Gizem Poyraz Intro: Welcome everyone and thank you for joining us this afternoon. I am Gizem Poyraz and I have here with me our CFO Mr Ashaboğlu, our IR Coordinator Gülsevin Tuncay and Fatih Sertdemir, our Finance Coordinator. 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 our E-Bulletin, which contains the link to our earnings presentation. After the call, you can access a replay facility on our website together with the transcript. Now I would like to hand over to Mr. Ashaboğlu to start the presentation by commenting on our positioning and recent actions. At the end of the presentation, we will have a Q&A session. Ashaboğlu: Welcome everyone. Lets start on slide 2. As you all know, our main priority as Koç Holding is to ensure sustainability. In this regard, we manage our balance sheet to ensure that we always remain resilient while also benefitting from opportunities to strengthen our portfolio. One of our key principles is to have a sustainable and efficient level of net cash at the Holding level. We manage this taking into account 2 levers: (1) Our dividends in and out (2) Our investments and growth opportunities. The first part of this equation is our dividend income. We have been saying for a long time that our dividend income would have a step-up in 2018 and this is exactly what happened. In fact, we had a doubling of our dividend income up to 2.5 bn TL. This was due in part to the full repayment of the SPV debt which was obtained as an acquisition financing tool for Tüpraş back in 2006. However, a much larger part was due to the significant improvement in the performance of our underlying companies, especially leveraging on the investments that they have made over the last 5 years. We expect the strong free cash flow generation of our underlying companies to continue also this year. Therefore, we expect to generate solid dividend income at the Holding. The second part is dividend payment out of Koç Holding. We have been very consistent in this regard over the years and we will continue to manage this taking into account our investment opportunities and our net cash position. Even though our dividend payout declined slightly this year, it is still relatively aligned with our historic average payout ratio of 20%. This was to ensure that while generating dividends for our shareholders, we maintain our strong positioning. Strengthening our businesses while ensuring sustainability is of utmost importance to us. The third important point therefore is our net cash position. We like to keep a specific level of cash to serve as a warchest against volatility and firing power in case we find a good investment opportunity. Our net cash over the last 2 years hovered around 550 mn $. This increased to 1 bn $ Koç Holding Investor Relations 1 / 6
in the first quarter of this year and stood at 800 mn $ including our dividend payment which was made at the beginning of April. I am sure you are all aware that YKB announced a 1.5 bn $ capital strengthening plan at the beginning of this month. 1 bn $ s of this will be through a rights issue where both ourselves and UniCredit will participate 100%. Our own share corresponds to around 345 mn $ s. This means that our adjusted net cash position currently stands at around 455 mn $, a level which is aligned with prior years and can easily serve as a warchest and firing power. This of course will strengthen further with our dividend income in 2019 as we don t foresee another capital strengthening action in our portfolio until then. If we touch upon YKB shortly; we have seen a marked improvement in profitability over the last few years but there is still improvement potential that we want to unlock. Considering our positive view of banking sector dynamics going forward; we believe that this capital strengthening, together with the bank s clear strategic roadmap which has been announced, will ensure a re-rating of YKB and further contribute to our portfolio strength. The Bank is targeting an ROE above 17% and we are confident that this plan is achievable. For Koç Holding, this will mean a great return for our capital, a boost in our net asset value and increase in our consolidated profitability. Additionally, it is yet another indicator of our capability to make bold investment decisions to transform businesses and ensure strong returns. With a net cash position of around 455 mn $, we are also very clearly in a position to benefit from growth opportunities as they arise while not keeping excess cash on our balance sheet. ---- Having already mentioned our disciplined approach in terms of how we manage our balance sheet, lets move to slide 3 to look at some numbers regarding risk management. I don t want to go into detail of our cash position but just to mention that it is very solid and in fact our only debt is two Eurobonds where the proceeds have not yet been used but also only generating negligible negative carry. We currently have a gross cash position of $2bn. Three other 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 also very conservative. In terms of FX, we have a long position currently both on a solo and consolidated basis, 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. Maintaining this disciplined approach gives us great resilience in times of currency and market volatility. --- Now I would like to quickly summarize our 1Q18 performance, focusing on the flagship companies in our main sectors. Let s start with Energy and Tüpraş on slide 4. In the domestic market, we saw robust demand for all refined products. There was around 13% y/y growth in diesel driven by ongoing infrastructure investments. Jet fuel sales volume surged by 25% y/y thanks to uptick in number of tourists and gasoline increased by 14%. When we look at the refining margins in the first quarter, we can see a 1 USD decline in the Med Complex margin to 4.0 dollars per barrel due to lower gasoline and fuel oil cracks. On the other hand, Koç Holding Investor Relations 2 / 6
