Koc Holding AS

IST:KCHOL.E

Earnings Call Analysis

Koç Holding faces challenges but expects stability and growth in 2025.

In the first nine months of 2024, Koç Holding posted a consolidated net loss of TRY 1.9 billion, impacted by tight monetary policies and demand slowdown. Revenue from international sales grew by 22% due to acquisitions. The automotive sector saw an 11% decline in domestic sales while export market performance was stable. Despite challenges, Koç is optimistic about 2025, expecting better results, especially in the automotive export side and improved performance from its energy sector. With $853 million net cash, they maintain a solid investment stance, hinting at potential dividend payouts if conditions are favorable.

Navigating Economic Challenges: A Glimpse into the Future

As we assess the recent earnings call, it's crucial to recognize the broader economic landscape in which Koç Holding operates. In the first half of 2024, Turkey's economy grew by a modest 3.8%, but signs of slowdown emerged in the second half. The tight monetary policy aimed at controlling inflation is likely to continue, presenting a challenging environment for growth and profitability across all segments. The company reiterated that Q4 of 2024 would largely echo the trends of Q3, with minor changes expected. Investors should gird for a prolonged period of cautious growth and ongoing regulatory pressures.

Segment Performances and Insights

Koç Holding operates in diverse sectors including energy, automotive, consumer durables, and finance. The Energy segment performed well, driven by strong utilization rates and robust sales, although softer crack margins were noted at $11.7 per barrel. Meanwhile, the automotive division, a significant profit contributor, faced headwinds with domestic vehicle sales down 11% year-on-year for the nine months. Despite strong export contracts, competition has intensified, and market share slipped by approximately 6 percentage points to 20% in the domestic market. In contrast, the Consumer Durables sector showed resilience, especially in international sales, which rose by 22%. However, challenges persist, including rising raw material costs and pricing struggles domestically. Investors should pay close attention to how these segments adapt to ongoing market pressures.

Strength in Financials and Cash Flow

Despite recent monetary losses primarily due to inflation accounting, Koç Holding’s financials remain stable. As of September, the company reported a net cash position of $853 million, bolstered by significant dividend income expected to reach $1.2 billion for 2024. The management affirmed their conservative risk management policies, preserving a current ratio of 1.3x and a net financial debt to EBITDA of 0.9x. This liquidity places Koç in a favorable position to navigate ongoing challenges and seize future investment opportunities.

Future Outlook and Guidance

Looking ahead, Koç Holding’s management expressed cautious optimism for 2025, particularly for the automotive segment, provided there are no significant changes in the regulatory framework. Expectations for the first half of 2025 include a potential uptick in export performance, especially for appliances in Europe, as conditions stabilize. However, the ongoing challenges in the banking sector and inflationary pressures will continue to be focal points. The guidance suggests there will be no major shifts from current performance levels in Q4 2024, which signals a steady but slow recovery trajectory.

Investment Considerations and Strategic Moves

For investors, the insights gleaned from this earnings call underscore the importance of a diversified investment approach with Koç Holding. The company’s resilience in financial management, coupled with a strong cash position, could provide a buffer against the prevailing economic uncertainties. Management's commitment to agility and prudent investments suggests that they are well-equipped to navigate upcoming challenges. As discussions about dividends commence for 2025, the focus will likely be on balancing shareholder returns with strategic growth investments. Investors should monitor these developments closely.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Koç Holding Conference Call and Live Webcast to present and discuss the Third Quarter 2024 Financial Results.

At this time, I like to turn the conference over to Mrs. Cansev Atak, IR Manager at Koç Holding. Mrs. Atak, you may now proceed.

[Cansev Atak, executive]

This is Cansev, IR Manager of Koç Holding. I have here with me our CFO, Polat Sen; our IR Coordinator, Nursel; Finance Coordinator ,Özge; and our IR Manager, Ismail, to go over the presentation and answer your questions during the Q&A session.

Our presentation on the first 9 months financial results contain the company's unaudited financial information prepared according to Turkish Accounting/Financial Reporting Standards by application of IAS 29 inflation accounting.

