Tofas Turk Otomobil Fabrikasi AS

IST:TOASO.E

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining the Tofas Türk Otomobil Fabrikasi conference call and live webcast to present and discuss the first quarter 2022 financial results.

At this time, I would like to turn the conference over Mr. Cengiz Eroldu, CEO; Mr. Fabrizio Renzi, CFO; Mr. Mehmet Agyüz, CFA and Investor Relations Manager. Mr. Renzi, you may now proceed.

[Fabrizio Renzi, executive]

Thank you, operator, and good afternoon. Thank you all for joining our call today. Before we start the presentation, I would like to underline the main achievements of the first quarter 2022. In spite of the difficult operational environment, we have achieved all our targets. Profit before tax amounts to TRY 1.2 billion and doubled compared to the same period 2021. With 11.5% PBT margin, we are in line with the guideline released at the beginning of the year. And on top of that, the cash position and cash generation remained very strong even after the dividend distribution of TRY 3.2 billion made in March.

In the local market, we maintain our leadership position even in this unpredictable period, focusing and pushing hard on the profitable LCV segment. In line with our plan at the end of March, we have launched the automatic version of Egea, and now we can reinforce our competitive position in the passenger car segment. By the way, the Egea model remains the best-selling car in Turkey thanks to its quality and affordability.

Regarding the exports, we have performed well in the LCV segment with an increase of 22%, while in the passenger car segment, the performance is below the expectation due to the microchip shortage, which affected severely our Tipo model. Anyway, this negative effect has been entirely offset by the take-or-pay mechanism being enforced in the export contract. At the end of March, finally, we have launched the hybrid version of Tipo, and we are now confident to recover some position in the Italian and European markets, also by exploiting the incentives introducing some legislation.

Last but not least, Stellantis and the future plan. On March 1, Stellantis presented the long-term strategic plan and it was announced, the launch of 75 new electric vehicles by 2030. In Tofas, we are working hard to play a leading role in this ambitious program. Now I invite Mehmet to proceed with the presentation and then we can take your questions. Thank you.

[Mehmet Agyüz, executive]

Hi. Good afternoon, and good morning, everybody. In the first quarter of the year, overall Turkish automotive production declined by around 12%, reaching to 300,000 units. During this period, Tofas constitute around 16% of the volumes in Turkey with a production of slightly below 50,000 units, which suggests around 16% decline compared to the same period last year.

In terms of production mix, the most notable change occurred, with now LCV production constituting 60%, whereas PC at 40%. And in the same period of last year, this was vice versa. As Fabrizio mentioned that this is also partly due to our deliberate efforts to focus on the more profitable LCV segment in addition to the other constraints on the supply side. Our total shipments declined parallel to our production, and it was down around 17%. And the decline was pretty much similar in domestic at 19% and exports with 16% decline. And this is mainly due to the production constraints due to the microchip shortage.

In terms of our shipment mix, overall, in total, 60% of our shipments were LCV, remainder in the PC, but the most notable change was observed in our export business with CV shipments constructing 3/4 of our volumes, which is suggesting around 24 percentage point increase compared to the same period of last year.

Moving on to domestic market. In first quarter, demand continue to be determined by the availability and the supply. And hence, due to the ongoing crisis light vehicle demand in Turkey was down around 24% in the first quarter, reaching slightly above 150,000 units. The decline in PC was more severe at 25%, whereas LCV demand decline was around 17% in the first quarter.

You can see here the monthly evolution of the shipments and after a slightly stable first 2 months due to the high base effect of last year, the decline has worsened in March. As Tofas, we performed slightly better than the market in the first quarter with our overall total shipments down 21%, reaching to slightly above 23,000 units. In the LCV segment, we significantly outperformed the market with 4% growth, with our LCV shipments reaching slightly below 10,000 units, whereas we underperformed the market in the PC side with 32% decline.

As you could see here, the monthly evolution of our domestic shipments, which is showing a similar trend to the underlying demand in the local market. In first quarter, we lost around 130 basis points market share on the passenger car due to more volatile production tempo at our plant due to the availability of some parts. And we are #2 position in the first quarter in the PC market.

However, as you may know that we introduced the automatic transmission and the hybrid versions of our passenger car family late first quarter of this year, which has been gaining notable traction, and this should support our market share for the rest of the year, given that almost 3/4 of the passenger car market in Turkey is automatic transmission.

In LCV market, we gained a substantial market share by more than 500 basis points, reaching to a LCV market share of 27.1% in the first quarter. And you can see the consistent trend in the last couple of quarters and LC our market share is now comfortably in the high 20s level compared to low 20s pre-pandemic. And of course, there is some less production disruption on the LCV side from the supply constraints, but nevertheless, this is a sizable accomplishment given that our vehicle portfolio is towards the end of its life cycle.

