Koç Holding Participants: Gülsevin Tunçay, IR Coordinator Gizem Bodur, Investor Relations Manager Fatih Sertdemir, Finance Coordinator Gizem Bodur: Good afternoon ladies and gentlemen. Welcome and thank you for joining us this afternoon. In today s webcast, our first speaker will be Ms. Gülsevin Tuncay, Investor Relations Coordinator of Koç Holding. She will walk you through the important developments in Koç Group and the operating results of our flagship companies. Afterwards Fatih Sertdemir, our Finance Coordinator, will discuss our financial results as of first half end. As always, at the end of our presentation, we will have a 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 our Investor Bulletin, which contains the link to our earnings presentation. The Turkish and English summary financial statements are available on our website. There will also be a replay facility of the call on our website, together with the transcript. Gülsevin Tunçay: Welcome everyone. Thank you for joing our call. Before I go into the details, I would like to start by commenting on our overall performance. In 2Q17, we continued our strong performance and overall recorded a net income of 2.5 bln TL in 1H17, up 89% y/y excluding one-offs (the most significant being Visa sale gain of YKB in 1H16). All of our segments contributed strongly to this performance and as Koç Holding, we are sustaining our focus on investing, growing both our domestic and international presence while at the same time maintaining our prudent risk principles and further leveraging digitalisation to enhance our efficiency. In this period, the operating backdrop has also been supportive with robust GDP growth, solid exports and improving inflation along with the government s accomodative measures to keep the domestic demand buoyant. As a result of our focused initiatives and the supportive backdrop, most of our flagship companies have revised up full-year expectations based on the successful 1H results indicating continuation of solid performance into 2H17. Now let me summarize the developments of the first half for each sector, focusing on the flagship companies in our main sectors. Let s start with ENERGY and Tüpraş on Slide 3. Firstly, looking at the domestic sales, we saw a robust 5% y/y growth in diesel driven by ongoing infrastructure investments and Tüpraş again captured 46% market share. Gasoline consumption also improved with 2% growth y/y -- here, Tüpraş met the entire gasoline demand in Turkey. The year on year decline in jet fuel consumption Koç Holding Investor Relations 1 / 8
continued but at a slower pace thanks to some uptick in the number of tourists in 2Q; bringing the y/y decline to 7.5% (from around -13% in 1Q). Solid domestic market and increasing exports supported by higher global demand and strong margins contributed to Tüpraş s total sales volume, which increased by 5% y/y up to 15.3 million tons in 1H. In this period, Tüpraş also reached record capacity utilisation rate of 111.5% and increased its white product yield by a further 2pp to 77.6% leveraging its Residuum Upgrade Project. When we look at the margins front, we can see a significant improvement in the Med Complex margin to 5.4 dollars per barrel from 3.5 a year ago supported by middle distillates as well as fuel oil cracks. This was driven by a mix of solid demand and a weaker supply side due to a variety of factors including (i) maintenance stoppages of global refineries (ii) declining supply, especially in fuel oil from Russia. In this period, Tüpraş was able to more than double its net refining margin up to 8.2 dollars per barrel, which indicates a positive gap vs the MedComplex of close to 3 points on the back of higher crack spreads and above 100% capacity utilisation. Regarding 2017 expectations, volume expectations are being maintained while strong margin performance has led to an upward positive revision in margins. Total production volume is expected to be 29.2 million tons The Med Complex margin expectation has been increased by 0.75 dollars per barrel to a range between 4.75 to 5.25 while Tüpraş net refining margin has been increased by 1.25 dollars per barrel to 7.0-7.25 range The capex guidance for refinery investments remains $ 225 mn Let me also briefly mention the developments of the LPG sector. In the first 5 months, domestic LPG consumption declined by 2% y/y, mainly due to weak autogas demand. Aygaz, our leading subsidiary in the LPG sector, outperformed the sector and managed to maintain stable volumes mainly driven by market share gains in autogas. With the contribution of robust of exports volume (+18%), total sales volume of Aygaz rose by 8% y/y. In this period Opet, continued to add new stations to its portfolio and increased