Tofas Turk Otomobil Fabrikasi AS

IST:TOASO.E

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Tofas Türk Otomobil Fabrikasi AS conference call and live webcast to present and discuss the fourth quarter 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; and Mr. Mehmet Agyüz, CFA, Investor Relations Manager. Mr. Renzi, you may now proceed.

[Fabrizio Renzi, executive]

Good afternoon. Thank you, operator. Thank you all for joining our call today. We are going to present the fourth quarter 2022 and the full year, as you know. In spite of the difficult operational condition resulting from the microchip and raw material shortage, we were able to achieve an outstanding result, which is the best in the history of the company in our currency. Profit before tax amount to TRY 8.6 billion, more than double compared to the full year 2021. PBT margin stands at 13.1%, up 1.3%, with an increasing trend year-over-year, the reason why we have upgraded our sustainable guidance to 12% from 2023. The cash position and cash generation are improving significantly, and this will support the dividend policy and the strategic plan of the company in the near future.

Regarding the manufacturing operations, we have produced 264,000 units with a rebound of 15% compared to the previous year, boosted by the great performance of the domestic sales, which accounts now for 55% of the total business of the company. This excellent result was possible only thanks to the solid execution and maximum flexibility of our manufacturing logistics organizations.

In the local market, we consolidated our leadership position with a market share of 18.7%. In this regard, I believe that the numbers are self-explanatory. Fiat brand leader 4 years in a row. Egea model best-selling car for the seventh consecutive year. About Egea, the new version hybrid and automatic introduced in 2022 are performing well and contributing to reinforce the price positioning and profitability of the model.

Our export sales have shown a slight recovery compared to 2021, up 8% in spite of the weaker European market. Remarkable the performance of Fiorino in Europe and Doblo in the NAFTA market.

About the future projects, we don't have news to announce today. I can only remind what has been stated by Stellantis some weeks ago. Discussions are ongoing between the partners in order to take the full advantage of this long-standing cooperation and maximize the possible synergies in Turkey in the production and commercial field. We expect the conclusion of this discussion in the coming weeks.

But in the meantime, the participation of Tofas to Stellantis value chain has been increasing significantly, and our R&D center in Bursa is growing and is contributing to the most important projects of Stellantis in Europe.

Now I will give the floor to Mehmet for the full presentation, and afterwards, we can take your question. Thank you.

[Mehmet Agyüz, executive]

Good afternoon, and good morning, everybody. We started the overall production in Turkey and for Tofas.

In 2022, total production -- automotive production in Turkey has rebounded by around 6%, reaching to slightly below 1.4 million units. And this is supported by slight easing in the component shortages that the sector has been experiencing in the past 2 years. As Tofas performed better than the overall sector and our production grew by around 15%, reaching to 264,000 units for the full year. Specific for fourth quarter, there was an acceleration in our production in the -- especially, last couple of months. And we delivered 77,000 units of production in the fourth quarter, suggesting around 25% growth over the same period of last year.

In terms of production mix, it was relatively stabled with passenger cars production constituting around 52% and LCV at 48% of total production. Our shipment is performed parallel to our production growth for the full year, and it grew by 15%, reaching to total shipment units of 270,000 units. In fourth quarter specifically, the growth was more evident with around 34%, and our shipments in the fourth quarter was around 84,000 units. And this was mainly enabled by very strong growth in the domestic shipments, which was growing by more than 50%, and there was a slight rebound in the export business as well with around 15% growth.

In terms of shipment mix by our business, the most visible change it has been ongoing throughout the year was the change in the export mix where LCV shipments constituted around 68% of the total export business, which is around 9 percentage points higher compared to the previous year. In terms of total shipments, we maintain a balanced shipment structure with around 48% shipments from LCV and the remainder from passenger car.

Moving on to domestic markets. Overall, with the easing in the component shortages, light vehicle markets were able to deliver around 6% growth, reaching to 783,000 units. But nevertheless, this demand has continued to be driven by supplies rather than the actual robust demand and the suppliers tried to catch up with demand, especially in the fourth quarter of year with higher availability. The growth was balanced between passenger car and LCV, whereas passenger car shipments grew by around 6%, reaching to 593,000 units. LCV demand growth was slightly higher at 9% and reached around 190,000 units.