Overall, in total, we are #1, we maintain our position in the market with around 40 basis points improvement in the market share at 14.7%. Including the premium brands, Tofas market share also has improved by 50 basis points, reaching to 15.3%. When we look at overall all the brands under Stellantis' umbrella, there is also an improvement on a year-over-year basis, which is around 140 basis points, and Stellantis market share reached to slightly below 30% in the first quarter of the year.

Moving on to export business. In the first quarter overall, European demand dynamics were similar to the local market and overall production disruptions due to the supply shortages in addition to the rising geopolitical tensions from the Russia's invasion of Ukraine, created a decline in the overall market. In passenger car registrations, this was down around 11% compared to the previous year, where Italy fared the worst among the major markets also partly due to the expiry of the incentives in the first quarter of the year. On the other hand, LCV market plunged around 22%, which is also partly due to the -- mainly due to the supply constraints, but also a slightly higher base effect on the LCV versus PC compared to last year.

At Tofas, as you can see, we outperformed the markets' underlying demand in Europe in our export business, which our export shipments was down around 16%, reaching to close to 28,000 units. And we substantially outperformed the markets in the LCV segment with 22% growth, reaching to about 21,000 units. And in PC side, we underperformed the market with around 58% decline. And this is mainly due to higher production constraints on the PC side as well.

Now to the evolution of our export volumes. As you can see from the high base of the first 2 months now, there is a stabilization in our export volumes as of March. In terms of end markets, the most notable change you can see in this chart is the share of North America, which is now constituting -- this is our second biggest market in the exports, 26% of our export shipments, almost doubling compared to the previous year.

Italy remains an important market, albeit its share has been declining, with 27% -- 27%, whereas 1 consistent phenomena is the increasing share of the MENA region, which reached close to 15% of our export shipments, which is around 200 basis points compared to the previous year. Overall, our total shipments were down around 5,000 units, both at export and domestic markets.

And you can see Ram ProMaster City, which we export to North America, has performed significantly and also our MCV model performance partly compensated the decline in our PC shipments for export markets. And also on the local side, Doblo continues to perform strongly, up by more than 50% compared to last year, which also partially elevated the decline in the PC business. So net-net, our total shipments were down around 10,000 units at 51,000 units in the first quarter of the year.

Moving on to financial performance. Overall, in the first quarter, around 17% decline in our shipments translates into 65% revenue growth. And this is mainly due to a reflection of the depreciation of Turkish lira against euro in both local markets and as well as the export market. Nevertheless, our profitability remains very strong, with almost doubling of our EBITDA, reaching to slightly above TRY 1.7 billion, and the PBT, our main KPI, doubled in the first quarter, reaching to TRY 1.23 billion.

The breakdown of our revenue growth, it was a balanced growth in the first quarter with domestic revenues growing by 62%, whereas exports grew slightly higher at 68% year-over-year. And the main enablers of this performance is good pricing in the local market and also stronger euro/Turkish lira for the export business.

So overall, in terms of profitability, on a year-over-year basis, there is notable improvement ranging from 200 basis points to 300 basis points from gross profit to PBT margin. Although there is some slight decline from the fourth quarter as we expected due to normalization, which was -- there were some abnormal conditions in the market due to the sharp depreciation of the rates that had some inventory effect, on a year-over-year basis, we managed to improve our profitability, thanks to our strong performance in the local market.

In local market also, there is a mix effect from higher LCV mix, which is more profitable, also had a positive impact. Net-net, on the PBT margin, we are happy to share with you that we attained 11.5% PBT margin, which in the previous quarter, we raised our guidance to double-digit levels. Our net profit growth was around 83%, reaching to TRY 1.13 billion. And due to higher tax rate compared to the previous year, our net margin improvement was lower at 100 basis points, reaching to 10.6% in the first quarter.

Overall, this is a snapshot of our P&L. And mainly currency driven top line growth has been reflected to the profitability very favorably, thanks to solid execution despite the unfavorable operating environment we have been observing in the past couple of quarters. Our balance sheet remains strong as of the quarter end with a cash position of TRY 4.3 billion, which is similar to the year-end despite we distributed around TRY 3.2 billion of dividends during the quarter.

Inventory was up slightly compared to year-end, mainly due to the currency effect, and the most notable improvement here is the working capital where there is a slight increase in our receivables, which was more than compensated by the increase in our payables resulting in a notable cash flow generation during the quarter.

Our financial position as of quarter end is almost nil, and compared to the same period of last year, this suggested notable improvements, which was around minus EUR 76 million. And our working capital, as we have been running quite a tight ship with usually negative working capital, and this is also EUR 50 million negative working capital suggest quarter-on-quarter and year-over-year improvement.

