Tofas Turk Otomobil Fabrikasi AS

IST:TOASO.E

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Popi, your Chorus Call operator. Welcome, and thank you for joining the Tofas Turk Otomobil Fabrikasi A.S. conference call and live webcast to present and discuss the first half 2022 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. Fabrizio Renzi, CFO; Mr. Mehmet Agyuz, CFA, Investor Relations Manager. Mr. Renzi, you may now proceed.

[Fabrizio Renzi, executive]

Thank you, operator. Good afternoon to everybody, and thank you for joining our call today. Before to go into the details of our presentation, I'm very pleased to underline the main achievements of the first semester of this year. In spite of the difficult operational environment, we have achieved outstanding results. Profit before tax amount to TRY 3.1 billion, more than double compared to the same period 2021.

With 12% EBITDA margin, we are above our basic guidance, double-digit guidance. The cash position and cash generation remains very strong even after the dividend distribution of TRY 3.2 billion made in March.

Regarding the manufacturing operations, we have produced 70,000 units in the quarter 2 with a significant rebound compared to the first quarter thanks to a slight improvement in the microchip supply chain, but also thanks to our ability to adapt in real time our production setup. In the local market, we consolidate our leadership position with a combined market share above 19% in the quarter 2, and we improved the profitability, thanks to a strong price discipline. In particular, in the passenger car segment, we have reinforced our presence with the launch of the hybrid and automatic version of Egea. Egea remains the best-selling car in Turkey, thanks to its quality and affordability.

Export remains weak following the negative trend of the European market that contracted by 14% in the first half of the year. On this regard, a positive sign comes from LCV segment that expanded by 26%, boosted by the good performance of Fiorino in Europe and Doblo in the United States. About the future projects including the continuation of production of Doblo, as we have declared in our recent public disclosures, discussions and assessments are ongoing between the partners. We are not in condition to provide additional info in this call, but we remain positive and confident in our competitive position within the Stellantis universe.

Currently, as a result of this competitive position, Tofas R&D center is contributing to the development of other Stellantis products, including premium brands.

Now I would like to give the floor to Mehmet for the full presentation, and then we can take your question in the Q&A session.

[Mehmet Agyüz, executive]

Hi, good afternoon, and good morning, everybody. Thank you for participating to our call. In the first half of the year, Turkish automotive industry has continued to suffer from the supplies-related challenges, whereas we have seen some improvement in the second quarter versus the first quarter. As a result of the rebound in the second quarter, production in Turkey increased by 2%, reaching to around 650,000 units. Within this production, Tofas contributed around more than 18% of the industry with a total production of around slightly below 120,000 units, which is down around 6%.

However, in the second quarter, production resumed its growth, reaching to 70,000 units, which is around 2% higher compared to the previous year. In the first half, production mix was 51% PC and 49% LTV, which is a slight change in favor of STV, which was around 41% during the same period of last year. In terms of total shipments, it followed a similar pattern to our production. And in the first half total shipments of Tofas was down around 6%, reaching 221,000 units. However, in the second quarter, we produced 70,000 units and which indicates around 5% growth compared to the second quarter of last year.

The main contributor of this significant ramp-up in production sequentially is a slight easing in the production constraints, which resulted in around 37% Q-on-Q growth. As a result of this, the decline in the production has decelerated to around 6% in the first half of the year. In terms of shipments by our businesses, in the first half the most notable change was observed in our export business, where we have seen SCV mix reaching to around 67% of the export business. This suggests around 18 percentage points higher compared to the same period of last year.

Moving on to domestic market. In the first half, light vehicle market in Turkey declined by around 9%, reaching to slightly below 360,000 units and the decline was around 10% for the PC and around 6% for the LCV segment. However, this decline was determined mainly by the supply constraints as demand remains quite robust. And as you can see, in the decline of around 25% in the first quarter, returned to around 5% growth in the second quarter with slight improvement in the availability of the semiconductors.

Here you could see the monthly trajectory of the light vehicle market and in the past couple of months also with the help of the base effect, light vehicle demand in Turkey returned to growth on a monthly basis compared to the previous year. We see demand remaining quite robust. There are couple of factors driving this performance is one of the factor is the consumer's willingness or appetite for -- to protect themselves from the inflation, due to lack of any alternative investment products, light vehicles are seen as an investment product as well.