I would like to note that our presentation and the Q&A session might contain forward-looking statements and assumptions based on our business environment as we see it today, and they might be subject to change.

Please remember, you can access the replay of the webcast on our website after the call.

Now I would like to hand it over to Polat bey to start the presentation. At the end of the presentation, we'll have a Q&A session. Polat bey?

[Polat Sen, executive]

Thank you, Cansev. Welcome, everyone. I'm delighted to share with you that this year is the 101st anniversary of our Republic of Turkey. We acknowledge once again with all our hearts and souls, that the Republic of Turkey was established not by chance, but through the fierce determination and wisdom and courage of our great leader, Mustafa Kemal Atatürk.

As Koç Group having witnessed the century-long history of our Republic, we will continue to be at the forefront, and we consider it our greatest duty to carry our Republic ever forward.

I'm going to start with moving on to Slide 3, you'll see today's agenda. I'd like to start by giving you a quick overview of our position in the current environment. In the third quarter of 2024, several global trends have shaped the economic and market conditions slowing, but manageable growth, monetary easing and interest rate decisions and rising geopolitical tensions and uncertainties. The global economy seems to be slowing, but risks of recession remain low, suggesting a soft lending for many regions.

In Turkey, economy continued its controlled growth and recorded a growth of 3.8% in the first half of 2024 compared to the same period of the last previous year, with the support of both domestic and external demand. Leading indicators suggest that domestic demand slowed down in third quarter, contributing to the disinflation process.

With the tight monetary policy implemented to control inflation, a slowdown in growth is expected for the rest of the year. However, the deterioration in pricing behavior and inflation expectations are delaying the reduction of inflation to desired levels.

I believe at Koç Holding, we have proven a track record of successfully managing the volatility. Our resilience, strong financial and intake fundamentals are the reflection of our diversified portfolio, agile management and prudent risk policies.

Let's start on Slide 5 with some key indicators of Koç Holding. On the left, you can see the sectoral breakdown of our diversified business portfolio at the end of September. On the right, you can see the revenue breakdown. Our portfolio diversification is not limited to sectors, but also includes international positioning. We are the largest exporting group in Turkey, with our exports accounting for around 7% of Turkey's total exports.

In terms of the composition of our revenues on a combined basis, in the first 9 months of the year, 29% of it comes from international sales. If we also include Tüpras, which is an FX-linked commodity business, approximately 48% of our revenues can be considered in hard currency.

Moving on to Slide 6. You can see the evolution of our net cash in 2024. At the end of '23, we had $795 million of net cash position, including YKB AT1 investment at the holding level. In 2024, considering items such as dividend income from underlying companies and the dividend payments from Koç Holding management fees, operating and financial expenses and currency conversion impact along with other developments, our net cash position at the end of September '24 became $853 million.

In the first 9 months, our dividend income in nominal terms amounted to approximately [ TRY 29.7 ] billion, which is accounting to $903 million, including dividends from our unlisted companies, yet excluding dividends from the remainder of the year.

Ford Otosan and EYAS already announced second dividends totaling to TRY 8.8 billion, around $260 million at Koç Holding share. Accordingly, Koç Holding dividend income will reach $1.2 billion at the end of this year, $1.2 billion, by the way.

On Slide 7, at the end of September, you can see that around 87% of our $1.6 billion gross cash is in hard currency. At the holding stand-alone level, we like to keep some liquidity to serve as a war chest against volatility as well as firepower in case of any investment opportunities. In terms of our funding at Koç Holding level, the only debt we have is the $750 million Eurobond, which is due in March '25.

We strictly apply and regularly monitor our prudent risk management policies at each underlying company on a combined basis. In terms of liquidity, leverage and foreign exchange position, we preserved our conservative levels. On a combined basis, our current ratio is 1.3x and our net financial debt to EBITDA, excluding the finance segment, is 0.9x. In terms of FX, we remain well within our risk management rules.

Now I'd like to hand over to Cansev.

