. This happened due to better availability of these products this year. So all in all, we shipped 213,000 units, which was around 79,000 units more than the prior year. Moving on to financial performance. Thanks to the inclusion of Stellantis Turkiye, our shipments grew by 60% to 213,000 units, whereas our revenue growth was 48% during this period with a top line of TRY 190 billion, whereas our EBITDA and PBT declined by around 50% due to the phaseout of Fiorino, which created a high base in the first half of last year. Looking into the details of our third quarter performance on the P&L side, our revenues more than tripled to TRY 87 billion, whereas our gross profit grew by 137% to TRY 4.2 billion. And our EBITDA grew by more than 400% with TRY 1.8 billion with a similar profit before tax, which grew by 150%, whereas our gross margin declined by around 130 basis points due to elevated competition and also some product phase-out with higher imported products in our sales mix, whereas our EBITDA margin grew by 80 basis points to 2.1%, thanks to also operational efficiencies we have taken from the acquisition of Stellantis Turkiye. All in all, our net margin was 1.4%, which is flattish compared to the prior year. In the first 9 months of the year, our turnover reached TRY 190 billion with an EBITDA of TRY 5.2 billion and PBT of TRY 3.1 billion and net profit of slightly below TRY 3 billion. Our balance sheet remains very strong and flexible ahead of the new projects as well as our -- to fund our ongoing CapEx cycle. Considering that we have spent EUR 400 million for the acquisition of Stellantis Turkiye as well as dividends and ongoing CapEx, our cash position stands at TRY 19 billion, which is only TRY 6 billion less compared to the year-end. And despite a significant increase in the turnover and the volumes, we managed to -- net working capital to remain at a stable level, which is a highly efficient control on the net working capital side. And with that, our shareholder equity stands at TRY 53 billion as of the end of September. Moving on to investments, in the first 9 months, we spent EUR 104 million and 80% of this CapEx was mainly [ considered ] K0-related investments, whereas 10% was K9 related. As you know, we officialized the contract in mid-September, whereas we started pre-spending of this project. And this CapEx is likely to increase notably with the K9-related spending in the next couple of quarters. Moving on to outlook. Given the very strong year-to-date domestic light vehicle volumes, which already reached above 1 million units, we decided to revise up our domestic light vehicle market demand guidance by around 15% to 1.3 million to 1.4 million units. And in parallel to that, we are raising our total domestic retail sales guidance to 350,000 to 370,000 units, a similar increase to the market. I should note that this number reflects annualized volumes of Stellantis Turkiye. But as you recall that the closure of the transaction was at the end of April. Due to the ramp-up related delays in the K0, we are reducing our export shipment volumes by 20,000 units to 50,000 to 60,000 units. And in parallel to that reduction, we are also reducing our production volume to 130,000 to 150,000 units. With the officialization of the K9 contract, we are revising up our CapEx spending outlook by EUR 50 million to EUR 200 million. And on the profitability side, considering 1.6% PBT margin in the first 9 months of the year, we decided to slightly lower our PBT margin guidance to plus 2% from 3%. This was mainly driven by the production-related [ rate ] as well as higher-than-expected inflation in Turkey. But nevertheless, we remain confident on our 2028 margin guidance of 5% to 7%, which is expected to be driven by higher localization within our sales in the local market compared to the imports, which tends to be our highest margin products. This marks the end of our presentation, and we are happy to take your questions. Operator?

[Operator Instructions] The first question is from the line of Ignebekcili, Murat with HSBC.

Now looking at your exports for this year, monthly figures, the maximum amount of monthly figure is 4,500, and given your guidance, that means if you reach the bottom end of the guidance, 50,000 exports, that means you need to do like 20,000, 25,000 for the rest of the year. So that means 6,000 to 7,000 exports at least on a monthly basis. You finished October already, so we're into November. I assume you're pretty confident with that. So that's a significant change in the monthly figures. So I just want to make sure that -- and is this going to be something that you will carry over to 2026 easily? And the second question is actually your 9-month PBT margin is around 1.6%. Now your revised guidance is plus 2%. So assuming it's -- you're targeting slightly over 2%, that still means for the fourth quarter, it's definitely over 2.5%, I would presume. So how -- I know your target is for 2028, but what sort of margin profile should we expect for 2026? Can you just elaborate on that, please?