It's a supportive factor, but note that since the pandemic, there is a significant pent-up demand in the system and unmet demand, and we see quite a decent visibility despite the turmoil in the macro conditions in Turkey. As Tofas, our volumes outperformed the market and our total retail volumes grew by around 1%, reaching to slightly below 64,000 units whereas we outperformed the market in both segments and our LTV shipments grew by 4%, whereas our passenger car shipments declined by 1%.

And our monthly progression of our domestic retail shipments shows a similar pattern to the underlying demand. And on a monthly basis, as you can see, especially towards the end of the second quarter, there is an increasing momentum in our domestic shipments where in June we reached quite a significant amount of sales, mainly impacted by our increasing production tempo on the passenger car side.

In terms of market share, in the first half of the year, we were able to increase our passenger car market share by around 160 basis points for Fiat brand, reaching to slightly below 15%. More importantly, in the second quarter, Fiat brand regained passenger car market leadership with 17.5% market share. Note that this was supported by the launch of automatic transmission as well the hybrid versions of the Egea, which we launched towards the end of the first quarter and which we started to reap the benefits of this. As -- recall that last year, we had a big gap in our product portfolio in terms of lack of an automatic transmission, which constitutes majority of the market.

So overall, when we look at the brands under Stellantis' umbrella, the market share has improved by around 180 basis points, reaching to slightly below 28% in the first half of the year. In light commercial vehicle market, we maintained our #2 position with an improving market share, reaching to around 26.4%, which is around 250 basis points better compared to the previous year. Better availability and also in a depreciating Turkish lira environment as the local producer, which boost our competitive position, these are the factors that is the underlying increase in our market share in the LTV segment.

So overall in total light vehicle markets, we maintain our distant market leadership, even widening to the closest competitor with a 190 basis points improvement compared to last year at reaching to 17.4% in the first half of the year. In the second quarter, the market share of Fiat brand was even higher at 19.3%, which is around 260 basis points better.

And when you look at the second quarter monthly trends, there is a growing momentum, especially in June, the total market share of Fiat brand was above 22%. Including premium brands, Tofas' market share as of June expanded by around 180 basis points, reaching to slightly below 18%. So all in all, despite the merger has not been finalized in Turkey yet, when we look at the brands under Stellantis' umbrella, the market share improvement was around 220 basis points, reaching to slightly below 30% in the first half of the year.

Moving on to export business. In the first half, similar to local market also export markets has continued to suffer from supply chain disruptions related with the semiconductor shortages. And this is more of a -- also a reflection of a supply rather than demand. But nevertheless, the markets fared worse than the local market. And in the PC registration, they were down around 14% compared to the same period of last year, whereas on the LCV side, the registrations were down more severe at 24% compared to the previous year.

For Tofas, we outperformed the market with our underlying end markets, whereas our volumes were down only 7%, reaching to 58,000 units and we significantly outperformed the underlying demand in the LCV segment, which grew by 26%, thanks to strong penetration into NAFTA region as well as good performance in Europe by our smaller LCV. On the other hand, our passenger car sales were weaker than the markets, which were down around 39% in the first half, although it shows slight deceleration as in the first quarter, it was down around close to 60%. That remains weak, but that is more of our production optimization strategy part of that with more constraints on the supply side for the export-oriented passenger cars versus LCVs that is impacting our PC export output more negatively compared to our other products.

But this is a monthly progression of our export volumes and you could see here is that in the past couple of months also supported by the base effect, it has started to show year-over-year growth in the past couple of months. In terms of the breakdown of our exports by end markets, Italy remains our most important market with a stable share in our export business by around 30% of our shipments.

The most notable change in this chart is the increased share of North America, which constitutes now 23% of our export volumes. This becomes the second biggest markets for our export business. And this is due to the -- which I will explain in the next slide, very strong penetration of our light commercial vehicle in this market.

