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

Ladies and gentlemen, thank you for standing by. I'm Paulina, 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 first half 2026 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. Ahmet Tasangil, CFO; Mr. Mehmet Agyüz, CFA, and Investor Relations Manager. Mr. Tasangil, you may now proceed.

Good afternoon, and good morning, everyone. Thank you for joining our call. In a moment, Mehmet Agyüz, our Head of Investor Relations, will take you through the details of our first half 2026 results. Before that, I would like to briefly share the key highlights. In the first half of the year, we delivered on our operational objectives. Production increased, export performance strengthened and we continue to execute well in the local markets. We achieved a PBT margin of 3.4% in the first half. This was broadly similar in the first and second quarters and notably higher than the same period last year. The year-on-year improvement was mainly driven by economies of scale, supported by higher production volumes and the consolidation of Stellantis Türkiye. In the domestic market, light vehicle demand declined by 8% year-on-year, mainly due to a softer passenger car market. Still, we managed our strong market leadership with a broadly stable market share of 26.3%. Our strong performance in LCVs, where our market share increased by 3.7 percentage points, offset a slight decline in passenger cars. Production by the way reached 77,000 units in the first half, up 30% versus last year. This improvement was mainly supported by the increasing penetration of the K0 model in our export markets, which also helped improve our capacity utilization. Looking ahead, we maintain our full year production guidance at 145,000 to 155,000 units. Export volumes increased more than 120% year-on-year in the first half. This growth was driven by the K0 model. Based on this performance, we are slightly revising our export volume outlook upward and now expect full year export volumes to be in the range of 75,000 to 85,000 units. Investments for the K9 model remain on track, and we expect to start shipments in October. In addition, K0 exports to North America are expected to begin towards the end of this year. This will also further support our export volumes next year. Finally, our feasibility studies for a new production project are now at the final stage. Preliminary spending is already ongoing, while the finalization of the related contracts is progressing. As part of our preparations for the new projects, we increased our annual production capacity by 50,000 units. This brings our total annual capacity to 0.5 million units. This direction is also well aligned with Stellantis regional strategy. At its Investor Day in May, Stellantis highlighted its ambition to reach full capacity utilization in the Middle East and Africa region and to increase regional production and sourcing significantly over the next few years. With that, I will now hand over to Mehmet for the rest of the presentation. After that, we will be happy to take your questions. Thank you.

Thank you, Ahmet. Good afternoon, and good morning, everybody. In the first half, Türk's automotive production increased by 6% and reached to around 663,000 units. Meanwhile, Tofas' production increased by 30% and reached 77,000 units during the same period, while the ramp-up at -- the production ramp-up at our plant continues with 24% growth in our quarterly production reaching to 41,000 units. In terms of production mix, LCV mix has been increasing due to the ramp-up period and now constitutes about 2/3 of our production volumes, which is almost double the level of last year. In the first half, domestic light vehicle demand declined by 8%, reaching to 560,000 units, and this was mainly driven by the decline in the passenger car shipments, which retreated by around 10%, whereas LCV demand was relatively stable at 118,000 units. There was a slight acceleration in the contraction in the second quarter versus the first quarter, mainly due to increasing geopolitical risks as well as the higher calendar effect from the long vacation period in May as you can see in the monthly evolution of the domestic light vehicle demand in this chart as well. In terms of market performance, Tofas light vehicle market share was stable at 26.3% in the first half. And you can see the strength in the Citroen and the Jeep brands mainly due to the product cycle was offset by the declines in the other brands. We executed quite strongly in the LCV market, and now we almost control almost half of the market with a market share of 48%, which is around 360 basis points higher compared to the same period of last year. The main driver of this improvement was the Fiat brand market share, where we benefited from higher availability compared to last year. On the PC market, our market share retreated slightly to 20.5% and the improvement in the Citroen and the Jeep brand was offset by the decline in the other brands. Moving on to export business. Our export shipments continued its strong recovery with 127% growth reaching to slightly below 40,000 units in the first half of the year. And this was driven by our LCV shipments, which is our only exports business at the moment, and grew by 162%, thanks to the introduction of new variants of the K0 model towards the end of last year. You could see the monthly evolution of our export volumes, and you can see a notable acceleration in our monthly volumes, except the May period due to the plant closure from the long holiday period. And we remain confident this performance to continue in the second half of the year. In terms of regional breakdown of our exports, main markets, mainly 4 main markets in EU, France, Italy, Germany and Spain constitutes around 80% of our export shipments, led by France, which constitutes slightly below 30% of our shipments and second -- followed by Germany and Italy with 21% and 17% respective share in our export business. This slide shows our shipment volume breakdown. And in the first half, we shipped around 153,000 units, which is -- in the domestic market, which is 55% higher compared to the prior year. And this was mainly driven by increase in the import business, which more than doubled to 120,000 units, mainly due to the consolidation of Stellantis Tüurkiy, whereas shipments in the local market from production declined by 21% to 32,000 units. And this was mainly due to the PC segment due to the life cycle of our production product there, whereas we continue to increase our penetration in the local market in the LCV side, which grew by 28%, reaching to slightly below 9,000 units. So all in all, we shipped 192,000 units in the first half of the year, which is 65% of our business, whereas LCV shipments performed better with a 94% growth and PC business grew by 43%. So now LCV mix in our total shipments constitutes above 50%, whereas around 40% levels during the same period of last year. This shows the snapshot of our financial performance. As you could see, 65% growth in the shipments, which translated into a real revenue growth of -- parallel growth of around 61% in the revenues. This reflected to around 16% growth in the EBITDA to TRY 4.8 billion, which is affected from the mechanics of the inflationary accounting, whereas profit before tax, which is our main KPI, grew more than 300%, reaching to close to TRY 7 billion in the first half of the year. Snapshot of our P&L, and you could see the strong real revenue growth translates into the similar growth in the gross profit side with a slight improvement in the gross margin, whereas our main KPI PBT margin improved by 2.1 percentage points in the first half of the year and reached to 3.4%, which is within the range of our full year guidance. Due to slightly higher tax rate, the improvement in the net margin was slightly lower at 140 basis points and reached to 3.1% in the first half of the year. Our balance sheet, on the net industrial debt position, we are quite comfortable, and we have a quite flexible balance sheet ahead of our ongoing investment cycle. And our cash and cash equivalents declined by around TRY 12 billion to TRY 11 billion, mainly due to the dividend payment in the first quarter of the year, whereas our inventory doubled from the end of -- compared to the end of last year. This is mainly due to seasonality, and we expect this to improve in the second half of the year, whereas the payables and receivables were pretty much in line with our budget. So all in all, our shareholders' equity stands at TRY 66 billion, which is around TRY 5 billion less compared to year-end. Our investment cycle continues, and we spent EUR 74 million in the first half of the year. And you can see the tail off of our K0 investments after 2 years of elevated spending, whereas we are ramping up our K9 investments, which stands at the majority portion of our investments in the first half of the year. And we expect a notable acceleration in the CapEx in the second half of the year. Moving on to outlook. Considering elevated geopolitical risks as well as the macro conditions, we decided to take a bit more cautious approach in the local market and reducing our local light vehicle demand outlook by 100,000 units to 1.1 million to 1.2 million units. And in parallel to that, and our position in the local market, we are also reducing our local retail sales expectation to 300,000 to 320,000 units. Considering a strong performance of K0 model in the export market, we are slightly revising our export shipment volumes by 5,000 units to 75,000 to 85,000 units, similar to the revision we did in the first quarter of the year. So as a result, our production volumes remain the same at 145,000 to 155,000 units. And our CapEx guidance remains on track with a EUR 250 million for the full year. On the profitability front, considering our year-to-date performance as well as our expectation for the new model launches, especially for the K9, which we will be selling in the fourth quarter of this year. We maintain our PBT margin guidance for this year at 3% to 4% level. And also our long-term PBT margin guidance for 2028 remains the same at 5% to 7% as well. This marks the end of our presentation, and we are happy to take your questions. Thank you.