[Cansev Atak, executive]

Thank you, Polat bey. Let's move on to sector development in the first 9 months of 2024. We'll start with Energy on Slide 9. The Energy segment's contribution to Koç Holding's consolidated net income was strong in the first 9 months of the year, mainly supported by strong utilization, higher sales and lower energy expenses despite the softer crack margins year-on-year.

The domestic demand for refined products grew around 3% in the first 8 months of 2024, gasoline sales surged 21%, jet fuel sales increased 7% and diesel sales remained flat year-on-year.

In the first 9 months, Tüpras international sales volume was up by 24% year-on-year, while the domestic sales were 1% down, resulting in 4% year-on-year higher total sales volume.

Looking at the crack margins, Tüpras weighted average crack margin amounted to $11.7 per barrel. Even though cracks are softer, they remain above the 5-year averages.

Tüpras capacity utilization rate was 92% in the first 9 months due to operational efficiency, even at a time when the route maintenance was held.

On the LPG side, in the first 8 months, consumption was weak, decreasing 7% year-on-year.

Although domestic retail sales volume was down 9% year-on-year, and including wholesale as well as contribution from Bangladesh, total sales volume decline was 8% year-on-year in the first 9 months.

Let's move to Slide 10 and discuss the developments in the Auto segment. The Auto segment was the largest contributor to consolidated net income in the first 9 months. The main drivers of the performance were: pull forward domestic demand in the first quarter, solid export contracts despite heightened competition in the domestic market and the lower pricing ability with sales campaigns, and increased vehicle availability.

The domestic auto market reached 884,000 units at the end of the first 9 months of 2024. The Turkish auto market experienced the shift with a 3% growth in the first half turning to a 1% decrease in the 9 months. The normalization has been experienced following strong performance in the first quarter. Since then, the domestic auto market has been slowing down and the domestic sales are down 11% year-on-year, excluding the first quarter.

The increase in the base price of the special consumption tax exemption applied to disabled students, the sales campaigns ahead of general safety regulation, the rise in domestic demand ahead of the end March 2024 elections despite the continuation of tight monetary policy and the reduced availability of LCVs in the market were effective in the market share performance. However, an end to election risk, the high base effect of 2023, the transition from the supplier market to buyer market and the early consumption of the pull-forward demand resulted in a correction after the first quarter.

All in all, our market share in the domestic market for the first 9 months of the year decreased around 6 percentage points to 20% compared to the same period of the previous year, which was mainly due to fierce competition with new entrants, especially with passenger cars.

On the export side, the European passenger car market grew 1% and the light and medium commercial vehicle market realized 8% of growth. Our group market share in the exports remained flat at 37%.

In the first 9 months of the year, Ford Otosan's export sales volume was 8% higher year-on-year. Tofas witnessed a 33% decrease in its export volumes, mainly due to transition with phaseout of [indiscernible] production models and regulatory setback as one of the main export destinations in the MENA region.

Weak volumes in Turkey and exports, combined with a challenging pricing environment, especially after the first quarter of the year impacted the financial performances of both Ford Otosan and Tofas.

TürkTraktör recorded a 16% decrease in revenues due to 10% lower volumes, owing to the weakness in export markets. The domestic tractor market was down 18% in the first 9 months in an environment of increasing interest rates.

Otokar, our leading bus and defense company, realized 7% year-on-year decrease in revenue, and the share of international revenues constituted around 64% of total revenues in the first 9 months.

On Slide 11, let's look at the Consumer Durables segment. Consumer Durables segment's performance was supported by slightly improving international demand, while slowdown in demand in Turkey, challenging pricing environment, increasing raw material costs and higher financial expenses continue to be reflected on financials.

The completion of the Whirlpool transaction at the beginning of the second quarter continued to contribute to revenues, but diluted the margin.

Turkish white goods unit sales increased 4% year-on-year in the first 9 months, while the export sales decreased 6%.

Looking at Arçelik figures, Turkey revenues increased 2% year-on-year. On the other hand, international revenues, constituting 66% of the total, increased 22% year-on-year, primarily due to inorganic growth stemming from Whirlpool's contribution.

