LPL Financial Holdings Inc

NASDAQ:LPLA

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome and thank you for joining the Tofas Türk Otomobil Fabrikasi conference call live webcast to present and discuss the first quarter 2024 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.

Good afternoon. Thank you, operator. Thank you all for joining our call today. We started the year with a good performance and the solid financial position that will allow us to properly manage the year 2024, which will be for Tofas year of transition, transition towards a new product range, starting with the investment and the launch of the K0 model in Bursa plant, transition to a new commercial setup with the opportunity to distribute in Turkish market, all the Stellantis brands when the merger will be approved by the Competition of Authority.

Meanwhile, in April, we have distributed dividend for an amount of TRY 10 billion, in line with the consolidated policy of our company to reward its shareholders. As we explained in our previous call, starting from full year 2023, we have implemented the inflation accounting principles. And now the restated financials we are going to provide give a better understanding of the operating performance as the impact of the historical cost on margin is eliminated.

In our guidance, we have confirmed that our profit before tax of 10% over the year, even though we registered a lower margin in the first quarter due to the impact of the IAS 29 restatement. On the domestic market with 13.5% market share, we were able to defend our leadership position in a market that is becoming more and more competitive. New players are entering the Turkish market with attractive products and very aggressive offers. Now a days, 7% of the market is owned by brand not present in Q1 2023.

On top of that, the actual special consumption tax scheme is not providing any support to the most affordable cars locally produced and all our range of products is subject to 80% taxation.

In this challenging environment, in the first quarter, we tried to protect as much as possible our margins. Regarding export, we have registered a good performance of Fiorino in Europe, boosted by a positive trend of the LCV segment, but we are also very pleased to see the strong demand of Tipo in the MENA region. Thanks to the successful presence of Stellantis in that region, now almost 50% of Tofas export is commercialized in MENA region. As a result of that, we are assuming a stable situation of the export volumes in the outlook 2024.

With reference to the manufacturing area, the refurbishment of the LC line is on track and we are preparing the ground to make possible the launch of new models. Technically, the Bursa plant will be able to start the production of new models in quarter 4, but the final decision will depend from the commercial strategy of all our partners.

Finally, the strategic agreement for the acquisition of Stellantis Turkey. As we disclose in December, we are waiting for the final approval of the transaction by the competition authority. The dialogue is continuous and fruitful, and we remain confident that the projects will be concluded positively.

Now I will give the floor to Mehmet for the presentation, and then we will be happy to take your question.

Good afternoon, and good morning, everybody. In the first quarter of the year, Turkish automotive production grew by around 3% year-over-year to 377,000 units whereas Tofas constituted slightly below 15% of the industry production with a production of around 56,000 units which suggests around 7% to 8% decline compared to the first quarter of 2023. In terms of production mix, there is a slight increase in the PC production, which constituted 69% of our production whereas LCV constituted 31% of our total production in the first quarter.

Our total shipments were parallel to our production, and we shipped 59,000 units, which was down by 7% compared to the previous year. Although we had a strong growth in the export side, which grew by 26% year-over-year. This was compensated offset by the 16% decline in our domestic business.

In terms of our shipment volumes by the business, as you can see in the middle pie chart, the most visible change was occurred in our passenger car business in export side. Its shares now comes to 62% of the export shipments, which is around 24 percentage points higher compared to the previous year. In terms of total shipment volumes by the business, we maintained a balance structure with 61% of our shipments going to the PC and the remainder for the LCV.

Moving on to domestic markets. In the first quarter, although there has been a tightening in the macro conditions, domestic market was strong and grew by 25%, reaching to 296,000 units. This was mainly driven by the passenger car demand, which grew by 33% year-over-year, reaching to 233,000 units, whereas as LCV demand remains healthy, which was slightly higher at 3%, reaching to 62,000 units. This shows the monthly evolution of the local retail sales as you can see in the first 2 months, there is a strong year-over-year basis. And the first 2 months growth was mainly supported by the sales to the disabled citizens, which benefited from the SCT, special consumption tax exempt sales as the government determines the cap at the end of the year and there is -- given the high inflation, there is a strong demand in the first 2 months of the year.