[Operator Instructions] The first question is from the line of Aytunç Uz with AK Invest.

I have 3 questions. And the first one is, in the domestic market, there has been a pressure on pricing for quite a while, I know. But in this quarter, it seems the pressure was far more pronounced. Do you expect better pricing in the third quarter or fourth quarter? Or do you expect the pricing pressure to continue at the second quarter pace? This was the first question.

Okay. Thank you for the question. I guess you will -- then 2 more questions will come. For this one, there is a competitive pricing, obviously, in the market for the last couple of years. And this quarter, we see a much more competitive one, mostly because of this TCR transition as well. So the domestic market has intensified its pricing activity in this quarter, and we expect that this will lift in the quarters to come. So less competitive pricing is our expectations for the rest of the year.

Okay. So the second one is, it seems there's a significant quarter-over-quarter jump in net working capital. What were the reasons for it? And do you expect it to continue at the second quarter level?

Okay. Thank you for the question. Looking at the net working capital balance, you are right, especially compared to the end of the year, there's an increase. And this increase is much devoted to the seasonal effect that we observed in the cycle. So most of it is coming from that. But obviously, there is also a negative effect coming from the softening of the market. The ratio, net working capital to sales ratio is about 11% for the time being. But we expect in the quarters to come to have a single-digit number on this one. So all in all, we can say that we will see some improvement on that front as well.

Okay. So the last question is, what was the impact of Iran-USA conflict on your cost base? And if there was any increase in your costs? Does it continue in the third quarter? I know the war is on and off again, but does it continue in the third quarter as well?

Okay. Thank you for that question as well. There is some increase in our cost coming from this increased tension. The effect is almost EUR 150 per car, which is not a significant number. And as you know, we also have some cost-plus contracts in place. So in terms of Tofas P&L, we don't see a significant impact of this tension as well.

I see. Is it like EUR 100 per vehicle, does it like produced and sold vehicles? Or does it include all the vehicles that are imported and produced as well?

You can fairly assume that it is like EUR 150 per vehicle, whether it is produced here or imported because we all are facing the same kind of raw material increase all over the world. So you can safely assume that it is pretty much the same irrespective of the production of the vehicle location.

And one follow-up, if possible. You mentioned the cost plus, I know, but like did you immediately reflect the cost in your cost-plus mechanism? Or does it take like 3, maybe 6 months to refresh the contract pricing and stuff like that?

Okay. Thank you for the question. We immediately reflected the cost. So there is no time lag between the increase in the raw material and the profitability on our side. All in all, I can clearly say that there is no P&L impact on Tofas coming from this issue.

The next question is from the line of Yassine Sarihan with [indiscernible]

I have 3 questions. One is that [indiscernible] production...

We cannot hear you. Can you speak up a bit more? Your line is a bit fuzzy.