Looking at our shipment volumes by model. On the left-hand side, our export business, you could see strong performances by the Ram ProMaster City, which is tilted for North America and also MTV, which is mainly for Europe. There is sizable increases in these volumes, which offset the negative impact of the decline in our passenger car business as well as the decline in the Doblo which is parallel to the decline in registrations in EU. So overall, we shipped around 4,400 units less exports reaching to 58,000, slightly more than 58,000 units.

On the domestic side, you could see a ramp-up in our volumes with increasing production tempo. Our crossover model is increasing its penetration with 2,000 more units sold, and this is also supported by the introduction of the automatic transmission as well. So all in all, our passenger car shipments were flattish, which is down only 1,000 units. On the other hand, Doblo continues to perform very well, which we shipped around 1,200 units more.

On the imported vehicles, we suffer from the availability more so here, which is down around 50%, especially availability issues on the commercial vehicle side impacted these volumes. So all in all, we shipped around 2,800 units less on the domestic business reaching to 2,500 units. And in total, we shipped 121,000 units, which is around 7,300 units less compared to the same period of last year.

Moving on to financial performance. This is in a nutshell reflection from -- of our P&L to the bottom line and 6% decline in our shipments resulted 86% revenue growth. 3 main enablers of this divergence between the shipments and the revenues, the first of all weaker lira, higher cost pressure and also product mix. Of course, our ability to pass through these cost pressures to our prices, as you have seen in our financials, were also a contributor to this gap between shipments and revenue growth.

On the EBITDA, we more than doubled our EBITDA in the first half, reaching to TRY 4.3 billion and profit before tax, which is our main KPI, also followed a similar pattern of the EBITDA growth, more than doubling, reaching to more than TRY 3.1 billion in the first half of the year.

In terms of our breakdown of our revenues, the revenue growth in the second quarter accelerated more than doubling compared to the first quarter, reaching to TRY 15.4 billion and increasing production tempo, very strong pricing in the local market and also weaker lira were the main drivers of this performance. And the growth between domestic and export business were quite balanced, which both of them more than doubled on a year-over-year basis.

As a result, our first half revenues expanded by 86%, reaching to more than TRY 26 billion in the first half of the year. Our profitability, as you can see here across the board, the continued improvement on a year-over-year basis on our all-profitability metrics has continued in the first half. And the main enabler of this is our strong execution in local markets, which alleviates the headwinds from the higher input costs as well as challenging operational conditions due to supply shortages.

So overall, our PBT margin was up by around 40 basis points, reaching to 12.3% in the second quarter of the year, which is above our previous sustainable guidance. Net profit showed a similar pattern with TRY 1.9 billion of net profit in the first quarter, which is up almost 120% with a net margin of 12.2%, also 70 basis points improvement. And in the first half, our bottom line growth exceeded the underlying inflation growth, which we were able to grow by 103% with a net margin of 11.5%. Here you can see the overall P&L snapshot and the growth in our revenues with good pricing as well as the weaker lira flow through the bottom line with improving margin profile and with a higher growth realized at the bottom line compared to the revenues.

Our balance sheet, as of June end, it remains very strong. There is an increasing -- there's an improvement in our financial leverage as well. In terms of industrial debt, we are in a net cash position. Our cash and cash equivalents compared to year-end increase grew by more than 50%, reaching to TRY 6.44 billion despite the fact that we distributed more than TRY 3 billion of dividends in the first quarter of the year.

And you can see the solid net working capital management. The increase in inventory was mostly due to the currency, whereas increase in the receivables were more than offset by the increase on the payable side, which results in quite a favorable financial position as of the end of second quarter.

Our financial position as of June stands at around EUR 172 million, which shows a notable improvement compared to the same period of last year as well as year-end and last quarter. And the main enabler of this is also net working capital management, which it stands around minus EUR 45 million compared to the positive figures in the previous quarter.

We spent in first half around EUR 25 million, bulk of which was constituted by our upgrade project for our passenger car family, which we almost completed. And the second item was the structural investments, which was around EUR 4 million in the first half of the year.

Moving on to outlook. In light of the very strong results in the first half as well as increasing visibility on the supply side, which is compared to the beginning of the year, of course, we are not out of the woods yet, but we are raising our local market estimate by around 50,000 units reaching to 750,000 to 800,000 units for the full year. Given the very strong market share performance and our production ramp up, we are also raising our domestic retail sales guidance by around more than 10% and we are now expecting 140,000 to 155,000 units.