Thank you very much for the questions. Starting from the first one about K0, yes, you are right that the 9 months export numbers are low. But then for the rest of the year is to increase the export volumes, and we see that with the introduction of our new combi models, we foresee that we will be achieving the number that we mentioned in our guideline. And for the second question that you mentioned, I mean, the profit margin, PBT margin, there are many aspects on this one. But in a nutshell, we foresee that we will manage to have plus 2% PBT margin for this year. Especially this will be depending on the increase in our production, as I just mentioned that we will see that increase in K0. And also, with the decrease in the inflation, that will be also doable for us for the full year as well. For the outlook that you asked, especially for K0, I just mentioned that with the combi model that we will be introducing in this month, we will foresee an accelerated increase in the number of volumes in the next year as well. So we are confident that the export figures will be much higher than what it is for the time being. Thank you.

The next question is from the line of Uz, Aytunc with AK Invest.

I have four questions. The first question is, I know it is early to talk about 2026, but currently, how do you see 2026 domestic market conditions? Would you expect the domestic market to grow further in 2026, maybe reaching around 1.5 million light vehicle units? The second question is, do you expect the price competition in the domestic market to continue driving down your prices in 2026? The third question is currently, how do you see the European market conditions for 2026? In this year, there was a significant decline in European commercial vehicle sales. Do you expect better or worse market conditions in Europe in the next year? And the last question is how much CapEx do you plan to make for Egea expansion?

Okay. Thank you for the questions. Starting from the domestic market outlook, this year is a very strong year. As you know, we foresee that it will be ending with 1.4 million units. For the next year, it is hard to tell, but for the time being, we forecast that it will be within plus or minus 10% of this year. So there will still be a very strong year as well for the next year. In terms of the CV market in Europe, we foresee that it will be stagnant and there will not be a significant change compared to this year. The other question was...

My second question was, do you expect the price competition in the domestic market to continue in 2026?

Yes. On the price competition, as we mentioned, there is an aggressive price competition for the time being. At the end of the day, this should be also normalized in the coming years. But this year, for the last quarter, we will be having the same trend going on. But starting from next year, we will be expecting some normalization on the pricing level as well.

I see. And the last question was how much CapEx do you plan to make for Egea expansion or maybe any CapEx?

Yes. On the Egea expansion, the CapEx will be really minimal, like EUR 2 million or EUR 3 million range. So not a significant...

The next question is from the line of Kilickiran, Hanzade with JPMorgan.

First of all, I couldn't understand your [ primary ] thoughts for next year's demand. How much growth have you highlighted for next year? Sorry, I missed that number, if you -- can you please repeat this? And the second one is, what is the current share of K9 models in your distribution sales, including all brands at the moment? Is it reasonable to assume a substantial pickup from this level in 2026, given that it will be locally produced in the later part of the year and also may be sold at competitive prices because I can't see the breakdown of your distribution sales on a brand level perspective and model perspective. And if you already now own the asset, I mean, do you share the current EBITDA margin in the distribution asset?

Thank you, Hanzade, for the question. Starting from the very last part. As you know, in the restated financials, the inflation sometimes plays -- is kind of a tricky one. For the EBITDA numbers that is reported, this is severely affected by the inflation adjustment. So especially for companies like Tofa, it is much better to look at the PBT levels. As you can see on the PBT levels, our PBT number is around TRY 1.7 billion, which is pretty much in line with the last quarter numbers as well because especially in the inflation environment, there is always a transition from the EBITDA figures to the monetary gain-loss item. So based on our nominal numbers -- non-inflation adjusted numbers, what we see is that the EBITDA figures are pretty much in line with the previous quarter as well.

But I would like to ask about the profitability in the distribution assets. I'm aware of the inflation impact on the EBITDA. But maybe on the PBT perspective, do you share the distribution asset profitability separately as you now own the assets? Just to understand how much -- I mean, I know you are guiding us for the midterm PBT margin, but I'm trying to understand the next year's PBT margin, where we should be landing when the production ramps up.

Sure. On the distribution asset profitability, you can assume the average company-wide profitability is also applicable for the distribution asset as well. So there is no significant change in terms of the margins, especially on the distribution side. On the first question that you asked about next year's volumes, we assume that it will not be different than 10%, minus or plus, of this year's numbers. So we assume that this year will be 1.4 million so that you can assume that it can be like 150,000 units high or 150,000 units low. That's the assumption that we have for the time being. For the K9 question that you asked, especially when the product is locally produced, there is always an additional volume coming from the locally-produced vehicle because of the flexibility that it offers. So for the next year, starting from next year, in Q3 of next year, we will be seeing that positive effect as well. And also, as you know, the locally-produced vehicles have a much higher profit margin. And in the next year, with the help of K9, we will also be seeing margin expansion coming from K9 sales. And the volume will be at least 5% or 10% higher than what it is for this year.

