Koc Holding AS

IST:KCHOL.E

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Jota, your Chorus Call operator. Welcome, and thank you for joining the Koç Holding conference call and live webcast to present and discuss the first quarter 2021 financial results.

At this time, I would like to turn the conference over to Ms. Sinem Baykaloz, IR Manager of Koç Holding. Ms. Baykaloz, you may now proceed.

[Sinem Baykaloz, executive]

Hello, everyone. Thank you for joining us today. This is Sinem, IR Manager of Koç Holding. And here with me are our IR Coordinator, Nursel Ilgen, to go over the presentation and answer your questions during the Q&A session.

I would like to remind you that our presentation and the Q&A session might contain forward-looking statements, including the effect of the COVID-19 pandemic. Our assumptions are based on the environment and our businesses as we see them today, and this might be subject to change. Before the call, we have sent out our e-bulletin, which contains the link to our earnings presentation. After the call, you can also access a replay of the webcast on our website.

Now I would like to leave the floor to Nursel to present our first quarter results. At the end of the presentation, we will have a Q&A session. Nursel?

[Nursel Ilgen, executive]

Thank you, Sinem. Welcome, everyone. On Slide 2, you'll see today's agenda.

Let's start on Slide 4, with some key indicators for Koç Holding. We were able to deliver solid performance and pulled our resilience one more time, thanks to our diversified portfolio structure, agile management, strong financials and our prudent risk policies.

On the left, you can see the sectoral breakdown of our diversified business portfolio as of the end of March. Business models of all companies were tested when new set of risks have emerged having different impacts on each business. Even under these challenging conditions, our portfolio proved its resilience as we have been favoring diversification. Also, we have leading positions in the sectors where we operate. This allows us to maintain our strong pricing power.

On the right, you can see the revenue breakdown. Diversification is not limited with sectors, but also includes international positioning. We are the largest exporting group in Turkey, with our exports accounting for 7% of Turkey's total exports.

In terms of the composition of our own revenues on a combined basis, 33% is coming from international sales as of the first quarter of 2021. If we also include Tüpraş, which is an FX-linked commodity business, 48% of our revenues can be considered not sensitive to the domestic economy.

On Slide 5, you can see our dividend income and payments. So far, this year, our dividend income was solid and amounted approximately TRY 2.8 billion, excluding dividends from our unlisted companies as well as potential dividends for the remainder of the year for some of our companies as per our past year practices. Our dividend income reached all-time high figure and showed a major recovery compared to last year's dividend income of TRY 1.2 billion for the whole year. This was a good testament to our diverse portfolio, enabling a sustainable dividend flow.

Note that the majority of our dividend income is derived from companies with FX or FX-linked revenues.

In 2021, our AGM resolved distribution of TRY 1.5 billion of dividend payments corresponding to 16% payout ratio. This seems lower than our average payout ratio of around 20%. However, excluding the TRY 3 billion noncash one-off income in 2020 linked to the acquisition of additional Yapi Kredi shares, the payout ratio becomes 24%.

Moving on to Slide 6. We have further strengthened our liquidity on the back of healthy and swift recovery in dividends. You can see the evolution of our net cash in the first quarter of this year. At the end of last year, we had $375 million net cash position at the holding level. Considering our dividend income and other items such as management fees, operating and financial expenses and currency conversion impact, our net cash position at the end of March 2021 reached $648 million, including Yapi Kredi Bank AT1 investments. Meanwhile, incorporating our dividend payments and dividend inflows from Aygaz and YKB/KFS in April, our net cash position becomes $466 million.

On Slide 7, you can see the main pillars of our solid balance sheet. As you all know, prudent management has always been a key focus area. As we have just discussed, as of the end of March, our net cash position stood at $466 million, including Yapi Kredi Bank's AT1 investments. 80% of our $1.8 billion of gross cash is in hard currency. Keeping an efficient level of liquidity has always been our approach and it allows us to maintain our resilience. With our agile management, we sustained our healthy balance sheet despite the headwinds of the COVID-19 pandemic and market volatility.

In terms of our funding at Koç Holding level, the only debt we have is the 2 Eurobonds outstanding as of the end of March. We strictly apply and regularly monitor our prudent risk management policies at each underlying company and on a combined basis.

In terms of liquidity, leverage and FX position, we preserved and even improved our conservative levels.

On a combined basis, our current ratio is 1.3x and our net financial debt over EBITDA excluding the finance segment is at 1.3x.

In terms of FX, we have a policy of keeping a neutral position and remain well within our risk management rules. As the largest investment holding company in Turkey and being active in diversified sectors, we manage our balance sheet in a way to ensure that we always remain resilient against market volatility. Going forward, we continue to prioritize maintaining the solvency of our balance sheet no matter how challenging the market conditions are.

Okay. Let's move on to the sectoral development in the first quarter of 2021. We'll start with Energy and Tüpraş on Slide 9. The Energy segment contribution to Koç Holding consolidated net income was negative, mainly due to historically weak crack margins, lower production and FX losses despite the inventory gains with the increase in crude oil prices in the first quarter of 2021. Note that FX losses occurred in March will be recovered via natural hedge mechanism in the coming quarter.