Whereas although March was also a record high March month. It was also partly due to the pull-forward demand ahead of the local elections as consumers were anticipating a level of currency depreciation, which may have triggered price increases and so they put their demand forward. With -- actually, with April, we have seen signs of a slowdown, which may continue in the near term.

At Tofas, we shipped 19% less to 41,400 units compared to the last year. But when you actually compare it with a more normalized pace of 2022, our shipments almost doubled in parallel to growth. The decline in our Domestic market performance was driven by lower passenger car shipments which declined by around 29%, reaching to 25,000 units whereas we outperformed the market in the LCV side as our shipments expanded by 6%, reaching to slightly above 16,000 units.

In terms of market share, the Fiat brands were able to maintain its market leadership with a market share of 13.5% albeit to a lower market share compared to the previous year. But when we compare to the first quarter of '22, the slide in our market share is less material with 120 basis points decline. This decline was driven by, as Mr. Renzi mentioned increasing competition in the local market with new entrance to the market, as well as our reduced local producers advantage due to lack of any revision in the consumption tax brackets, which is done every year, essentially most of our products to the 80% SCT range for the vehicles below 1.6 liter engine. For the brands under Stellantis umbrella, the total market share was realized slightly above 30% in the first quarter of the year.

In passenger car markets, we moved down to the second position with a market share of 10.2% and this -- although it marks a significant reduction compared to previous year, compared to the prior year, it's more -- it should be view as the more normalized level for the first quarter. Passenger car market share under Stellantis umbrella are declined by around 11 percentage points to slightly below 27% in the first quarter.

In light commercial vehicle market, Fiat brand moved to the market leadership position with a 25.9% market share, which is 60 basis points higher compared to the prior year. And the main driver of this performance is although it is coming to the end of its life cycle, our small LCV Fiorino is performing very strongly as well as better availability of imported vehicles are the main drivers for this performance. The brands under Stellantis umbrella improved their market share by around 100 basis points, reaching to above 45% in the first quarter of the year.

Moving on to export business. In Europe, there has been a recovery in registrations in both PC and LCV market. PC markets climbed by around 5% in the first quarter and hybrid/plug-in hybrid and BEV were the main drivers of growth, although the -- the pace of the growth has been decelerating. On the LCV side, the market remains healthy with a growth rate of 12% year-over-year and growth across all the main markets in Europe in the first quarter.

We outperformed the underlying markets with 26% growth in our export volumes to slightly less than 17,000 units. And the main enabler of this growth is our passenger car exports, which more than doubled to 10,000 units, thanks to our sustained penetration into the MENA region, which we have been capitalizing on the wide distribution network of Stellantis in this region.

This shows the monthly evolution of our export volumes, which now we have more favorable base and we are expecting a more stable situation during this transition year.

This slide shows market breakdown for our exports. As you can see, the most notable changes are shipments to the MENA region with share increased from 15% to 42%, thanks to our passenger car shipments although it's important to note that this figure is relatively a low number as we are in a transition year and this pie chart should change in the coming quarters as well as next year.

In terms of our total shipment volumes by our model, in the exports business on the left-hand side, we shipped 400 units of more exports and this was enabled by more than doubling of our passenger car shipments, which constituted almost 65% of our shipments, whereas our MCV model has been performing quite well with a stable shipments of more than 6,000 units.

On the right-hand side, our domestic shipments, we shipped around 8,000 units less with 42,000 units. And the main driver of this is our lower shipments in our good performing product, Egea which we shipped 10,000 units less due to the factors I mentioned before.

Moving on to financial performance. In a nutshell, 7% decline in our shipment unit translated into 5% growth in our revenues, thanks to price adjustments as well as a weaker Turkish lira compensating for the lower shipments. As a result, our EBITDA grew by 1% to slightly below TRY 4.5 billion and our profit before tax declined by 17%, and the gap between operational performance and the PBT is mainly due to the application of IAS, inflationary accounting practices, which penalizes our cash reach balance sheet through monetary losses.

This shows a snapshot of our P&L, and you can see the 4% growth at the top line translates into a around 2% growth in the bottom line which are in an aggressive market with our gross margin being improving, which shows our pricing discipline and with our net margin flattish at around 8.3%.