Next question is a follow-up question from Ignebekcili, Murat with HSBC.

I just have a small follow-up question. Now in the second quarter call, that was at the end of July, you had a PBT guidance of 3% for 2025. Now your revised guidance is essentially in practice a 50 to 60 bps decrease compared to previous guidance. So is that revision -- I mean, we cannot obviously see the separate balance sheets of Stellantis Turkiye and existing Tofas production operations, but I don't expect you to tell me, of course, those figures. But how much of the downward revision is coming from lower performance of these two specific units? Is it solely because of lower production on export figures? Or you had some disappointing profitability in the Stellantis Turkiye operations as well? And how do you expect these two entities to perform in fourth quarter? The recovery in the fourth quarter PBT is going to be driven by which of these? Can you please elaborate on this?

Sure, definitely. I mean, first of all, we are really very happy with the performance of Stellantis Turkey asset. It's really performing well. The main reason why we lower our guidance is because of two main reasons. One is, as you know, the inflation rate is affecting our P&L. 1% inflation rate increase affects our bottom line at least TRY 500 million. So that's one reason that we lowered our guidance. The other one is the lower-than-expected export volumes. But as I mentioned to you, this is only a temporary delay in our production plan. And we are seeing that with the new combi model that we are introducing in this month, we will see an accelerated growth starting from November, and it will continue onwards in the next year as well.

[Operator Instructions] Ladies and gentlemen, there are no further audio questions at this time. We will now move on to our written questions from our webcast participants. The first question from one of our webcast participants is from [indiscernible] and I quote: we've seen some temporary pressure on profitability and cash flow during this period. Which areas do you expect to show the first signs of recovery over the coming quarters? And what gives you confidence that 2026 will mark a clear turnout in terms of margins and over balance sheet strength?

Thank you for the question. As I just explained, it is much better to take a look at our financials, our profitability on the PBT level because of the inflation effect that I just mentioned because the EBITDA numbers are understating in case of an increase in the inflation. So looking at it from the PBT level, we are almost in line with the last quarter. And looking at on the cash flow, Mehmet also just mentioned about this year, we spent EUR 400 million for the acquisition of Stellantis Turkey. And on top of it, we also distributed [ EUR 150 million ] of dividends. But despite of the significant cash flows -- cash outflows, we are still in net cash position. And this is because of the EBITDA generation that we have amounting TRY 5 billion, also the improvement that we achieved in the net working capital. So we are still in net cash position. And this will also provide us ample room for the future growth and for the new projects as well. Thank you for the question.

The next question is again from [indiscernible]. As the production of the year comes to an end, if it is understood that a new passenger car project is under development, without disclosing any details before an official announcement, could you share whether this project is focused on a single model or if it could be similar to the K9 program, be positioned under multiple brands within the Stellantis portfolio? Additionally, from a production standpoint, when do you expect to see the first signs of this transition taking place at the plant?

Thank you for the question. As we announced that Egea will be coming to the end -- at the end of June next year. As you know, the capacity utilization rate of the Tofas plant is below 50% for the time being. And as the distant market leader in Turkey, we also would like to increase our capacity utilization rate to serve the Turkish market much better. And for this one, maybe I can give you more color. Last September, meetings between major shareholders and top management of Stellantis and Koc Holding took place in Istanbul and Bursa. And both shareholders once again expressed their commitment to fully saturate the capacity of the Bursa plant. So following this visit, we are also -- we have also started the feasibility studies of new projects, and we are currently working on this. And we hope that we will announce a new project in the coming months if everything goes according to plan. Thank you for the question.

Our next written question is from Evren Gezer with BNP Paribas, and I quote: do you have any time line for a potential replacement for Tipo? How much CapEx may be needed? When do you think the plant may reach full capacity?

Thank you for the question. As I just answered, we also would like to fully saturate the capacity of the Bursa plant, and we are working on this front as well. And since the project is not clear yet, it is hard to come up with the CapEx number, but you can also take a look at our previous projects. As you know, for a product with 1 million units of sales for the life cycle -- for its life cycle, we spent approximately EUR 300 million of CapEx. But as I mentioned to you, it will depend on -- it will change for each project, and we will announce it when it is ready with all details, including CapEx.