Due to weak export shipments, which were hampered by supply side conditions much more so compared to the domestic side, we are reducing our export shipment outlook by around also 10% to 110,000 to 125,000 units. As a result of these changes, our production volume guidance increases by around 5,000 units. And we are expecting to produce 245,000 to 275,000 units for this year. But of course, this is quite a favorable mix for the company as the export business is protected by take-or-pay, whereas the additional domestic retail sales we are planning to make in the second half will be EBITDA-accretive for our P&L.

For the investments, due to the ongoing efficiency gains and that we adopt under Stellantis' umbrella, we are slightly reducing our CapEx outlook from EUR 100 million to EUR 80 million. And we stick to our previously provided PBT margin guidance as a sustainable plus 10%. It's rather low teens. We maintained that target as well.

With that, this concludes my presentation. And we would be happy to take your questions. Operator?

[Operator]

[Operator Instructions] The first question comes from the line of Demirtas Cemal with Ata Invest.

[Cemal Demirtas, analyst]

Congratulations for very good results. My first question is about the profit before tax guidance. You mean, it's likely to be above 10%. And so far, you are around 12% level. Could we expect some decline in the third quarter related to euro/dollar, or you see upside to your 10% estimate? That's my first question.

And related to Stellantis, we see that still there is no news, but at least you have a positive view and you are confident that Tofas will earn some projects, which I totally agree. There is any time line related to relations that we should be looking, not in the very short term, but let's say 3, 6 months because when we look at the time line for Tofas Fabrika, the Doblo is ending in 2 years so at least we should see some direction by the end of this year, considering their times and the project time. So maybe any other -- I know there are no major things, but at least something -- anything you share will be welcomed.

[Fabrizio Renzi, executive]

Good afternoon, Cemal, Fabrizio Renzi speaking. Okay. About PBT, okay. I can confirm on the longer run, the double-digit long-term sustainability of our PBT. Why? Because the result of 12%, of course, is the result of favorable condition. Favorable condition, it means also the low level of the exports that generates a positive effect in terms of the [indiscernible]. And also is the result of the local market profitability.

So this is the reason why we believe that sustainable is 10%. But of course, if the question is if we will be able to keep this level in quarter 3 and quarter 4, my answer is if the condition will be similar to the quarter 2, we can -- we are confident to stay -- to maintain -- to remain above 10%. So local market now we improved our profitability. This is a result of many reasons, price discipline, of course, price positioning. So our model now is the leader.

Egea model is the leader in the last 3, 4 years, so price positioning from this point of view. And of course, in this moment, the market is driven by the offer, not by the demand. So in this moment, we are more selective in terms of mix -- product mix, in terms of market mix. So if this condition of the quarter 2 will be replicate in the quarter 3 and quarter 4, we are confident that we can stay above 10%, including the low level of the export that in this moment is a matter of us.

About the Stellantis, as you know, we made 2 statements, 2 disclosures in June and July. And today, I'm not able to add anything else compared to what we have already communicated to the market. Generally speaking, and regarding the position of Tofas and Stellantis word, I can confirm what I have already mentioned in the previous session. So Tofas is one of the more competitive, production up in Stellantis. Also, there in the center is a very competitive and excellent R&D center. So we remain positive and we remain confident on our competitive position in the Stellantis world.

Your last question is related to when can we communicate, when can we expect news on this regard. I believe that in the second semester or before the year-end, we should have some news. Only because if we want to stay on the market with the new products, hopefully, in the second semester 2024, it's time to start to work on these projects. So this is what I can say on this regard today.

[Operator]

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

[Hanzade Kilickiran, analyst]

I have a question about the exclusion of Doblo contract impact next year. So how much export contract size would you have, I mean, in 2023, Van Doblo for Europe is excluded? And how much production loss should be assuming for next year because of this contract remover?