In the fourth quarter specifically, the growth was remarkable and reached 47% compared to the previous year with a balanced growth between passenger car and LCV. And it seems this demand has continued in January also, which were released yesterday, and it was a record high January in the history in terms of local light vehicle market demand.

This is the monthly evolution of the light vehicle market demand on a monthly basis, and you can see a significant acceleration in the -- towards the end of the year, significant growth rates and also even higher than the second half of 2020, which was also a very strong semester for the light vehicle demand in Turkey.

In Tofas here, we performed much better than the market and our shipments expanded by 20%, reaching to 150,000 units and above 2020 levels. And on the passenger car side, we significantly outperformed the market's underlying demand and our PC shipments surged by more than 30%, reaching to slightly above 100,000 units. Whereas our LCV shipment growth slightly led the market with around 2%, reaching slightly below 50,000 units in 2022.

The monthly evolution of our local sales are showing a similar pattern towards -- compared to the underlying demand, and you can see especially our performance in -- towards the end of the year was quite remarkable. And as you have witnessed from our market share towards the end of the year, which was quite strong compared to the first half of the year.

In terms of market share, in total, light vehicle markets Fiat continued to lead the market with a way ahead of the closest competitors with around 18.7% market share, which is around 230 basis points better compared to the previous year. And this market leadership is quite a sustainable one, which is now marked the fourth year in a row. In fourth quarter, the market share was slightly higher than our overall market share in the -- throughout the year with around slightly below 19%.

Including premium brands, the market share evolution is similar, which was around 19.2% and 2.3 percentage points better. And here, in addition to strong performance of our core Fiat brand, we also on the imported side Alfa Romeo and Maserati were high performance, especially Alfa Romeo sales has more than quadrupled compared to last year. This was enabled by a successful launch of the new SUV model Alfa Romeo introduced and whose world premier to play in Istanbul in midyear, Tonale. And we are looking for another strong year for 2023 as well.

Also on the premium side, Maserati shipments more than tripled also due to a new SUV launch, and these are important because distributors imported business profitability has been also improving significantly, and in the coming years also will contribute to the strong profitability of Tofas going forward.

Then we get to whole market in terms of Stellantis brands also, they performed quite strongly and now the brands under Stellantis umbrella comment around 32% market share, which is more than 330 basis points better compared to the previous year.

In terms of market share, the Fiat brand, I think, passenger car market leadership compared to last year with 16.4% market share more than 340 basis points better. The better positioning of our main core Egea model was the main enabler obviously, and we introduced hybrid and automotive transmission versions midyear, which they have been gaining quite a strong traction in addition to the launch of crossover in the previous year. And with those, Egea has maintained its best-selling car status in the market. This is the seventh year in a row since its launch. It hasn't lost such since then.

In fourth quarter specifically, the market share improvements of PC -- of Fiat was also quite evident with around 520 basis points, reaching to 17.4%. In LCV markets, Fiat brand maintained its #2 position even though with a slight retreat in the market share with 25.7%. But note that this is substantially above the pre-pandemic levels, where Fiat LCV market share has been holding around 20%. And of course, slightly better availability impacted this market share decline but nevertheless, considering the [ aging nickel ] portfolio, it was still a remarkable position for the Fiat brand in 2022.

Moving on to export markets. In 2022, similar to local markets, the demand was delivered by supply and the component shortages plays an important role for the overall light vehicle registrations in European markets. For passenger cars, registrations were down around 4%. Although in the first half, the growth -- the contraction was much more severe, and actually, the market has started to recover since August.

Nevertheless, full year demand in Europe was the lowest that's been observed since 1993. So we can say that there is a sizable pent-up demand in the system. And when you look at the major markets and Germany was the only market that was able to post a slight growth and due to the strong recovery, especially in December.