Moving onto investments. In the first quarter, we spent EUR 14 million, bulk of which was constituted from our existing upgrade project for our passenger car family and the other portion must be related with Doblo.

Moving on to outlook. We shared our guidance 2 months ago, and we are sticking to our guidance for the local market for 700,000 to 750,000 units and our local sales of 125,000 to 140,000 units. Our current market share assumptions suggest an improvement for the rest of the year when you look at our first quarter performance, but this is mainly supported by the introduction of the new variant in our PC family, which we expect to bolster our competitive position for the rest of the year.

On the export front, we are maintaining our export shipments to 125,000 to 140,000 units, which is suggesting a slight increase compared to the previous year. And as a result, we are expecting to produce 240,000 to 270,000 units, and we expect a CapEx of EUR 100 million, which is similar to the previous year.

And with that, we conclude the presentation, and happy to take your questions.

[Operator]

The first question is from the line of Lanka Sashank with Bank of America.

[Sashank Lanka, analyst]

I have one question, mainly related to your guidance. It seems like the passenger car segment volumes were impacted much more than the LCV segment. You maintained your guidance, so I just wanted to understand what's driving that view given the supply shortages. And also wanted to understand, in terms of the Chinese lockdowns and the Ukraine situation, how is that impacting your supply right now? And why do you expect the recovery for the rest of the year.

[Fabrizio Renzi, executive]

Good afternoon. Thank you, Fabrizio Renzi speaking. So let's start from the guidance. Of course, if you have a look to the results of the first quarter, our guidance seems optimistic. But there is a rationale behind. So in this moment, we don't have full visibility on the future. We have visibility on the second quarter, and we are assuming that the second quarter will be not so different from the first one. So we are in April. We have a good view on May and June.

So we can say that the first semester will be not so positive. But on the other side, we have a better view and we expect an improvement in the second half of the year. So this is the reason why the guidance imply a kind of normalization in the second half. I repeat, we don't have full visibility. As you know, the procurement process, we are -- in our procurement process, we are in the Stellantis ecosystem. So also, this is a problem in terms of visibility.

So this is the rationale behind our guidance. Of course, for the full picture '22, the second quarter will be crucial. So I believe that to better understand that if it is realistic or not, we need to wait the next session. So this is, let me say, the explanation of our guidance.

About China and Ukraine, let's start from Ukraine. As at Tofas, we don't have direct connection with Ukraine in terms of suppliers. So we don't have Tier 1 and Tier 2 supplier located in Ukraine. Having said that, of course, the war could be the reason of a further increase in some commodity. So about Ukraine, we don't expect a problem in terms of logistic and supply problem, but might be this will be the reason of a further increase in some commodity like nickel and so on.

About China, in this moment, it's difficult to divide, which is the problem of the microchips coming from the constraint of the capacity, which is the problem linked to the new lockdown in China. We will see. Also this is -- this new lockdown in China just started as a problem for us, we will see. I repeat. So our guidance is based on this assumption, normalization in the second semester. We will see in the coming months if it is realistic or not.

[Operator]

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

[Hanzade Kilickiran, analyst]

Fabrizio, I just to make a follow-up on the upcoming projects. I mean, in the previous quarter call, you mentioned that there could be some sort of announcement by the first quarter, but we still didn't hear much around the CapEx cycle. I mean, is there a change here? Or what is the reason of a rather slow progress on these project announcements?

[Fabrizio Renzi, executive]

Good afternoon, Hanzade. I don't want to disappoint you all about the future project, but today, we don't have tangible news compared to what we declared 2 months ago in our first session. Last time, if I'm not wrong, I mentioned that we could have some evolution in the first semester. So maybe in the next session, there could be some news. Not today.

What I can confirm is that we are working together with Stellantis in their location program. We are fully involved in this plan. As you know, Stellantis announced in the long-term strategic plan the launch of 75 new electric vehicles, and we are working to be fully involved with a part of this project.

About the timing, let me add something, Hanzade, that we expect to have the new generation of vehicle in production in Bursa in the second half 2024. It's not late in terms of timing, because the time to market in Stellantis is reduced compared to the standard before. We are noticing that among the different models, there are a lot of commonality. So the time to market is now reduced to the past. So this is the reason why most probably we need to wait a bit more before to announce some [indiscernible].

Last but not least, as you can understand, we are strictly linked to the Stellantis word. And in terms of confidentiality, we cannot announce something without their approval. So please consider that also this is -- will be another issue in the coming months. So when the time will come, we have to be in line. We have to be aligned with Stellantis in terms of officialization of something news.

[Hanzade Kilickiran, analyst]

Thank you, Fabrizio. But I mean Doblo was going to expire by the end of this year, so for 2023 projections, could this be a threat on a like lower volumes? Because I don't know if you would be able to complete the projects before the expiry of the contract or you will continue to produce Doblo next year as well?