We have another audio question from Mr. [indiscernible] with [indiscernible] Invest.

Congratulations for the results under very difficult conditions and uncertainty, especially related to your strategy. And my question is about -- we have less visibility about 2026 and 2027. Maybe in the following quarters, more visibility on that direction give us more clear analysis. And for now, for third quarter, my question is we have inflation accounting, other complications. But when you look at -- in terms of your management performance or anything, the profitable levels in the Stellantis and the export side, could you give us some comparison? Because my point is export margins have been lower, domestic margins have been higher. But with this new entry, did it have any Stellantis dilutive effect on your margins? That's my question. And the exports side, again, what was the level of the -- not the exact number, but as a comparison in order to understand the levels. And in addition to these factors in the market, we see very strong volumes. But as we know, it's a buyer market. And did it have any additional impact on your margins in this quarter? That's my question.

Okay. Thank you for the question. Just comparing the -- each channel that we have in terms of import, export and locally-produced and locally-sold vehicles. Obviously, the locally-produced and locally-sold vehicles have a much better margin. But for the export vehicles and for the import vehicle business, you can assume pretty much the same level of margins.

And for the following year, do you think you will be able to give the guidance for 2026 and 2027 as a rough like the project base, will it be possible? Or are we going to just try to just make estimates?

We are still in the budget phase. But as you know, as usual, we will provide our guidance in the start of the next year. But having talked about K9, as I just mentioned, will be a positive effect on our portfolio with 80% of the total production will be devoted on the domestic market. So starting from Q3 of next year, we will foresee a significant increase in the margins of K9 business, and this will also reflect to the whole year as well. And on top of it, as I also just mentioned, we all expect that the inflation rate will go down next year as well. And this will also have a very significant effect on the profitability of our business. So all in all, we are seeing -- we will see a gradual transition from 2% profit margin level to 5% to 7% profit margin level in 2026, and there will be a gradual shift towards that in the years to come, and we will see the first signs in next year. Thank you very much.

And the last question, when you look at your export guidance over the last several quarters, unlike the previous years, there were downward revisions a couple of times. How do you just evaluate the situation? Because this year was really exceptional and transition year, we accept that and the market gives credit. But after June, wasn't it's obvious that your export guidance wouldn't meet? I just want to hear your evaluation, which for me, it's not this year is definitely it's not the case, and we have great expectations for the future. But at least in terms of planning side, I want to understand this strategic negotiations, all those things, how much did that affect? Because this year, the company -- the plant was almost idle because of the delays in the regulatory issues, all others. So I just really want to understand whether we are at a jumping period for Tofas in the following years and maybe the evolution of at least those revisions, as I said, which I don't give very high importance. But just I want to understand the technicalities of that.

Okay. Thank you for the question. K0 is in the ramp-up stage. And that's the reason why the numbers are below the production capacity of the model. But as I mentioned to you, we will be also introducing the combi version in this month as well, and this will complete our lineup, and this will significantly improve the sales volume in the coming months and also in the next year. Thank you very much.

And another question is about moving to the increasing shifts. Do you think we are going to see some increase in the shifts in the following year at some time by mid-2026? Or is it early to make such a comment?

Sure. We will be shifting to two shifts in the factory as well with the increase in the export volume. So that is our current plan for the time being.

[Operator Instructions] Our next question is from our webcast participants, [indiscernible] with Trident Asset Management. And I quote: can you please explain why is the margin still so much lower than expected as the total sales is actually much better than expected? Does it mean the lower export volumes are pressuring the margin so much, even though there should be take-or-pay contracts?

Thank you for the question. I mean, it's a very important question. We discussed it a couple of times during this Q&A session. But again, I would like to highlight that it is much better to take a look at our profitability on the PBT level. As I mentioned to you, the inflation adjustment understates EBITDA numbers, especially for this quarter. Just looking at the non-inflation restated numbers, the nominal EBITDA figures that we see is pretty much even slightly higher than Q2 of this year. So we see no problem on this one. And on the PBT levels, we can see that the monetary gain-loss is also higher than next -- last quarter as well. And we see that -- we see the positive effect on the PBT level. And on the export, I mean, as the question says, as we increase the volumes, we will also be benefiting from the efficiencies and it will also increase the profitability of the company, which we hope to see in the last quarter. Thank you very much for the question.

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

Thank you. Thank you. We certainly appreciate your time today and your interest in Tofas. I wish you a good day.

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