Moving on to balance sheet. You can see we have a significant amount of cash of TRY 28 billion, which is similar to the year-end. I should note that this we -- this year, we distributed dividends right after the end of quarter, around TRY 10 billion, which is not reflected here. And on the inventory side, due to the declining activity in the market, it has improved slightly to around TRY 10.6 billion. And as a result of the dividend payout, our shareholder equity declined by around TRY 7 billion with TRY 35 billion as of the end of first quarter.

Our CapEx, we spent EUR 9 million in the first quarter and most of that was allocated to the K0 investment. Although this seems to be tracking over our expectation, our commitments for further spending is actually much higher than this figure.

Moving onto outlook. Given the strong performance in the first quarter, whereas counterbalanced by the -- our -- relatively more cautious outlook for the rest of the year, we are maintaining our local market demand outlook to 800,000 to 1,000,000 units, whereas we have decided to take a more cautious approach and reduced domestic outlook by 20,000 units to 140,000 to 160,000 units given the first quarter performance, whereas we are maintaining our export shipment outlook at 60,000 to 70,000 units. And as a result, we are reducing our production volume outlook at the low end by 10,000 units and at the high end by 20,000 units to 170,000 to 190,000 units during this transition year whereas we are maintaining our EUR 200 million CapEx and our PBT margin target of plus 10%, although this was lower in the first quarter with the utilization of the cash position, we are expecting this to move improve for the rest of the year.

And this marks the end of our presentation and we are happy to take your questions. Operator?

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

Congratulations for good results. My first question is as usual about the Competition Board decision expectations. You mentioned during the presentation but I would like to understand, is there any time limitation to that because last December, it was like postponed possibly. And the next time line, what could be the possible time line, if any decision will come out of this? Should we expect within 1 or 2 months, that's my first question.

And the second question is about the market conditions. So far, the trend is above the expectation possibly? And in which quarter we should expect some significant decline, if any? And related to that, do you see any signal from the fleet side because they were not in the pipeline in the past, but now the credit interest rates are higher, so it might not be also effect for them. But I would like to understand the fleet and the retail demand side on the domestic side.

Thank you for your question, Fabrizio speaking. But for the Competition Authority, as I mentioned during my initial speech, we remain confident. Of course, your question is focusing on the deadline. As we communicated in December, in December, the authority ask for an extension of the investigation. And as you know, the extension is for additional 6 months. So now we are waiting for their feedback. But to be honest, even though they need additional 1 month, 2 weeks, 2 months, we don't see any problem on this. We're ready to take any comment and to apply any solution and remedy that they will ask to Tofas.

But for the moment, we continue to be very, very positive on this. Of course, we cannot say they need 1 month, they need 2 months. Of course, we are exchanging a lot of data because as you can imagine, the transaction is relevant transaction for the Turkish market, considering that both company will exceed 30%. If we take into consideration the actual situation, but as you have seen in our market share is going a bit down. Also, we are going to discontinue Fiorino in the second half. So there could be also some contraction of our market share. So in a nutshell, we remain confident that is not a problem if the authority needs some more time to analyze all the data that we are providing.

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

I think we haven't answered the second question of Cemal. Sorry, Hanzade. Let's first answer and then we'll take yours question.

So regarding the market conditions, as you know, we had a not very good performing April but now in May, what I can say, there is also now a little bit complication in the market due to the GSR-B application at the beginning of July. So for some brands, which is the cars that will not be sellable after the July 1st week. Now they are trying to get rid of from these kind of stocks, cars. And this in May artificially can also increase the market but we are seeing also this is impacting fleet customers because they are looking for the best opportunities in the market in the environment.

So this is -- there's a trade for the brands like ours because you're seeing also from our margins. So we are trying to protect our margins under these circumstances of the market.

But the retail part is doing well. So this is, I think, promising for the coming months. And after this GSR-II-B passage in July, we will see, I think more normalized market. Of course, GSR-II-B building also some cost ups in the market. Some players are already selling those kind of cars with the updated costs, but for some will be issued for the acceptance of the cost ups. So what I'll see, we will see more normalized market after the June. Also June will be under this pressure of GSR 2 passage mainly for the importers.

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

Actually, Cengiz partially answered my question. I had a follow-up question on competition in the market. Do you also currently participate in the fierce pricing in the industry? And do you -- actually you answered this, but do you expect competition to intense in the rest of the year given that consumption may slowdown. That's my question for the domestic market.