Finally, let me also briefly talk about the Finance segment and the developments that we upgraded on Slide 12. The Finance segment's contribution to our net income was negative in the first 9 months of the year. Please note that in our consolidated financials, we used the Yapi Kredi's inflation adjusted financials, which is affected by monetary loss due to the net monetary position of the bank.

As a separate note, Yapi Kredi's contribution to Finance segment results may differ from the bank's IFRS results, which is mainly due to purchase price allocation adjustments regarding Koç Holding's additional share purchase transaction in February 2020.

Here, when providing the main KPIs of the bank, I'd like to switch to BRSA financials, as banks are exempt from the inflation accounting for 2024. In the first 9 months of the year, total performing cash loan growth was around 35% and the total customer deposit growth was 25%. The bank's strategy to focus on small tickets in deposit gathering and contribution of efficient customers continued and the share of demand deposits in total customer deposits became 44%.

In the first 9 months of the year, TL loan-to-deposit spread was under pressure due to the high interest rate environment and narrowed by 32 bps compared to the last year. However, thanks to the ongoing loan repricing, the controlled increase in the cost of deposits and the strong demand deposit base, TL loan deposit spread widened by 236 bps compared to the previous quarter. Net fees and commissions registered a significant 132% growth year-on-year, while the cost growth was 77% year-on-year. As a result, the fee coverage of operating cost ratio realized as high as 98%.

During the period, with the contribution of the strong collection performance, net cumulative cost of risk, including currency hedge, was at 23 bps in the first 9 months of 2024. Conservative coverage levels were preserved and the total coverage was 3.5% on a consolidated basis.

Yapi Kredi preserved its strength in capital and liquidity ratios. The FX liquidity coverage ratio was 333%, while the total liquidity coverage ratio was at 127% level. In terms of capital, Yapi Kredi continued to operate with 318 bps buffers on its capital ratios compared to the regulatory requirements. The capital ratios continue to remain comfortably above regulatory levels and the adjusted consolidated capital adequacy ratio and the Tier 1 ratio was at 14.8% and 12.3%, respectively.

Now I would like to leave the floor to Polat bey.

[Polat Sen, executive]

Thank you, Cansev. On Slide 13, I'll walk you through the overall results of the group in the first 9 months of the year, incorporating all the segment trends we just discussed. Please note that all figures in this slide are inflation adjusted due to the application of inflation accounting. Accordingly, on a combined basis, Koç Group registered TRY 4.9 billion in profit before tax and TRY 14.7 billion in net income. Consolidated net loss, on the other hand, is amounting to around TRY 1.9 billion.

In the first 9 months, we faced monetary losses in our companies that have high monetary asset positions like Tofas, Tüpras and Koç Holding. As a reminder, Yapi Kredi already reported its financials according to BRSA, and banks are exempt from inflation accounting there. But we must consolidate the bank applying inflation accounting, which is resulting in monetary losses and marked it as the main contributor to the negative results.

Moving on to Slide 14. You can see our third quarter results. If we move to Slide 16, you will see the evolution of net asset value discount. Our weekly average NAV discount so far in '24 has been approximately 22%, competitively better than the 31% average NAV discount in '23, and long-term average discount is around 12%.

At Koç Holding, we benefit from our market proxy status, and we observed our NAV discount narrowing down to low teens through the year when supported by sentiment and return of foreign investors. Unfortunately, considering approximately 90% of our NAV is composed of our listed assets, the share price performance of our -- most of our listed companies recently is not reflected to Koç Holding share price. Besides the increasing value of our unlisted companies is much higher compared to their book values, which is obvious in an inflationary environment.

In summary, our balance sheet is strong with a solid net cash position with further cash inflow in the fourth quarter, and our portfolio structure and diversification ensures resilience against volatility. As the leading investment holding company in Turkey, we are focusing on managing our portfolio dynamically. We will continue to create value with our leading practices in the fields of environmental, social and governance, value creation, extending our global footprint and diversifying our businesses further are always the key priorities for us. We have the potential to further diversify our positioning both domestically and internationally through our investments while sustaining an efficient level of liquidity.

Thank you for listening. Now we can open the floor for questions.

