Koç Holding 9M18 Earnings Webcast Transcript

Transcription

1 Intro: Welcome and thank you for joining us this evening. This is Gizem, IR Manager of Koç Holding. I have here with me Gülsevin, our IR Coordinator and Fatih, our Finance Coordinator with me to go over the presentation and answer your questions during the Q&A session. I would like to remind you that our presentation and the Q&A session might contain forward-looking statements. Our assumptions are based on the environment and our businesses as we see them today, and this might be subject to change. Before the call, we have sent out our E-Bulletin, which contains the link to our earnings presentation. After the call, you can also access a replay facility on our website. I will start the presentation and we will have time for questions at the end as always. Lets start on slide 2. I would like to start by giving you a quick overview of our positioning in the current environment. As you all know, our main priority as Koç Holding is to ensure sustainability - and in the first nine months of 2018, we maintained our net income stable year-over-year, which is a similar performance to our first half results despite the elevated level of volatility in the third quarter. This performance is a testament to the resilience of our diversified portfolio supported by our prudent management approach. In 2018, as you know, we doubled our dividend income mainly thanks to the strong operational performance of our subsidiaries. In November, we will also receive the second dividend payment of 155 million TL from Ford Otosan. So what are the main components which ensure this sustainability? (1) The first important point is that around 50 to 55% of our revenues are FX or FX-linked. Apart from our auto and consumer durables businesses, Tupraş contributes positively to this amount. In fact, these segments are also the main dividend contributors to Koç Holding (around 70% of dividends). (2) Secondly, our portfolio is sectorally very diversified which hedges us against sector specific sensitivities and cyclicality. No single sector represents more than 30% of our NAV. (3) Domestically, we also have leading positions in the sectors in which we operate. This allows us to maintain solid pricing power. You can easily see that sustainability is exactly the reasoning behind how we set up and how we manage our portfolio. Let s now move to slide 3 to look at the solidity of our balance sheet via some key metrics. At the Holding stand-alone level, we have a gross cash position of $1.8 billion of which 83% is kept in USD. In terms of net cash, we have a total of $330 million. This level allows us to feel comfortable amidst volatility and also provides us ammunition to take advantage of opportunities as they arise. Koç Holding Investor Relations 1 / 6

2 In terms of our funding at Koç Holding level, we have 2 eurobonds totalling $1.5 bn with no repayment requirements until These funds are being kept in USD deposits and with the current FX deposit rates, they are generating positive carry. We have no other debt. Three areas which we monitor closely both on a combined basis as well as for each specific underlying company are liquidity, leverage and FX position. You can see that all of these indicators are at conservative levels. In terms of FX, we have a policy of keeping a flat position with slight leeway for practicality purposes and you can see that we remain well within our risk management rules. Going forward, we will continue to adhere to our prudent risk measures and maintain our solid balance sheet profile. Now I would like to briefly summarize our 9M18 performance, focusing on our main sectors. Let's start with Energy and Tüpraş on slide 4. So far this year, the domestic market has been robust for refined products. We saw 8% y/y growth in diesel and 12% growth in jet fuel which was supported by growth in the aviation sector. When we look at the refining margins, we see 1.3 USD decline in the Med Complex margin to 4.5 dollars per barrel due to lower crack margins, especially in fuel oil. On the other hand, Tüpraş managed to maintain its clean net refining margin stable y/y at 8.3 dollars per barrel thanks the better performance of diesel and jet fuel cracks, which constitute a high share in Tüpraş s production mix. With the positive inventory impact, Tüpraş s overall net margin reached 10.7 dollars per barrel versus 8.5 dollars during the same period of last year. In terms of capacity utilisation, Tüpraş recorded a lower level vs last year despite increase on a quarterly basis due to the planned maintenance program. After also undertaking the announced RUP maintenance in the first half of 2019, Tüpraş will be fully positioned to take advantage of the upcoming International Maritime Organization (IMO) 2020 opportunity. Based on the 9 month developments, year-end expectations have been revised slightly. Tüpraş net refining margin expectation is increased by dollars per barrel to dollars per barrel mainly due to the inventory impact vs a small downward adjustment of cents per barrel for the Med Complex margin. Capacity utilisation will be around %. On the LPG side, consumption expanded by 4%. Aygaz, the leading player in the LPG sector, focused on profitability and therefore recorded some contraction in volumes. Accordingly, Aygaz revised its full year guidance and expects low single digit contraction in volumes, similar to 9M results. Accordingly, if we look at the energy segment contribution to Koç Holding, we can see that share in combined operating profit and consolidated net income are 45% and 23%, respectively. Combined operating profit increased 63% y/y while bottom line decreased as inventory gains at the operational level were offset by FX losses. Let's move to slide 5 and discuss the developments in the Auto segment. Again starting with the sector trends, in the first nine months we can see that the Turkish auto market contracted by 26% in total, with a significant portion of the impact being recorded in 3Q (1H: -11%). On the other hand, exports displayed a solid performance in the first nine months despite a high base (+24% y/y in 9M17). Koç Holding Investor Relations 2 / 6