its market share up to 17.9%, thereby maintainings its #2 position in Turkey. Lets move to slide 4 and discuss the developments in the AUTO SEGMENT. In the first half of 2017, the Turkish auto market declined by 9% y/y. The decline was more visible in passenger cars with -10% while light commercial vehicle sales, where our companies are more active, decreased by only 5%. Exports, on the other hand, displayed a very strong performance with 29% y/y growth thanks to the success of new models introduced by the Turkish auto companies. In this period, our auto companies, Ford Otosan and Tofaş increased their exports volume to by 12% and 14%, respectively to record levels supported by the investments they have made over the last few years. Additionally, Tofaş managed to increase its domestic sales by 4% despite the shrinking market thanks to its new passenger car Fiat Egea [Ford Otosan domestic sales -12%]. In fact, Egea became the best selling car model in Koç Holding Investor Relations 2 / 8
Turkey. Accordingly, the total sales volume grew 5.5% for Ford Otosan, while Tofaş recorded 10% volume growth. When we look at revenues, it is clearly visible that the strong export performance had a very positive impact. Both companies recorded above 40% growth in international revenues. On the domestic front, despite contracting/flat volumes, both companies were able to record revenue growth due to disciplined pricing. Regarding 2017 expectations, both our companies revised up their domestic market growth expectations while Ford Otosan also raised its export guidance. For the domestic market, we forsee a slightly lower decline vs the 1H17 figure; at -5/8% Ford Otosan foresees a slightly down/flattish trend for domestic sales and ~15% in its export sales (up from 11%); overall contributing to a sales volume growth of ~10%. Due to the strong trends in exports, Ford Otosan has also announced a plan to increase its capacity from the current 415K up to 440K by the end of this year and further to 455K by 3Q18. This will allow the company to ensure continued growth through a minor investment of around $52 mn. Tofaş expects 7% growth in domestic sales and ~13% growth in its exports to reach an overall sales volume growth of ~11% Let me also touch upon our tractor company, TürkTraktör. Domestic revenues grew 16% supported by domestic sales volume growth of 6% on the back of a focused strategy which led to market share gains. Since then, the company has implemented some upward pricing which will increasingly support profitability going forward. During this period, international revenues increased by 5% despite 12% decline in export volumes mainly due to currency impact. On the next page, we can look at the CONSUMER DURABLES segment slide 5. In the sector, domestic white good sales grew by 27% y/y up to 4.4 million units with some slowdown in 2Q with the easing impact of the special consumption tax cuts. On the other hand, export volume growth was more muted at 2% and number of units reached 9.4 mn. Looking at Arçelik s revenue figures: domestic revenues increased by 26% supported by rapid volume growth. As of August, the company has implemented some price adjustments which will further support domestic revenues going forward. On the international front, revenue growth was 32% but driven primarily by Pakistan consolidation, which is contributing 5% to total revenues as of 1H, and currency impact. Despite muted Western Europe, Eastern Europe is continuing to support and there are also some positive signals from South Africa with return of positive growth in the sector (+2%) as of 2Q presenting some upside potential going forward. In terms of 2017 guidance, Arçelik increased its growth expectation for the Turkish white goods market up from 5% to 10%. The revenue growth for Arçelik was also revised up to ~25% (from >20% previously) while the EBITDA margin was decreased slightly from 11% to 10.5%. One other important development at Arçelik was the announcement of a new exciting greenfield investment in India together with the largest Indian conglomerate, Tata. Accordingly, Arçelik will look to penetrate the Indian Koç Holding Investor Relations 3 / 8