On the LCV side, the situation was worse in terms of components shortages and the registrations declined by around 18% compared to the previous year. At Tofas, our export shipments outperformed the overall underlying demand at Europe. We shipped 8% higher vehicles, reaching to slightly below 122,000 units. And this was mainly enabled by light commercial vehicle shipments, which grew by 24% versus the notable decline in European markets.

On the passenger car side, our shipments were down more than the market with around 15% decline. As the short -- component shortages we have been experiencing on the PC side for the export markets was much more severe compared to the LCV, especially on some certain engine types that we use for the export market, there is the highest scarcity and as well as some regulatory issues in Egypt kept our performance under passenger car exports in 2022.

This is the monthly evolution of our export volumes. And as you can see, there has been a slight recovery in the second half of the year, except in December, there was inventory cleaning at the Stellantis networks, which caused some decline in December, but this creates a healthy pipeline for 2023.

In terms of our market breakdown of our export business, here the chart -- the lion's share also goes to Italy, even though its share is declining, slightly below 30%. It is our biggest export market. The second market here is the North American market, which is share more than doubled due to LCV shipments in that region. The other factor impacting here is the regulatory issues I mentioned in Egypt, which resulted in almost half-ing of the export shipment mix to the MENA region, which is now slightly below 10% compared to 19% in the previous year. But as soon as those issues are resolved, we are expecting the MENA region also to pick up the growth trend it has shown in the past couple of years.

In terms of our shipment volumes by model, on the left-hand side, in our export business, we shipped around 9,000 units more in 2022. And this was mainly enabled by strong performance of Fiorino, in -- which is also a relatively old vehicle, and also our strong shipments to the North America for Ram ProMaster was another factor. And you can see that our crossover version also has been gaining notable momentum, which has also increased by more than 1,300 units for our exports, which is offset by lower Doblo shipments to EU as well as lower sedan shipments for the export business.

On the right-hand side, domestic shipment mix. We shipped more than 26,000 units compared to the previous year. And you can see, the main enabler of this, is the strong performance of Egea, our passenger car, which we shipped more than 26,000 units more and now reaching slightly below 100,000 units for local markets. So it's been a great success for this model for the local market.

And for Fiorino also, the appetite of the consumers in local markets remain strong, and we shipped more than 5,000 units more. And for Doblo, which is already dying product, which declined by around 5,000 units.

On the imported vehicle side, we continue to suffer from availability issues, but the situation has been improving. You may remember, in the first 9 months, this figure was negative, but with the growth in the fourth quarter, we shipped around 133 units more in 2022 compared to the previous year. So overall, we shipped almost 36,000 units more with 270,000 shipments in 2022.

Moving on to financial performance. As you can see here that the 15% growth in the shipments translated into 100 -- more than 120% growth in the revenues, and the main drivers of this is the -- between the 2 is the higher better pricing in the local markets on the back of weaker lira as well as higher input costs. And also on the export side, weaker lira against euro also supported this performance and resulting in such a strong growth on the revenue side.

Under EBITDA, it's more than almost doubled to above TRY 11 billion. And in terms of profit before tax, which is our main KPI, it almost grew by 150%, reaching to TRY 8.6 billion in 2022.

In terms of revenue breakdown, especially in the fourth quarter, revenue growth was quite strong with [ 133% ]. And this was mainly enabled by 171% growth in the domestic business, and our turnover in the fourth quarter reached almost TRY 24 billion. Healthy pricing in the local markets, increasing production tempo as well as weaker lira against euro were the main drivers of this performance. As a result, our turnover reach for the full year, TRY 66 billion, and this was enabled by strong growth in the domestic as well as the export revenue.

Here, our profitability snapshot. You can see on a year-over-year basis, the -- our profit before tax, there has been an improving trend. And despite the high base of fourth quarter of last year, our PBT in the fourth quarter also grew by more than 110 basis points, reaching to 15%, the highest in the company story. And as a result of that, our full year PBT margin also improved by 130 basis points, reaching to 13.1%.