The domestic demand for refined products was weak in the first 2 months of 2021. Adverse impact of the pandemic was the most visible in jet fuel sales with 48 -- 46% decline. Gasoline sales were impacted by mobility restrictions and decreased 12%, while diesel sales were relatively resilient with only 4% decline compared to the same period last year.

In the first quarter of 2021, Tüpraş domestic sales and export volumes were lower year-on-year, resulting in 20% lower total sales volume.

When we look at the refining margins, we see $2 per barrel decline in the Med Complex margin to minus $0.2 per barrel, predominantly due to lower crack margins. Weakness in jet fuel cracks was a key factor of headline margin as relatively slow recovery in air traffic led to the weakness in cracks.

On the other hand, Tüpraş net refining margin was $1.7 per barrel higher than Med Complex margin, mainly due to inventory gains and more advantageous crude selection ability of the company. Tüpraş overall net refining margin amounted $1.5 per barrel versus $1.2 per barrel during the same period of last year, mainly due to inventory gains this year, compared to past inventory losses last year despite weaker crack margins as well as lower production.

In terms of capacity utilization in the first quarter of this year, Tüpraş operated with around 65% capacity utilization rate, mainly because of the shutdown for maintenance work at Izmir refinery in January and February.

On the LPG side, consumption decreased by 18% in the first 2 months of 2021. Aygaz, the leading player in the LPG sector, focused on profitability, and its sales volume was up by 23% in the first quarter of this year.

Okay. Let's move on to Slide 10 and discuss the developments in auto segment. On the back of robust domestic demand, supported by pent-up demand and changing consumer preferences, our auto companies continue to show a very strong performance in the first quarter of the year. Auto segment has the highest contribution to consolidated net income with TRY 1.3 billion. The main drivers of the solid performance were substantial growth in domestic market, favorable product mix, solid export contracts as well as OpEx control and pricing discipline. On the back of this strong performance, consolidated net income of auto segment surged by a significant 153% year-on-year.

In the first quarter, domestic auto sales showed a very strong performance and witnessed a massive 61% growth despite TL depreciation and increasing loan rates since the third quarter of last year. We observed that consumers are still eager to buy vehicles. Our market share in the domestic market increased by 1 percentage point year-on-year to 25%.

On the export side, in the European markets, the recovery still lags behind Turkey. In the first quarter, European PC and LCV markets registered a total growth of 4% year-on-year. Our group market share in the export increased approximately 7 percentage points to 45%. Meanwhile, similar to the trend in Turkey, light commercial vehicles' performance was relatively better, thanks to the growth in e-commerce. During this period, Ford Otosan export sales volume was 29% higher, while Tofas witnessed 16% decline in its export volumes.

Strong demand in the domestic market, sales mix as well as currency tailwinds supported total sales revenues of Ford Otosan and Tofas, and they increased by 74% and 45% year-on-year, respectively. Domestic revenue growth was robust for both companies on the back of strong volume growth, favorable product mix and pricing discipline. Tofas realized 16% growth in export revenues despite the shrinkage in export volume. International revenues were supported by euro-based cost-plus contracts, and in the case of Tofas, also take-or-pay.

On the back of better-than-expected domestic market, Ford Otosan revised its 2021 guidance. Accordingly, expectations for the domestic auto market and Ford Otosan's domestic retail sales are lifted, while its export volume is reduced. There was no change in the production volume guidance despite issues in the supply of some parts where imported microchip use is intensive.

Türk Traktör, our tractor company, also had a solid start to the year. In the first quarter, the increase in Ziraat Bank's loan rate did not cause a meaningful interruption in the ongoing positive momentum in domestic tractor demand. And Türk Traktör's domestic sales volumes surged by 126% year-on-year.

During this period, the company's export volume was up only by 2%, mainly due to COVID-19. Türk Traktör's total revenues grew by 125% year-on-year, thanks to the stellar growth in domestic revenues, together with 38% increase in international sales. The company's net income increased by more than fourfold to TRY 348 million.

On the back of better-than-expected domestic market and recovery in export markets, the company revised its 2021 guidance. Accordingly, expectations for the domestic tractor market, Türk Traktör's domestic tractor sales and export volume projections are all lifted.

Otokar, our leading bus and defense company with superior R&D capabilities and prosperous products, also enjoyed a very strong start to the year. In the first quarter, Otokar's domestic revenues increased 128% year-on-year, and international revenues grew 70% year-on-year. Overall, total revenues increased 91%, while net income increased almost fivefold year-on-year to TRY 107 million.

On Slide 11, let's look at the Consumer Durables segment. As in the case of auto sales, Consumer Durables segment also had an outstanding start to the year on the back of robust demand on both domestic and export markets. The segment contribution to consolidated net income was up by almost 4x year-on-year to TRY 458 million. Stellar performance was driven by strong domestic and international revenues, currency tailwinds and strict cost management despite higher raw material prices.