market through a new refrigerator plant construction and export of other products into the Indian market from other Arçelik plants. With this new initiative, Arçelik has taken another step toward becoming a truly global company. Finally, let me also briefly talk about the FINANCE segment and the developments at Yapı Kredi Bank on slide 6. In 1H17, Yapı Kredi recorded significant profitability improvement. Net income (adjusted for Visa sale gains in 2Q16) grew by 44% y/y to TL 1.9 billion and ROATE reached 14.7%. This performance was supported by decrease in cost/income by 2pp to 41% on the back of sustained revenue growth and cost discipline as well as a positive trend in cost of risk. Selective and balanced volume growth approach continued. Loan growth of 5% ytd was mainly driven by the effective utilisation of the Credit Guarantee Fund where volume reached 10 bn TL. Deposit growth was aligned with loan growth at 5% leading to a stable Loans/Deposits Ratio at a comfortable level of 110%. Yapı Kredi also continued to effectively diversify its funding sources by issuing a 7 year US$ 500 million Eurobond transaction and a 3 year TL 500 million Eurobond transaction in June 2017. The capitalization of the Bank continued to improve through internal capital generation on the back of strong profitability. Bank-only CAR increased 63 bps ytd to 14.8% and common equity Tier-1 ratio increased by 61 basis points to 11.2%. Regarding asset quality, non-performing loan ratio declined by 45 basis point ytd with positive impact of NPL portfolio sales of TL 1.3 bn as well as improving trend in net NPL formation. For 2017, YKB confirmed its previous guidance: On both loan and deposit volumes, YKB expects around 10-12% growth, aligned with private banks Net interest margin to be stable with some improvement in deposit costs into 3Q and support from expansion of loan yields and CPI-linkers yields in 4Q Cost growth to be contained at 2-3 percentage points below inflation, as confirmed by the 1H figures Overall, YKB is confirming its mid/high-teens growth guidance for net income Before finishing, I would like to also mention the developments on the digital transformation front. As you all know, we attach strong importance to sustainability and innovation. In this regard, all of our companies are continuously and actively undertaking new initiatives to improve efficiency on both costs and sales via digitalisation. In the first half, Yapı Kredi s efforts in this area were recognised internationally with 3 awards from Global Finance including Most Innovative Digital Consumer Bank in Europe ; Arçelik was also awarded 3 Red Dot Design awards for its Grundig products. Now let me turn to Fatih Sertdemir, our Finance Coordinator to discuss our financial results as of the first six months. Fatih Sertdemir: Thank you Gülsevin. Good afternoon, everybody. Koç Holding Investor Relations 4 / 8
Let me start on slide 8, by giving you an overview of Koç Group s financial performance. On a combined basis, Koç Group registered 100.8 billion TL in revenues, 8 billion TL in operating profit and 6.5 billion TL in net income in the first half of 2017. Koç Holding s consolidated net income after the share of non-controlling interest amounted to 2.5 billion TL. Overall, we are pleased to post a robust financial performance in the first half of the year. As you may follow on the right hand side of the table, all major profitability indicators displayed significant growth on a y/y basis. Moving on to slide 9, to analyze our top-line performance, you may follow that, our combined revenues increased by 36%, thanks to double-digit Y/y growths achieved at all segments. At Energy, combined revenues displayed 54% y/y growth with the positive impacts of (1) 30% increase in average oil prices, (2) 25% increase in the average US$/TL parity and (3) higher sales volumes at all major Group companies. Total sales volume of Tüpraş and total LPG sales volume of Aygaz increased by 5% and 8% y/y, respectively, on the back of strong export performances. Meanwhile, Opet s white products volume grew by 7% Yyy. Automotive also achieved a strong first half performance by registering 30% Y/y revenue growth. Increasing export volumes and positive impact of higher EUR/TL parity were the main drivers of the related growth. Tofaş export volume surged by 14% y/y, with the contribution of Fiat Egea family vehicles; and Ford Otosan achieved 12% y/y export volume growth thanks to increasing demand from the European market. On the other hand, around 9% y/y contraction in domestic automotive market, partially deteriorated the export driven positive performance. In Consumer Durables, 29% y/y growth in revenues was driven by Arçelik s strong performance both in domestic and international markets. In the first half, domestic MDA market grew by 27% y/y, with the positive effect of Special Consumption Tax cuts on white goods, implemented from early February onwards. In line with the market, Arçelik achieved 26% domestic revenue growth. In international markets, strong demand in Italy, Spain, Russia and Romania could partially mitigate the declining UK and German markets. As a result, Arcelik s international revenues contracted by 2% in organic terms. However, with the inorganic growth impact of Dawlance and the depreciation