diesel and jet fuel cracks improved due to a mix impact of refinery maintenances globally, strong global demand, growth in aviation as well as cold weather conditions. In the first quarter, Tüpraş undertook important maintenance activity -- the last similar one was in 2014 -- in order to prepare for the high season and effectively position for the upcoming International Maritime Organization (IMO) 2020 market opportunity. These maintenance shutdowns had an impact on net refining margins as a result of lower production and higher cost per barrel. Margins were also impacted by narrowing crude differentials. However, for both of these indicators, we expect an improvement in the remainder of the year. Year-end expectations incorporate these impacts. Net refining margin is expected to be $ 7.5-8.0/bbl for the full year compared to a Med Complex level of $ 4.75-5.00/bbl. Capacity utilisation will be around 100%. On the LPG side, consumption expanded by 8%. Aygaz, the leading player in the LPG sector, focused on profitability during the quarter. The company had a 7% decline in total volumes but domestic sales volume remained flat. Aygaz has maintained its full year target of 330-335 tons for cylinder gas and 750-785 ton for autogas. These figures point to relatively stable volumes year-over-year. Accordingly, if we look at the energy segment contribution to Koç Holding, we can see share in combined operating profit and consolidated net income are 27% and 14%, respectively. There was a decline year-over-year in both of these items mainly due to the impact of planned shutdowns and narrowing crude oil differentials at Tüpraş. Let s move to slide 5 and discuss the developments in the Auto segment. Again starting with the sector trends, we can see that the Turkish auto market grew by 2% in the first quarter. Looking at the segments, passenger car sales grew by 5% y/y while light commercial vehicle sales declined by 10% in the same period. Exports displayed a slightly weaker performance with 3% y/y decline again due to the high base of last year when growth was 33%. In this period, we focused primarily on profitability. In the domestic wholesale market, we had relatively flat volumes overall while retail market share declined slightly. In terms of exports, we gained market share supported by 10% y/y increase in Ford Otosan s exports volume. Tofaş exports declined due to high base impact where growth was 35% last year. Looking at the total revenue performance of Ford Otosan and Tofaş, we can see 35% and 8% growth, respectively. This performance was driven by both domestic and international revenues. For both companies, international revenues contributes around 80% to total revenues with growth driven by solid volumes and currency impact. On the domestic front, both companies were able to record solid growth thanks to their focus on pricing. Regarding 2018 expectations, Domestic market is expected to remain relatively flat Ford Otosan kept its domestic volume guidance but raised its export volume guidance on Ford Europe s positive outlook by 3% to 305-315k units which indicates around 4% growth in exports. Previously announced capacity increase plan is underway and will be completed by Sept 18. Total capex guidance is around EUR 220mn Koç Holding Investor Relations 3 / 6
Tofaş made no changes to its previous 2018 guidance whereby the Company expects slight decline in domestic volumes but flat to 7% growth in its exports. Capex will be around EUR 160mn. Let me also touch upon our tractor company, TürkTraktör. Total revenues grew by 9% y/y supported by pricing focus in the domestic market and currency impact for exports. Although tractor market in Turkey had a slow start to the year (1Q18: -13% y/y), for the full year it is expected to be flat/slightly up. In summary, we can see that the successful performance of all of our auto companies resulted in a solid contribution of the auto segment for Koç Holding. Overall, our auto segment accounted for 25% of the combined operating profit of the Group. The auto segment operating profit increased by 20% y/y and consolidated net income contribution reached 429 mn TL with 66% y/y growth. I would like to highlight that we had a one-off positive benefit from the favorable purchase gain of Otokoç on its acquisition of a car rental business in Greece. This impact is 109 mn TL at the consolidated net income and therefore adjusted growth is 24% y/y. The main drivers of this positive performance were (i) solid international revenues, (ii) higher EUR/TL parity, (iii) pricing focus and (iv) tight opex control more than offsetting increasing raw material prices during this period. On the next page, we can look at the Consumer Durables segment slide 6. In the sector, domestic white good sales decreased by 19% y/y due to high base impact of the special consumption tax cut last year whereby the market grew by 36% y/y. Important markets like Western Europe recorded a slight decrease due to weaker volumes in UK, Germany and Italy, but this was offset by the strong performance of Eastern European market especially Poland and Ukraine. Overall, exports increased by 11% y/y. Looking at Arçelik s revenue figures: Domestic revenues declined by only 3% due to price increases despite sluggish domestic volumes. On the international front, revenue growth was strong at 26% driven both by organic growth and currency impact. Eastern Europe, South Africa and Pakistan were the main markets contributing to the organic growth. First quarter also marked a successful period in terms of market share gains all across Europe and Beko was the top market share gainer. In terms of 2018 guidance, domestic market is expected to remain flat to 5% down y/y. Revenue growth is expected to be around 20% and EBITDA margin around 10% with improving performance to continue in the following quarters. Arçelik management reiterated price adjustments will continue should raw material prices increase further. Overall, the consumer durables segment operating profit increased by 9% y/y and contributed 10% to the Group s total combined operating profit. This performance was driven by (i) price hikes in Turkey (ii) stronger EUR/USD and (iii) effective opex management despite pressure from raw material prices. 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 24% y/y to an all-time high of TL 1.2 billion and ROATE was 17.1% with 126bps improvement. Decrease in cost/income by 3pp to 36% and positive trend in cost of risk supported this performance. The Bank focused on selective and balanced growth and market shares remained relatively stable compared to the end of 2017. Loan growth was well diversified among segments. Deposit growth was Koç Holding Investor Relations 4 / 6