In addition to healthy pricing dynamics, of course, our protective export contracts also supports our profitability in addition to the volumes. Net profit evolution is similar and our net profit margin for the full year was similar to our PBT margin as we did not pay taxes, and it reached 13.1%, which is 200 basis points better than the previous year. And in the fourth quarter also, we reach all-time high net income margin of 14.9%, suggesting TRY 3.5 billion in just fourth quarter in terms of net profits.

This is the snapshot of our financial performance income statement. And as you can see, the strong growth is translating into strong profitability. I should note that here is the -- although our main KPIs has been improving, there is some decline on a year-over-year basis from gross margin to EBITDA margin due to the very high base of fourth quarter, which was, as you know, there were abnormal conditions in the market with the currency towards the end of 2021.

In terms of balance sheet, we have a very solid balance sheet ahead of the new potential CapEx cycle and other projects. But we have more than TRY 12 billion of cash and cash equivalents. And despite paying -- this is around TRY 8 billion increase despite paying more than TRY 3 billion dividend in the year. So overall, there was a solid net working capital management. Also, there was also deleveraging on our balance sheet, which we also paid down some loans, as you can see here.

Our financial position here, excluding KFK, we have a very solid financial position by more than EUR 500 million, EUR 520 million. And compared to the same period of last year or the previous quarter, this is suggesting a significant improvement in our financial position. Also, this was partly due to continued solid net working capital management. As you know, we have been running quite a tight ship. And in terms of net working capital, we run -- we try to run a neutral position and towards the -- at the end of the year, we had a minus EUR 44 million of net working capital as of December.

Moving on to investments. In 2022, we spent around EUR 46 million in CapEx, bulk of which constituted from the almost completion of our upgrade project for the passenger car family. And the second important item was our ongoing structural investments, which is around 25% of our total CapEx for the full year.

Moving on to outlook. After a decent rebound in the market in 2022. In 2023, we are expecting further growth -- slight growth for 2023 as we are expecting some easing on the supply shortages and the initial signs of strong demand for the full year, confirms our view. At Tofas, we are expecting to perform better than the market with around 7%, 8% growth in our shipments with 155,000 units to 165,000 units.

In terms of exports, we are looking for a lower export volumes of 70,000 to 80,000 units due to phasing out of Doblo for export markets. And in line with the lower export shipments, we are anticipating slightly lower production with around 215,000 to 235,000 units. And after a slight decline in investments in 2022, we expect a rebound in our CapEx reaching to EUR 100 million. And given our very strong performance in terms of profitability in the local market as well as what we see with our current portfolio.

We are upping our sustainable PBT margin guidance. This is the third time we are doing in the last 18 months, and now we are anticipating PBT margin to be above 12% from previous level of plus 10%.

With that, I'll stop there, and we'll be happy to take your questions. Operator?

[Operator]

[Operator Instructions] The first question is from the line of Kilickiran Hanzade with JPMorgan.

[Hanzade Kilickiran, analyst]

Congratulations for your strong results. I have 3 questions, if I can. The first one is about the pricing in the domestic market. The last 2 years were extraordinary years for the industry and [indiscernible] availability issues in the market. And I understand this also lead to substantial repricing in second-hand cars, which also provides some room for further pricing for first-hand cars. So assuming that 2023 will be a better year in terms of production ramp-up, would you still expect pricing to remain strong in Turkey in harsh currency terms, not Turkish Lira?

And I want to complement this question about your market positioning. I mean you benefited a lot from -- I mean your availability and also affordable pricing. So how sustainable is the current market share in 2023 under easing supply issues?

And the second question is about your export guidance. I mean I don't know if you can, I mean, break down this guidance per model. So how much of them is expected to be PC and commercial vehicle? And finally, on your CapEx guidance, I mean would you give us some sort of breakdown of this CapEx? Because I really wonder how much is related to the structural CapEx and how much is related to what? I mean, I want to see what you are planning under this CapEx guidance.

[Cengiz Eroldu, executive]

First question was regarding the pricing in the domestic market. What you see, first of all, in 2023, we are expecting better raw material prices. Thus, first of all, can help us on the pricing side. From other end, the price positioning of our products, of course, but we see there is still room to improve the positioning because as you know, the prices in the local market are mainly driven by 2 factors. One is the cost and exchange rate and the other one is the competitive position.