of TL against hard currencies, Arçelik s international revenues grew by 32% in TL terms. Finally, for Finance, gross revenues had the benefit of higher loan volumes and increased by 18% y/y. Now let s move on to Slide 10 to analyze Koç Group s operating profit performance. Our combined operating profit increased by 53% Y/y. Excluding the one-off gain on Yapı Kredi Bank s sale of Visa shares realized last year, y/y increase was 61%. All business segments contributed to this strong performance by achieving double digit growths, while the highest contribution came from Energy. As Gülsevin also pointed out; favorable crack margins (especially at diesel, jet-fuel and fuel-oil) was the key driver of Energy s strong profitability performance. Average Med Complex refining margin increased by 1.9 $/barrel in the first half compared to a year ago. During the same period, Tupras net refining margin improved by 4.2 $/barrel thanks to favorable margin environment and full capacity utilization. In addition, (1) positive impact of higher US$/TL parity on gross profitability and (2) low base year impact of RUP hydrocracker unit shutdown at Tüpraş in the first quarter of 2016, also contributed to the strong y/y performance of Energy. For Automotive, operating profit increased by 27% y/y, thanks to the revenue growth achieved in export markets and the positive impact of higher average EUR rate environment. On the other hand, contraction in the domestic market, higher commodity prices and inflation put pressure on domestic profitability. At Consumer Durables, strong top-line performance deteriorated partially to 10% at operating profit, due mainly to the contraction in gross profit Koç Holding Investor Relations 5 / 8
margins and the decline in incentive income from Turquality program. Overall gross profit margin of Arçelik contracted by 2.7 percentage points on a y/y basis, since increasing costs driven by higher FX rates and raw material prices (especially panel prices) could not be fully offset via price adjustments. Finance Segment had operating profit of 2.2 bn TL in the first half, up by 17% y/y, excluding the one-off impact of Visa sale. The related increase was driven by higher net interest income and higher fees generated on the back of loan volume growth achieved and improvement in cost to income ratio. Cost to income ratio of Yapı Kredi Bank stood at 41% in the first half, displaying 2 percentage points improvement on a y/y basis. When we move on to Group s net income performance on Slide 11, we see that Koç Group generated 6.5 billion TL on a combined basis, up by 62% y/y. We had one special item, very minor though, related with Koç Holding s stand-alone P&L. Koç Holding recognized 26 million TL after tax fair value gain in the first quarter, upon the delivery of office areas within the scope of The Veliefendi İstanbul real-estate development project. This was the third and the last delivery within the scope of the project. As of today, there is no outstanding unit left to be delivered to Koç Holding. Excluding the effect of this one-off item, as well as the one-offs items that were realized last year, combined net income was up by 70% y/y. In combined operating profit - net income reconciliation; negative effects of (1) slightly higher FX losses at Energy and (2) higher net financial expenses at Automotive was offset by the increase in deferred tax income of Tüpraş and Arçelik in relation to their investment tax credits. Moving next to Slide 12, Koç Holding s consolidated net income after the share of non-controlling interest amounted to 2.5 billion TL. This was up by 89% Y/y, excluding the one-off items. Improvement in y/y consolidated net income performance, compared to that at combined net income stems mainly from two impacts. The first one is the y/y increase in Koç Holding s effective rate at Yapı Kredi, following the 4.7% additional share purchase realized at the end June 2016. And the second one is the robust performance of Tüpraş, at which Koç Holding has a comperatively higher effective rate, with respect to other major portfolio companies. Slide 13 shows our performance in exports and international revenues. On a combined basis, our exports and international revenues increased by 19% and 18%, respectively. Higher oil prices and strong export volumes at Automotive and Energy were the major positives. On slide 14, you may follow that Group s total combined capex was 2.9 billion TL in the first half of the year. More than half of the Group s total capex came from Automotive. Moving on to the risk management issues, you may follow on slide 15 that our net cash position at the Holding level stands at 586 million US$ as of the end of June 2017. Gross cash at the Holding level is around US$ 2.1 billion and gross debt at Holding level includes two Eurobond issues only, with a total of US$ 1.5 billion. Our consolidated net debt excluding Finance Segment at the end of June 2017 was US$ 3.3 billion. On slide 16, you can follow that, at the Holding stand-alone level, we carry a small long FX position of US$ 74 million. At the consolidated level, our net short FX position is US$ 1.1 billion, after taking RUP financing loans of Tüpraş into consideration as hedging instruments. As we always emphasize, these loans are subject to cash flow hedge accounting in accordance with the IFRS. Therefore, FX gains / losses of RUP financing loans resulting Koç Holding Investor Relations 6 / 8