3 In this period, we focused on balancing volumes and pricing in the domestic market and therefore witnessed some market share decline. On the export side however, we saw a slight increase in overall Koç Group market share from 42% to 44%, especially supported by the performance of Ford Otosan. Looking at the total revenue performance of Tofaş and Ford Otosan, we can see 11% and 36% growth, respectively. This performance was mainly driven by international revenues where both of our companies have cost plus contracts and therefore remain resilient in times of currency depreciation. For both companies, international revenues contribute around 80% to total revenues. Regarding 2018 expectations, Due to the developments over the past few months, domestic market expectations have been revised down to around ~35-40% contraction (vs ~20% contraction previously). Accordingly, both Ford Otosan and Tofaş also decreased their domestic volume guidance by around 25k units Regarding exports, Ford Otosan maintained its export volume guidance at k units while Tofaş revised it down by 10-20k units to k units due to slightly weaker Italian market Both companies also revised down their capex guidance. Ford Otosan reduced it by 10 mn to mn and Tofaş by 30 mn to mn. Let me also touch upon our tractor company, TürkTraktör. Total revenues contracted by 2% y/y with weak domestic market dynamics almost fully offset by strong export performance. In summary, we see an improving contribution of the automotive segment for Koç Holding. Overall, our auto segment accounts for 22% of the combined operating profit of the Group. The auto segment operating profit increased by 46% y/y while consolidated net income contribution reached close to 1.2 bn TL with 28% y/y growth. The main drivers of this positive performance were (i) solid international revenues, (ii) higher EUR/TL parity, (iii) pricing focus and (iv) cost discipline. The one-off highlighted here is linked to the purchase gain recorded by Otokoç in 1Q18. On slide 6, we can look at the Consumer Durables segment. In the domestic market, white good sales decreased by 15% y/y due slowed demand in 3Q as well as the high base impact of special consumption tax cuts last year when market growth was 23% y/y. Western Europe market recorded a slight decrease due to weaker volumes in UK and Germany whereas Eastern European remained strong at 8% y/y driven by Russia and Ukraine. Overall, Turkish market exports increased by 6% y/y. Looking at Arçelik's revenue figures, domestic revenues increased by 6% due to pricing impact despite contracting volumes. On the international front, revenue growth was strong at 45% driven by solid organic growth of 10% and currency impact of 35%. During this period, Arçelik was able to gain significant market share across its export markets utilising the positive impact of currency depreciation on its competitiveness. In terms of 2018 guidance, domestic market guidance has been revised down to 15% decline y/y from flat to 5% decline. On the other hand, thanks to strong international revenues, revenue growth has been revised up from around 25% to 30%. EBITDA margin expectation of 9.5% was maintained. Overall, the consumer durables segment operating profit increased by 26% y/y and contributed 8% to the Group's total combined operating profit. This performance was driven by the disciplined approach in the domestic market and solid contribution of international revenues. Consolidated net income contraction Koç Holding Investor Relations 3 / 6