[Fabrizio Renzi, executive]

Okay. Hanzade, good afternoon, Fabrizio speaking. So to be honest, for 2023, we don't expect a big drop because of the discontinuation of Doblo for the European market. So we believe that we can compensate the Doblo for the European market with the Doblo for NAFTA. And also, we are very confident that Doblo in the local market can perform very well. As you know, Doblo will remain the only LCV segment in the Turkish market. So we don't expect a big impact when we will shift from '22 to '23.

[Hanzade Kilickiran, analyst]

So Fabrizio, you are expecting the loss to be offset by strong market dynamics in North America and also Turkey, right, next year? So that won't be a major production.

[Fabrizio Renzi, executive]

Yes. Yes. Yes.

[Hanzade Kilickiran, analyst]

All right. And can I please ask one more question on Stellantis? I don't know how much you can comment around this. But you are showing this market share of other Stellantis brands, which is roughly around 13%, putting the overall Stellantis over 30% market share in Turkey. So that's a very substantial market share versus the PA. And what is the action in other markets for these brands? Are they all launched under one entity? And is there a strategy to merge all these brands under Tofas?

[Cengiz Eroldu, executive]

Well, the -- there is no joint venture. They are managing under one national sales company, all the brands together in all the European markets, if this is the question.

[Fabrizio Renzi, executive]

Yes, in all the other country in Europe, they are trying to unify the operation under the Stellantis umbrella.

[Cengiz Eroldu, executive]

Yes, because there is a important synergy possibilities by also managing all the brands together. That's a normal way of managing the business.

[Hanzade Kilickiran, analyst]

Okay. So this can be always a strategy for Turkey as well, right, Cengiz?

[Cengiz Eroldu, executive]

Normal conditions, yes.

[Hanzade Kilickiran, analyst]

Business update is a -- I think a bottleneck?

[Cengiz Eroldu, executive]

Not a bottleneck, it's an agreement because in other cases, they met directly first day of the -- after 1 month, they took the decisions and they act because there is no need to any further discussions and so on. So that's the complication of the JV structure. These are the normal issue, I think.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time.

Excuse me, we have a question from the line of Ignebekcili Murat with HSBC.

[Murat Ignebekcili, analyst]

I just want to make sure that I not missed this point. Have you talked about supply side issues and how do you see the second half coming along? Can you talk about better environment in terms of supply issues?

[Cengiz Eroldu, executive]

It's not easy answer because in normal conditions, our expectation is better supply from the suppliers. But unfortunately, every week, we are facing with some new issues. So frankly speaking, it's not easy to make the forecast. But from chip side, I can say that second half could be better. But the issue is not only the chip because, for example, the last week issue was the tires because in Turkey, the tire demand on after-sales market continuing to increase, and the OEMs is the production capacity and so on. So it's not only the issue of the chips. So the raw material and the CapEx management also become important. But in normal conditions, we should see better supply conditions.

[Fabrizio Renzi, executive]

Also, if I can link this with our guidance, Murat, so the second quarter in terms of semiconductor was slightly better than the first one. So even though we don't have a full visibility, we are assuming the quarter 3 and quarter 4 parallel to the quarter 2, that means we will continue to have a problem, but better than the beginning of the year. And this is what we reflected in our guidance. So also for this issue, the semiconductor availability, we are reflecting the guidance of quarter 3 and 4 similar to quarter 2. But the problem is still there and the visibility is not the complete one as of today.

[Operator]

[Operator Instructions] And now we will proceed with the written questions from the webcast. And I quote, the first question is from [ Alexia Yuka ] with [ Bearings ]. And the question is, what is Tofas' ability to fill order books to utilize production capacity?

[Cengiz Eroldu, executive]

Thank you for question. So as you know, we are working in 2 shifts conditions in the Tofas plant. And nowadays, we are also working with the maximum speed with the daily capacity of 1,300. And our forecast is to continue with speed until the year-end. So we don't see issues on the production capacity side.

So the demand -- or what we can produce with the availability of materials, sure, the demand is higher than what we can produce, but we have also availability concerns. So in these circumstances, we want to keep this daily speed for the second half of the year. Thank you, again.

[Operator]

[Operator Instructions] 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, operator. I would like to thank all the participants for the interest and for the available questions, and I wish you all a good day.

[Operator]

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