So in -- what you see in 2023, both 2 sides are positive for our products, and we are -- we will able to do better margins in the local market, what I can say. Sustainability of market share, our target is to improve our market share in 2023 compared 2022, and our product portfolio is suitable for this target. So we are confident also on this.

Regarding export breakdown, as you know, we stopped the Doblo export at the end of 2022. So on the light commercial vehicle side, our export, we've been limited with Fiorino model. So for this season, I can say that the 1/3 can be exported and the remaining passenger can be a light commercial vehicle and the remaining 2/3 or more passenger car. CapEx details, your last question. The CapEx -- our CapEx forecast includes only the structural investment and the ongoing projects.

[Hanzade Kilickiran, analyst]

Okay. So I mean, if you are going to be awarded with the new projects, models, you are going to revise this CapEx. So this doesn't include any sort of potential preliminary work for the new models.

[Cengiz Eroldu, executive]

[indiscernible].

[Operator]

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

[Cemal Demirtas, analyst]

Congratulations for very good results again. My question is about the domestic outlook. In January, we already see some availability issues. It's really hard to find products in your models. How do you see the trend in February and March? Will you have more availablity? And will you see higher demand? How do you see the demand outlook in the domestic side?

And the other question is about the [indiscernible] Stellantis issue. I know maybe no new development, but still any word on that? Or is there any kind of -- at least, should we assume that nothing that [indiscernible], but it's a process no timing kind of thing? Any comments, if possible.

[Cengiz Eroldu, executive]

I would like to start from the second one. So we are the joint venture management. So to talk on the words of Mr. Tavares is not correct. So because he said in open way that the communication between the shareholders are ongoing, and he was also -- he said that in a short period, they are going to conclude the discussions.

Regarding the domestic market, unfortunately, is also we made a public disclosure. We closed our plant for 3 weeks. This is mainly because we changed our production software, which is a very tough -- was very tough issue for this season. We also dedicated this period between the year-end inventory and the software changes on the manufacturing side. And we work only 2 weeks, and with this production, we reached 20% of market share. We are also following the local market numbers. So in February, we assumed that we will have better conditions for raw material availability.

[Operator]

[Operator Instructions] Our next question is a follow-up question from Ms. Kilickiran Hanzade with JPMorgan.

[Hanzade Kilickiran, analyst]

Sorry, I have few more questions. The -- I mean, it's about the dividend. So you keep your dividend policy for this year, as I can see in the remarks -- in the opening remarks. Would you able to distribute maximum dividends if you agree with Stellantis on new projects and also potential collaboration on sales activities that you have highlighted.

And on the PBT margin, I mean sustainable margin is now taken over 12%, but you have very high PBT margin in the fourth quarter. I mean, I assume that in 2023 this year, could this be sustainable? I mean it's not related with the sustainable margin of the new models or this type of things because majority of your models are amortized already. So would it be too optimistic to assume something to be kept at slightly over 12% in 2023.

[Fabrizio Renzi, executive]

Fabrizio speaking. About the dividends, what I've mentioned is the technical capability of the company to distribute dividends. So at this stage, as usual, as a management, we can comment only on the possibility and technicality to distribute dividend and based on our good cash position, of course, we have this possibility. So I can say that we can stay in line with the previous year level of dividends. But as you know, this will be decided by the Board of Directors in the next couple of weeks. I don't expect big change, but I cannot comment on the decision that is in charge of the Board of Directors of Tofas. We can distribute, and we can support also the spending for the second part of the year related to the preliminary activity for the new project and new model.

Second question about the PBT sustainability, as Mehmet mentioned in the presentation, we have increased significantly this PBT in the last years. So 7.8% was the result in 2020, 11.8% in 2021, and now we have this 15.1%. That, of course, is also the result of the great [indiscernible] in the fourth quarter. But what we would like to provide you is a sustainable level. So we cannot take into consideration the seasonality of this. So I believe that as a starting point in 2023, 12% is a good starting point. We believe that this 12% is achievable, but also challenging because we expect tougher competition in 2023 due to the better availability of the cars and the imported cars on the market.