[Operator]

The first question comes from the line of Bystrova Evgeniya with Barclays.

[Bystrova Evgeniya, analyst]

I have 2 questions. So my first question is regarding the outlook for the 2025. Given that 2024 seems to be challenging, especially for exporters amid strong lira and weaknesses in export market, what is your outlook for 2025, maybe like first half of the year for some of the key companies in your portfolio?

And my second question is also how are you viewing the maturity coming up in March and potential refinancing or issuance of another bond?

[Polat Sen, executive]

Thank you, Evgeniya. The first question is about outlook. I think we have started to see the effects of monetary tightening, especially in the second half of this year. And our expectation is that we are going to keep on seeing those effects, at least in the first half of next year as well.

When I'm talking about -- this part, I'm talking about the domestic demand. So therefore, in all the areas that we are working on, I think that we are going to be suffering from demand retraction. But again, there are sometimes positive surprises because of this special consumption tax issue in January, if there's not going to be any change in the next 2 months. Again, January and February could be a positive month for Automotive, which is going to be helping or contributing positively to the results.

But in terms of Energy, especially refinery business, Tüpras, we do not really expect a big change with the crack margins, so we expect to see the same performance on Tüpras side. So Automotive and -- Automotive, I think it's going to be a bit better for the domestic market.

On the banking side, the challenges will continue, unless there is no change in the regulatory environment. And most probably, we are going to suffer from the same things that we are suffering now.

On the appliances side, I think the first half of next year is going to be -- we expect to see a better first half than the year before, especially -- not only in Turkey, but also especially in Europe, which is our main market.

On the Automotive export side, half 1, yes, as you said, yes, the strong Turkish lira has been challenging for all the exporters. So it's also affecting our Automotive and White Goods business as well. But at the same time, this is keeping us working on more -- being more cost-effective producer. So all our teams in the factories are working on to offset the effects of this strong Turkish lira.

So we do not expect to see further, let's say, market loss or something like that in the export markets. The most important thing that we are expecting for Europe, of course, Europe has been going through a very, very rough time, but it has been the case for a long time. And in appliances, Europe has been shrinking a lot. On the Automotive, things are changing, all the story is changing. In the next year, you're going to see better. But on the appliances side, I think we should be expecting a small growth next year. We do not expect any more -- any further decreases in the market.

The second question about the bond, Eurobond, that we have the March '25 maturity, we didn't decide on anything yet. We are cash rich right now, so we would like to see the conditions in the first quarter of next year. And according to -- if there will be a cash out or cash in our dividend expectations and also some opportunities that we are looking for investment, things can change. So it's really hard to make a comment from today, but it will be much more clear on January time period.

[Bystrova Evgeniya, analyst]

One follow-up. So in terms of the potential wage increase, minimum wage increase, do you expect that to help the domestic demand?

[Polat Sen, executive]

It's a tough question. It's really hard to predict from now on because it's not only an economic decision, from now on, it's a political decision at the same time. So there are a lot of increases -- percentage increases being talked about. So to be honest with you, it's really hard to say from now on. But of course, there's going to be a minimum wage increase at the end of the day compared to today, regardless of what it is going to be. So generally, these kind of increases are making an effect on demand. So we should be expecting some at least demand right in the first quarter because of that.

[Operator]

Ladies and gentlemen, there are no further audio questions at this time. We will now move on to written questions from our webcast participants.

Our first question from our webcast participant is from Umut Ozturk from Ata Invest. And I quote, "I have 2 questions, if I may. Question number one, how do you see the outlook of fourth quarter 2024 for each of your business segments? For which segment do you think the work has been left behind?"

[Polat Sen, executive]

I'm sure that you have already seen all our group companies, listed group companies announced their guidance, making adjustments after seeing the 9-month results. You can see their guidances on Page 29 of our earnings presentation as well.

But the key messages are the same, the slowdown in the domestic market will continue and exports will differ according to the companies. So this tight monetary policies seems like it's going to continue, especially for the next quarter, if we are talking about Q4 of '24, I don't think there's going to be so much different than Q3. So we are not expecting any major changes in Q4.