And second, you highlighted that your -- I mean, your PBT margin is going to be higher than Q1 in the rest of the year, given the reversal of the monetary losses, I understand. But is there another driver to move the PBT margin above Q1, I mean, operationally.

The price volume in the market, I think till the end of June will continue to do the -- due to the stock management of 2 brands. But I think after normalizing stock level in the second half of the year, the aggressiveness of the brands will be limited because this level of market now, of course, creating a big pressure on the means for all players in the market. So for this reason for 2 months, I think the aggressiveness will continue. But after we will see more normalized periods from competition point of view into the local market.

For the second question Hanzade, Fabrizio speaking, for the PBT. As I mentioned, in this guidance, we have confirmed the 10% PBT for this year. This is our target, but this is also what we believe is achievable. We haven't seen this margin in the first quarter, exactly the margin achieved is 8.8% PBT margin but as I tried to mention in the initial speech, we had a specific and extraordinary condition in the Q1. So we ended the quarter with a lot of catch in our end and also huge amount of equity and other inflation economy with the effect of the restatement, these generates a negative monetary cost that you can see in our P&L.

So in a nutshell, we believe that the effect of the hyperinflation adjustment will be lower in the coming months because we will lever less cash. We distributed the dividend in April, most probably, if everything will go well. Also, we are going to acquire Stellantis Turkey in the coming months. So we expect that hyperinflation will be lowered the effect on our balance sheet as [indiscernible] also in the P&L. So we remain confident that this 10% can be achieved.

I just wonder, is it possible also to comment without the inflation accounting. So how was your PBT margin develop if you consider that cash was not a problem because of the accounting growth in the first quarter?

Hanzade, I don't like too much to answer this question, so which is the effect of the hyperinflation effect. But I can remember you that -- the last quarter, we published the PBT without hyperinflation. We were in the range of 20% PBT. So -- but we cannot say that the effect is 10% because as I tried to explain before, it depends how your balance sheet evolves. So we cannot say that it's 10% of the negative effect of the every inflation because it's such [indiscernible]. So please take the 10% as the new guidance for the future.

I tried to understand if there was a positive development in the first quarter, in terms of PBT margin, if you were to report according to previous accounting growth, I mean because this quarter, as you explained well, monetary losses was a reason of the lower PBT margin, and this is going to reverse. But in the meantime, have you also absorbed some sort of stable PBT margin if you didn't apply this inflationary accounting into your financials.

Okay, we clarified your question here. The trends in this moment, we can say is a stable trend. So -- when we compare it with previous year, 10.9%, this is what we believe we can achieve also this year. So if you want, is a stable trend. Of course, we have some concern about the coming quarter because as Cengiz mentioned, the competition on the ground is very, very tough. But for the moment, we can say that we try to stabilize on the 10% our PBT margin. It would be not easy, but this is our target.

[Operator Instructions] Ladies and gentlemen, there are no further audio questions at this time. I will now move to our webcast question.

And our first question comes from [indiscernible] with portfolio and I quote. "Hello, thank you for the call. Do you see a material risk on the production and sales volume side due to GSR II regulation. To what extent do you expect an increase in unit prices due to the requirements of the new regulation? Is there any change in the timing of K0 production? Or should we continue to expect it to be completed in fourth quarter '24? Thank you."

Okay. For the material risk of the solutions, we don't see any risk because this regulation is largely [indiscernible]. So we didn't see any risk. Of course, we will be in June, some pressure to commercialize as much as possible all the cars that the company has in their stock. But in terms of material, we use it to plan organized very well the end of life of any product. So we don't see too much product.

In terms of effect of the new regulation GSR II on the price, of course, there will be an increase but it's not an increase that it will change the position of the car on the market. So finally, the impact will be not so huge. The remaining question, K0, no. For the moment, okay, we are in the final phase of negotiation of the K0 contracts. So for the moment, also for K0, start of production, we don't see any need to postpone. So the plan is in line with the expectations. So we don't expect further delay from this point of view.

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

Thank you, operator. I would like to thank all the people attended this conference call and for your interesting questions. Have a nice evening.

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