Turkey's white goods market made a strong start to the year with 40% year-on-year growth in the first quarter. Similarly, international markets registered a robust performance and as a result, Turkey's white goods exports increased 26% in the first 3 months.

Looking at Arçelik figures, domestic revenues increased by 69% year-on-year with 48% growth in unit sales. Similarly, international revenues constituting 64% of total, increased by 66% on the back of FX impact and higher unit sales.

Looking at the key risk metrics, Arçelik managed to attain healthy levels. The company's working capital-sales ratio increased to 27% on the back of higher sales affecting inventory and receivables. Leverage stayed at comfortable levels with a net debt-to-EBITDA ratio of 1.4x.

Regarding 2021 expectations, Arçelik's revised guidance following its strong first quarter results. Revenue growth is expected to be more than 30% in Turkish lira terms on the back of more than 10% increase in international revenues in FX terms, while domestic revenues is foreseen to grow by around 25%. EBITDA margin expectation for this year is also raised to approximately 12%.

Finally, let me also briefly talk about the finance segment and the development of Yapi Kredi on Slide 12. The finance segment's contribution to consolidated net income was up by 10% year-on-year, and the share in consolidated net income was realized at TRY 603 million.

Yapi Kredi managed to increase its profitability, while the bank preserved its prudent approach in provisioning. According to the BRSA financials, Yapi Kredi's net income increased 29% year-on-year to TRY 1.5 billion in the first quarter while ROTE realized at 12.3%. Cost growth was below average inflation at 12% year-on-year. Similarly, revenues came 12% down year-on-year on the back of the decrease in net interest income and higher swap costs despite substantial improvement in fee income at 22% year-on-year.

In the first quarter, the growth was Turkish lira-driven in both loans and deposits. Total loan growth was 8% and customer deposit growth was 5% quarter-on-quarter. The bank's strategy to focus on value-added segments such as Turkish lira, small ticket and demand deposits continues. Currently, loans to retail customers constitute 50% of the portfolio.

The cumulative cost of risk, including currency hedge, improved 155 basis points year-to-date to 96 basis points, mainly due to limited inflows, strength in collections and front-loaded provisions in 2020 despite further increase in coverage of postponed loans and loans with 90 to 180 days of past due. The total coverage was 7.4% on a consolidated basis, in line with the conservative approach. Net NPL inflows turned negative in the quarter on the back of significant improvement in recovery.

Yapi Kredi remains comfortable in terms of liquidity. Total liquidity coverage ratio of the bank stands at 149% as of the end of first quarter.

In terms of capital, the bank's capital ratios are well above the regulatory requirements. CAR and Tier 1 ratios stood at 15.4% and 12.6% by March end, respectively, indicating 340 and 305 basis points of buffer without considering forbearance measures. As a reminder, in January, Yapi Kredi also successfully issued Tier 2 notes totaling $500 million, which had replaced the previous loan that had been called upon this issuance.

Please note that the bank will begin using the Internal Rating-Based, or IRB, approach, in reporting its solvency ratios starting from June. Yapi Kredi estimate the positive transition impact to be around 60 basis points on CAR and around 90 basis points on Tier 1 ratio.

If we move to Slide 13, we can talk about the overall results of the group, incorporating all of the segment trends we just discussed. On a combined basis, Koç Group registered TRY 98 billion in revenues, TRY 5.3 billion in profit before tax and TRY 4.8 billion in net income. Consolidated net income amounted to TRY 2.1 billion with a 39% year-on-year decrease, mainly due to 2 one-off items related to Yapi Kredi Bank transaction in February last year.

Let me remind you of those 2 one-offs: first, TRY 3 billion noncash net gain resulting from the bargain purchase and change of control at Yapi Kredi Bank; and second, TRY 0.4 billion termination fee income from UniCredit. Excluding these one-offs, our net income significantly increased versus last year, driven by strong performance of almost all segments.

Finally, on Slide 15, I would like to bring your attention to the widening NAV discount, which we believe to be unwarranted, given our strong fundamentals that we have just discussed. Although we maintained our strong financial profile and prudent approach with a track record of sound liquidity, our NAV discount widened significantly, mainly because of outflows from foreign investors due to risk of moat that impacted Koç Holding more severely because of our Turkey proxy positioning and the massive dislocation with being Koç Holding and underlying company's performance, which can be clearly seen in the 2 charts on the left-hand side. As a result of these, Koç Holding's NAV discounts widened down to more than 30% territory for the first time, as opposed to the historical average of single-digit NAV discount.

Okay. Thank you for listening. That's the end of my presentation. Now we can open the floor for questions.

[Operator]

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

[Nursel Ilgen, executive]

Okay. Thank you. Before closing, I would like to extend our appreciation one more time to all participants. If you have any further questions, you can always get back to us. As a reminder, the presentation and the replay of this conference call can be found on our website together with transcript. Thank you. Goodbye.