[Operator]

Second question from Mr. Umut Ozturk of Ata Invest. And I quote, "do you expect 2025 to be a better year, assuming some easing in the interest rate and inflation?"

[Polat Sen, executive]

Yes. I have already answered, I guess, to this question before. But in a nutshell, what I can say is '25, especially the first half, the first quarter of '25 could be a little bit better because of the regulatory environment in the automotive industry. And on Tüpras, we are not expecting a big change actually. But banking will continue if nothing changes on the regulatory side, as it is. And also we are expecting a better result, especially on the export side of Arçelik than compared to last year.

[Operator]

Our next webcast question is from our webcast participant, Cenk Orcan with HSBC. And I quote, "your net cash will exceed the USD 1 billion. Do you think this can facilitate a high dividend payout ratio? Is there an obstacle to take any dividends regarding profit status?"

[Polat Sen, executive]

We are still working on our company's '25 budgets, and we didn't decide on any dividends for '25 yet. I'll be able to provide you more color at the beginning of next year, hopefully. But despite the losses, we have significant reserves that could enable us for dividend payments. But I have to say that dividend payments is not only about the amount of cash we have, also the projects that we are planning to pursue and the investment plans that we have in all our companies also are going to be the decider rather than the cash in hand.

[Operator]

Our next webcast question is from Hanzade Kilickiran with JPMorgan. And I quote, "most Turkish companies have failed to keep their guidances this year. This also includes Koç Group companies. What is the main challenge in guidances?"

[Polat Sen, executive]

Actually, I think the main issue is the first half of this year [indiscernible] the second half of this year has been kind of Jekyll and Hyde. The first quarter has been much better than we expected when we were making the '24 budget. And for the second quarter after the elections, we haven't seen the effects of monetary tightening. And in quarter 3, we started to see them. So it really has changed the situation -- the picture a lot.

And to be honest, we want our companies to guide correctly. So we wanted them to really reflect the right picture for the end of the year and not painting, let me say. And this is what we see right now, and we wanted to share. But when you compare Q2 and Q3 only, you can see that there are big changes in almost all of our companies. And it's mainly because of the demand and this situation in the domestic market. That is the main reason that I can share.

[Operator]

Second part of Ms. Kilickiran question is, is this accounting issue or market environment is worse than expected?

[Polat Sen, executive]

I think I've already answered. There is an accounting issue, but the accounting issue that we're talking about here is the inflation accounting. And in terms of cash, we are not seeing a problem because all this monetary gain and loss does not reflect any problems on our cash flow. So yes, the profit and loss statement is very important in terms of inflation accounting. But we are also equally keeping an eye on our cash situation, which looks positive for almost all of our companies or in group in general, let me say.

[Operator]

Our next webcast question comes from [indiscernible]. And I quote, "question number one, could you share your expectation on 2 key cost items for the group, wages and electricity prices?"

[Polat Sen, executive]

Yes. This is too early for me to answer because we are still in the budgeting process. And we do not really see that. But the only thing that we are hearing about is the electricity increases to be happening. The expectation is that to happen in the beginning of the year rather than April. So this is what I can say. But in terms of how much it's going to be, I don't have enough information on that as of today.

[Operator]

Second question from Mr. [indiscernible], and I quote, "given the increased discount to NAV, could you give us an update on your appetite to do buybacks?"

[Polat Sen, executive]

Yes. This is always an issue. At the end of the day, the buybacks mean for us, for all our companies and ourselves as Koç Holding as well to use our cash. If we feel that this is the best way to use our cash, we can always consider that. But as of today, we do not have any short-term plans to use our cash for buybacks at Koç Holding level.

[Operator]

Our next webcast question is from our participant Maksim Nekrasov with Citi. And I quote, "considering strong cash position and given recent share price pullback, would you consider doing a buyback program?"

[Polat Sen, executive]

I just answered, I guess, this one.

[Operator]

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.

[Polat Sen, executive]

Okay. Thank you very much. Thank you for everyone listening to us. If you have any further questions, please contact our IR team.