Of course, if we -- in the coming weeks in the next conference call, we can forecast an upside of this 12%, you will learn this, and we will share with you this. But as a starting point, 12%, I believe is fair enough, also taking into consideration the competition environment that in 2023 will be more aggressive than in 2022.

[Operator]

[Operator Instructions] We have a follow-up question from the line of Demirtas Cemal with Ata Invest.

[Cemal Demirtas, analyst]

My question is about the currency side. You see more stable U.S. dollar [indiscernible] Europe Turkish Lira is a little bit appreciating. How do you see the impact of inflation and those factors at least on your profitability in the first half of the year or at least in the first quarter? Because maybe even in fourth quarter, that might be some contraction but we see improvements in fourth quarter a little bit surprising for me at least. How do you see the trend on that side?

And about the take-or-pay, now you don't have Doblo, with the others also, I think there might be some take-or-pay. How should we expect that to affect your financials now your capacity utilization lower -- much lower. But I'm sure you would take those things into account. So at least in the first -- for the first half, assuming that nothing will be announced very soon, how could we consider the trends on your financials?

[Mehmet Agyüz, executive]

First of all, the macroeconomic environment is not going to create a problem for our business because as you know, you are also following Tofas since long years. We are working with cost-plus principles. So for export, we are protected. On top of this also existing products has the protection from the take-or-pay applications. Regarding the local market, as I said at the beginning of the meeting that we have possibility to compensate our cost increases. So in 2023, of course, we will have the increase on the inflation. Until the elections, the exchange rate most probably reflect, but after the election, it's a question mark. And on top, we are waiting also improvements on the raw material side. So in this combination, we are able to protect and also improve our margins. So we don't -- I don't see any problem from the margin management side for both markets.

[Cemal Demirtas, analyst]

Any comment on take-or-pay side?

[Mehmet Agyüz, executive]

Products are also covered with take-or-pay conditions because [indiscernible], and we are differing those are the existing products, and we are continuing with the existing agreements.

[Operator]

[Operator Instructions] Ladies and gentlemen, we don't have any other audio questions at this time. We'll now move on to our webcast participants with the written questions. The next question is from Mr. Burak Saliman with [indiscernible]. I have a couple of questions. One, can you elaborate the possible cooperation with Stellantis? Will it be possible to have a new model in 2023? What is the reason for your year doubling CapEx guidance in 2023?

[Fabrizio Renzi, executive]

Okay. Fabrizio speaking. Thank you for the question. Okay. About the cooperation with Stellantis, apart of the ongoing discussion that we don't want to comment, we can say that cooperation is going well, and the proof of that is that our R&D center, as I mentioned at the beginning, is working hard, is contributing to many important projects of Stellantis like, for example, the new Panda, the new Jeep that we'll be launched on the market with the commercial name of Avenger also we contribute to that. So from cooperation point of view, it's going well.

About the potential new products in 2023, there is any decision, but we expect something like that. If something will be allocated in 2023, what I can comment is that our time to market is 18 months. So if this decision will come in the next month or week, we can stay on the market in the second half of 2024. Might be even better than 18 months can be the time to market in the Stellantis environment because what we have learned that the level of complexity of the cars in Stellantis, but also the level of diversification, or if you want, the level of integration is very, very high. So maybe we can reduce this time to market. So even though the decision will be maybe in the coming months, we can stay on the market. We have the chance to stay in the market in the second half of 2014. I believe that's all, right?

The last point was CapEx. As we mentioned, we have -- in this amount, we have basically -- the recurring amount that we spend in the plant for the renewal, for the maintenance and even for the project optimization. In particular, in the 2023, we want to start a very important project of energy. Because of the cost increase we experienced in 2022, we decided to go on with a very important project on energy in order to improve our renewable energy, solar energy. So part of this EUR 100 million is also represented by this important energy cost spending. That's all.

[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.

[Fabrizio Renzi, executive]

Thank you, operator. I would like to thank you all for the participation and the interesting question. So I wish you all a good day and a good weekend.

[Operator]

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