[Fabrizio Renzi, executive]

On this point, I can comment positively what we are doing because there is not too much confidentiality, because it's something that we are already producing in Bursa. So we are working on possible prolongation of the actual Doblo on 2023 and might be on 2024. So we are working on this possible promulgation. You are right, the contract of Doblo will expire 2022, but there is a high chance to prolong it.

Also, we are really surprised about the good performance of the car in NAFTA, if you have seen the presentation delivered by Mehmet. So we are very happy with the performance of the Ram ProMaster in U.S.A. So I believe that 2023, we expect something very, very similar to this year in terms of volumes.

[Operator]

The next question is from the line of Ignebekcili Murat at with HSBC.

[Murat Ignebekcili, analyst]

Recently, I think a couple of weeks ago, there were news about Stellantis and Qualcomm collaborating to power new vehicle platforms. So could this be something that can ease concerns about chip availability, and therefore, your production levels in the second half or maybe further into 2023?

[Cengiz Eroldu, executive]

This is Cengiz. I think it's not related issue, so what I see, those are the separate issues. So the chip problem, we had at the first quarter of this year, and it continued also in April. But what we are seeing in the coming months, we will see improvements in our side. So because we are also finding ways to manage this problem. So in the market, I saw also a lot of brands that are pessimistic for the chip problem for also 2023. But from our perspective, the trend is positive. That's all I can say about the chip issue. Thank you.

[Operator]

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

[Fabrizio Renzi, executive]

Thank you.

[Mehmet Agyüz, executive]

Operator, there is a -- I see a question regarding Doblo continue to be produced at Bursa plant in the upcoming years. I think Fabrizio already addressed that question regarding the prolongation of the -- potential prolongation of this project for the next couple of years, and also what are Stellantis and Tofas plans for the next 10 years in Turkey.

As we have been saying that we have been working on a couple of projects and an alternative project, not only on the existing production portfolio, but for new vehicles. And as Fabrizio mentioned, there is not a tangible progress in the past 2 months into that meeting, but those discussions are ongoing. And when the time comes or Stellantis could approve this, we will be sharing these new plans with you. But for the moment due to the confidential issues, we cannot further elaborate on this one. Thank you.

[Operator]

Another audio question. And the next audio question come from the line of Demirtas Cemal with Ata Investment.

[Cemal Demirtas, analyst]

My first question is about availability. That was the issue started by early 2021. And during this period, there was an expectation that, that concern could be eased by this year. What do you think -- what challenge -- is the process globally going slower than expected and the companies are running out of inventory? Is that a big issue right now compared to 6 months ago? That's my first question.

And then there's, in the media, there's the news Stellantis will produce electric car in Serbia. Does it any -- does it mean that they can change their plans regarding Tofas? Thank you.

[Cengiz Eroldu, executive]

Thank you, Cemal. This is Cengiz for your question. So first of all, I also tried to explain it in my previous answers. So the chip issue from our perspective has a positive trend. So every month, we are trying to improve our production numbers by managing the issue and the -- our visibility for the coming months are better than what we had in the past. So first of all, this is the 1 point.

Second point, regarding the Serbia investment of Stellantis, and also, Mr. Tavares said, after 2030, Stellantis group in Europe will sell only electrified cars. So what -- how we can read this, so all the plants that are working for -- or exporting to the EU markets, they should align itself in this position. So everybody at the end of the day will produce electrified cars. So also the production of electrified cars are much more simpler than also producing ICE engine cars. So for this reason, the Serbia investment is regarding the second part of this [ decay ]. And of course, in line with Stellantis projects, they are aiming to produce electrified cars also in Serbia.

But in all Stellantis plants, there will be production of electrified cars. So this is not making any differentiation between Serbia and other Stellantis plant. So Serbia is not a center of excellence for electrification, but all -- I repeat, all Stellantis plant will sell the cars for the European market. We're obliged to produce electrified car, because this is not a choice also. This is the -- most of the business. So nobody's -- has possibility to choose this kind of investment. There is only 1 way. So if you want to stay with EU export markets, so you should invest on this part.

[Operator]

Next question is from our webcast participant, [ Luca Franza ] with [ Vixit Ventures ]. "What about the demand outlook in the domestic marketplace?"

[Cengiz Eroldu, executive]

So what we are keeping unchanged our outlook. So what we are seeing there is high demand in the Turkish market in different segments of customers, both corporate customers and also retail customers. So what we see also, as I repeated in several answers that according to our position, also the chip issue is improving. So for this reason, we are not planning for the moment to change our market outlook. And for the moment, we are confident that Turkey market will continue in this way. Thank you.

[Operator]

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

[Fabrizio Renzi, executive]

Thank you, operator. I would like to thank all the participants for the questions and the interest on Tofas. I wish you all good day.