from the valuation differences have no immediate effect on P&L. Approximately US$ 1.2 billion of our net short position is subject to natural hedge through FX linked pricing of Tüpraş inventories. All in all, our consolidated net FX position after natural hedge is US$ 79 million long as of June 2017. This concludes my discussion on the financial results. Thank you for listening, now we can open the floor for questions. OPERATOR: MEMİSOGLU O: TUNCAY G: MEMİSOGLU O: TUNCAY G: MEMİSOGLU O: BODUR G: MEMİSOGLU O: The first question comes from the line of Memisoglu Osman of Bank of America Merrill Lynch. Please go ahead. Hello, thank you very much for the presentation. I wanted to get latest update from you, regarding your dividend policy, particularly considering the increasing cash into the holding from Tüpraş with the debt now completely paid. And with regards to that, if you have any color on the future inorganic growth strategy? That would be helpful. Thank you. Hi, Osman, it is Gülsevin. Well, actually your two questions are linked, so the dividend policy as well as the inorganic growth opportunities will be based on one or the other. So if we had good opportunities, we will like to look at these and if they are aligned with our IRR and rest of our investment principles, this is something that we can definitely consider and we are looking very actively at. And based on this, dividend policy will be decided. So will very much depend on the opportunities for investments that we find. And in regards to the investments geographically. Is it fair to say, you are looking primarily overseas geographies or is domestic geography still an option? There are both definitely options and we would like to find good opportunities which create value for us. So if they are domestic, then we d now also look at these, so given the current environment and the potential within the countries, it looks like international opportunities could also be very attractive, and may be more feasible in this period. So this is definitely something that we are looking at. So both, I would say both, but probably the likelihood of an international one is slightly higher. Okay, thank you. Hi, Osman. This is Gizem. When you look at our revenues, around 30% are derived from international revenues. However, in terms of capital allocation, international markets constitute a very small portion. And when it comes to Koç Holding, it is very important for us, the diversification of the portfolio in terms of NAV, diversification of the revenues, but also diversification of the cost base. So, an investment abroad would be also very valuable for us in terms of cost diversification. Great, thank you, Gizem. Koç Holding Investor Relations 7 / 8
OPERATOR: GURSOY O: TUNCAY G: GURSOY O: OPERATOR: BODUR G: We have one question just registered for Gursoy, Övünc of TEB Invest. Please proceed with your question. Hi, this is Övünc from TEB Investment. I have actually a question about 2018 guidance. What may impact your results in 2018 and whar are the growth figures you expect? Could you put some color on that? Thank you. It is very hard for us to give you any guidance right now regarding 2018, as we will be working on our budgets and strategic planning with our companies. We will be able to provide guidance towards the end of the year or towards the beginning of the year. So currently, there is not a significant amount we can say on this topic. Okay, thank you. Excuse me, there are no more questions registered at this time. You may now proceed with your closing statements. Thank you. Okay, thank you. Thank you everyone, for joining us today. I would like to extend our appreciation one more time to all of our participants. If you have any further question, you can always get back to us by phone or by email. As a reminder, our presentation and a replay of this conference call can be found on our website together with the transcript. So we hope to see you all again in our next webcast. Have a nice weekend. Bye-bye. Koç Holding Investor Relations 8 / 8