4 was due to (1) higher financial expenses and (2) tax impact. The company s working capital to sales ratio increased in 3Q mainly due to the currency depreciation impact but is being actively monitored and managed. In addition, the Company effectively hedges its FX position to ensure minimal impact on financials. Finally, let me also briefly talk about the Finance segment and the developments at Yapı Kredi Bank on slide 7. Yapı Kredi's net income grew by 31% y/y to TL 3.6 billion and ROATE was 15.4% excluding the mtm valuation gain for interest rate swaps under equity. Decrease in cost/income by 8pp to 33% supported this performance significantly while the Bank applied a conservative approach in terms of cost of risk. Volume growth was controlled and NPL ratio declined to 3.7% mainly supported by NPL sales totalling 2 bn TL this year. Total coverage ratio stood at 4.6%, which is the highest level among peers. In terms of capital adequacy, the Bank recorded 13.3% CAR and 9.8% CET1 ratio as of Sept 18 excluding regulatory forbearances. Including these impacts, CAR is at 16.1% and CET1 12.1%. With the current FX rate, CET1 would be above 10.4% excluding forbearances. The Bank has been internally generating capital effectively and has announced a potential AT1 issuance which would further support capital ratios. In terms of YE18 guidance, cost/income ratio has been revised down from below 40% to below 35% and cost of risk is expected to be around 200bps. All in all, high teens net profit growth expectation was maintained. Overall, finance segment operating profit increased by 34% y/y and the share in total combined operating profit was realized as 25%. In terms of consolidated net income, the total contribution reached 1,309 mn TL with 31% y/y growth. If we move to the slide 8, we can talk about the overall results of the Group as a result incorporating all of the segment trends we just discussed. On a combined basis, Koç Group registered bn TL in revenues, 18.1 bn TL in operating profit and 9.8 bn TL in net income. The consolidated net income reached 3.8 bln TL with a relatively stable y/y performance. This was mainly impacted by the energy segment. Excluding the energy segment, consolidated net income growth is around 25%. On slide 9, we can see the breakdown of the consolidated net income performance. Our consolidated net income remained relatively flat in 9M at 3.8 bn TL. The biggest contributor to this performance was the finance and auto segments. Energy segment, on the other hand, contributed negatively due the impacts at Tüpraş that we mentioned earlier. I would like to wrap up our presentation on slide 10. In summary, We recorded a sustainable performance in 9M. We maintain our disciplined management approach as always. Our balance sheet is strong with a solid net cash position and our portfolio structure and diversification ensures resilience against volatility. Thank you for listening, now we can open the floor for questions. Koç Holding Investor Relations 4 / 6

5 Q&A SESSION Koç Holding 9M18 Earnings Webcast Transcript OPERATOR: MEMISOGLU O: The first question comes from line of Mr. Memisoglu Osman with Bank of America Merrill Lynch. Please proceed. Hello. Thank you very much for presentation and your time. I have two questions. First one is a short one: Do you give any guidance on capacity utilization estimate for Tüpraş for 2019 given the scheduled maintenance that you mentioned in the first half? The second question is about capital allocation both for you and the subsidiaries. I am trying to understand if there is any colour or rule of how much dividend you can ask from the subsidiaries, particularly of course for more levered companies such as Arçelik. If you could give us some colour on your thinking that would be helpful. Thank you. Okay. Thanks, Osman for the questions. In terms of guidance for Tüpraş, it is relatively early to say. They announced their results yesterday and also guided the market that the plant shut down and maintenance schedule for 2019 will be announced either before or with their fourth quarter results. Based on that, during those announcements we will have a better idea of its capacity utilization for So it would be very early for me to say something on that now. For your second question on the capital allocation, of course our first priority at Koç Group is always to maintain the resilience of our balance sheet, both for ourselves as well as for our underlying companies. And in case of need, we are always ready to support our companies as we have also done in the past. Currently the balance sheet position of our companies is solid. Therefore imminently there is no activity that should be expected in this respect. Yapi Kredi, as you know, has announced that they may do an AT1 issuance going forward and potentially the shareholders maybe supporting in that case. This is something to be discussed and seen going forward. Other than that I can tell you that in terms of capital allocation we support underlying companies and if there are different opportunities in the market, we are always analysing those and look at them should they make sense from a value generation and long term perspective. MEMISOGLU O: OPERATOR: KURBAY B: Okay. Thank you. Thank you. The next question comes from the line of Mr. Kurbay Berna with BGC Partners. Please proceed. Good evening and thank you for the presentation. Just a follow-up to Osman's question on the dividend outlook that you would expect from your subsidiaries. Would you perhaps be more cautious going into 2019 given the high borrowing rates, especially for some of the subsidiaries like Arçelik and maybe also TürkTraktör? Who would normally borrow in Turkish liras to pay the dividends? Would it be fair to expect a lower dividend from these companies for next year? Koç Holding Investor Relations 5 / 6

6 Of course this is a discussion we had during the 2019 budgeting process which we have started but will conclude by the end of year in December. As I said, the most important thing for us is the solidity and sustainability of our underlying companies. Therefore these decisions will be made looking at these perspectives. At the same time, it is important for our holding position to manage that effectively between our different companies. It doesn't necessarily mean that we force our companies to pay dividends, but we also don't like them to be sitting with excess cash while maintaining a solid balance sheet. So all of those decisions would be done and made looking at the different aspects I mentioned. KURBAY B: OPERATOR: Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you. So thank you so much to everyone for participating and we look forward to seeing you at our next conference call. Thank you. Bye-bye. Koç Holding Investor Relations 6 / 6