driven by increase in TL deposits with continuing focus on demand deposits. Bank-only capital adequacy ratio closed the quarter with a slight decline at 14% incorporating the one-off IFRS 9 impact and sub-debt amortization offsetting the positive impact of internal capital generation. For 2018, YKB revised up its full year guidance. Accordingly, the Bank now expects high-teens net income growth driven by better cost/income performance leading to further improvement in ROATE. Capital adequacy ratio is now expected to be above 15% via capital strengthening plan and internal capital generation. Overall, finance segment operating profit increased by 38% y/y and the share in total combined operating profit was realized as 40%. In terms of consolidated net income, the total contribution reached 459 mn TL with 33% 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 57.5 bn TL in revenues, 4.1 bn TL in operating profit and 2.9 bn TL in net income. The consolidated net income performance on a y/y basis was relatively flat; -8% excluding the one-off related to Otokoç that we mentioned earlier. This was mainly impacted by the energy segment. Excluding the energy segment, consolidated net income growth is at 20%. In fact, this is exactly the reason why we formed our portfolio incorporating companies in sectors with different cyclicalities and sensitivities. We as Koç Holding are able to manage our performance and record sustainable results even when there are seasonal impacts in one specific sector. On slide 9, we can see the breakdown of the consolidated net income performance. Our consolidated net income remained relatively flat in 1Q at 1.1 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 1Q. We have taken a step to strengthen YKB s performance and we are confident that its contribution to Koç Holding will increase going forward. Also incorporating the announced capital increase where we will participate fully, our net cash position remains solid and at efficient levels. This allows us to continue to scan the market for further growth opportunities and to further enhance our shareholder return. We of course, maintain our risk discipline as always. Thank you for listening, now we can open the floor for questions. Memisoglu O: The first question comes from the line of Memisoglu Osman with Bank of America, Merrill Lynch. Please go ahead. Hello, thank you very much for the presentation. I have two questions: How do you see the current macro environment, where you see any upside or downside risks to your budget in the core businesses? And on the second part, how do you see your strategy on the utilities business investment? I know you ve been relatively active recently on that front with the hydro power and the wind. But any color you could give me on that front on a medium term level would be helpful. Thank you. Koç Holding Investor Relations 5 / 6
Ashaboglu A: Hi, thank you for the questions Osman. As to the macro environment, and obviously that is a bit of a difficult question to answer given the upcoming elections and the volatility that we have been seeing in the past few weeks in the marketplace. But having said that, our base case scenario remains intact. We think that 2018 overall when everything is said and done is going to be a fairly okayish year for the Turkish economy in terms of GDP growth. It will be below last year most likely but at the same time probably at or around its medium to long term average potential. As to the energy generation sectors, as you know that it has been a sector in that is gone and some are still continuing to go through some difficulties. We have been saying for a long time that the assets valuations had been a bit irrational, higher than where they needed to be. However we have been seeing in the past year also a bit of a rationalization along those lines and the valuations has started approaching to a fair value, in our opinion. Our recent investment in Menzelet and Kılavuzlu is an example of this view. We do believe that we have acquired very good assets at fair valuation and we are quite bullish about the potential of that sector. So we will continue to scan the marketplace for good assets which we do believe will be able to fetch at good and favorable valuations for our shareholders but we will continue to be very selective along that dimension. Memisoglu O: Ashaboglu A: Ashaboglu A: Poyraz G.: Thank you. We will continue with the question from our webcast participant, Myra Chen with AIG Asset Management. And I quote, "Will Koç consider to enter real estate sector?" Okay, thank you. Real estate sector is not currently within our strategy. We have another question from our webcast participant Selim Kunter from Deniz Invest. Could you please elaborate on your investment plans if any for the two hydro plants? And would it be possible to give some color on the profitability expectations of these assets. Thank you. Okay. First the EBITDA margin for that sector is around 30% and this is our forecast for this year. In terms of evaluating or the re-evaluating assets in that sector, we are looking north of 16% IRR. 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. Thank you, everyone for joining us this afternoon again. So we are looking forward to meeting with you again in our second quarter results in August. Thank you, bye-bye. Koç Holding Investor Relations 6 / 6