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Edited Transcript of KCHOL.IS earnings conference call or presentation 8-Aug-19 4:15pm GMT

Q2 2019 Koc Holding AS Earnings Call

Istanbul Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Koc Holding AS earnings conference call or presentation Thursday, August 8, 2019 at 4:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gizem Poyraz Bodur

Koç Holding A.S. - IR Manager

* Nursel Ilgen

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I am Santinos, your Chorus Call operator. Welcome, and thank you for joining the Koç Holding conference call to present and discuss the first half 2019 financial results. (Operator Instructions) And the conference is being recorded. The presentation will be followed by a question-and-answer session. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Gizem Poyraz, Investor Relations Manager at Koç Holding. Ms. Poyraz, you may now proceed.

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Gizem Poyraz Bodur, Koç Holding A.S. - IR Manager [2]

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Thank you. Welcome, everyone, and thank you for joining us this evening. This is Gizem, IR Manager of Koç Holding. I have here with me our IR Coordinator, Nursel Ilgen; and our Finance Coordinator, Fatih Sertdemir.

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 in 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 a link to our earnings presentation. After the call, you can also access a replay facility on our website.

Now I would like to hand over to Nursel 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. Thank you.

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Nursel Ilgen, [3]

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Thank you, Gizem. Welcome, and thank you for joining us. Let's start on Slide 2. I would like to start by giving you a quick overview of our positioning.

Our main priorities at Koç Holding is to ensure sustainability. And in the second quarter of 2019, we maintained our net income stable year-over-year. This performance is a testament to the resilience of our portfolio against volatility and domestic slowdown as well as our strong risk management principles, which we always adhere to.

In this period, we have sustained our Koç Holding dividend income to a large extent despite the volatile environment. This year's figure does not incorporate the dividends of our unlisted companies as well as potential dividends for the remainder of the year from some of our companies as per our past year practices.

Another factor, which contributes to the sustainability of our dividend flow is the fact that around 80% of our dividend income is derived from companies with FX or FX-linked revenues. In summary, this dividend level can be considered as a new sustainable level, as we expect the free cash flow generation for our underlying companies to be solid also in 2019.

So the main components, which ensure the sustainability are: one, we have a sector of diversified portfolio, which hedges us against sector-specific sensitivities and cyclicalities, no single sector represents more than 30% of our AAV; two, we are the largest exporting group in Turkey, with our exports accounting for 10% of Turkey's total exports.

In terms of the composition of our own revenues on a combined basis, 34% is coming from international sales as of first half 2019. If you also include Tüpras, which is a FX-lined commodity business, 55% of our revenues can be considered not sensitive to the domestic economy.

Three, we have leading positions in the sectors that we operate. This allows us to maintain our strong pricing power. In this regard, we manage our balance sheet and investments to ensure that we always remain resilient.

On Slide 3, you can see the main pillars of our solid balance sheet. As you all know, prudent management has always been a key focus area. As the largest company in Turkey active in many diversified sectors, we manage our balance sheet to ensure that we always remain resilient against market volatility. At the holding stand-alone level, we like to keep a certain level of cash to serve as a warchest against volatility as well as buying power should investment opportunities arise.

As of the end of June 2019, our net cash position at the holding level stood at $400 million. As you know, in January 2019, we participated in Yapi Kredi Bank's AT1 issuance with $200 million. Therefore, including the Yapi Kredi Bank's AT1 investment with accrued interest, our net cash reached $617 million. Our gross cash is close to $2.7 billion, and 79% of this position is kept in hard currency.

In terms of our standing at Koç Holding's level, we have 3 Eurobonds, including our latest Eurobond issuance of $750 million in March of this year. The issue was a 6-year note priced with a coupon of 6.5%. The issuance allows Koç Holding to prefund the Eurobond totaling, again, $750 million due in April 2020 1 year in advance. The funds are mainly being kept in short-term dollar time deposits, and we have no other debt at Koç Holding stand-alone level. As a reminder, Koç Holding's ratings are BB- from S&P, which is 1 notch above Turkey's sovereign rating; and B1 for Moody's plus sovereign.

We also have well-defined and prudent risk management policies that are regularly monitored both on a combined basis and at each underlying company.

In terms of liquidity, leverage and foreign exchange position, we are at conservative levels. On a combined basis, our current ratio is 1.3x and our net financial debt-to-EBITDA is at 1.5x.

Note that these figures exclude IFRS 16 effect. Otherwise, Koc Holding combined level, the effect of IFRS 16 are negligible on net financial debt-to-EBITDA ratio.

In terms of FX, we have a policy of keeping a neutral position as we remain well within our risk management rules. As of June end, we are slightly long on dollars, both as solo and consolidated basis.

Now I would like to briefly summarize our first half performance focusing on our main sectors. Let's start with Energy and Tüpras on Slide 4. The domestic demand for refined products continued its downward trend in the first 5 months of 2019. We saw 7.4% decrease in diesel sales volume compared to the same period last year. On the other hand, gasoline and jet fuel were resilient and posted 1% and 3% growth, respectively.

Tüpras' domestic sales volume was down by 10%, while export volume more than doubled, leading to 6% increase in total sales volumes. When we look at the refining margins, we see $1.5 per barrel decline in the Med Complex margin to $2.7 per barrel due to lower gasoline and jet fuel crack margins. On the other hand, Tüpras' net refining was $0.8 higher than Med Complex margin, thanks to advantages in product yield and crude selection ability of the company. Tüpras' overall net refining margin amounted to $3.5 per barrel versus $8.9 per barrel during the same period of last year, mainly due to Residuum Upgrade Project maintenance impact and narrow differentials.

In terms of capacity utilization, Tüpras operated with 95% capacity utilization rate despite RUP maintenance, which started on February 26 and completed on May 13, nearly 2 weeks ahead of schedule. Although this maintenance had a negative impact of around $100 million in the first half on EBITDA, with the completion, Tüpras is fully positioned to take advantage of the upcoming IMO 2020 regulation change.

In terms of expectations for 2019, Tüpras lowered its refining-related CapEx guidance from $250 million to $200 million, mainly due to the postponement of some projects. The Med Complex margin is maintained at $3.75 to $4.25 per barrel, while Tüpras' net refining margin is expected to be $6 to $7 per barrel. Capacity utilization is foreseen to be around 95% to 100%.

On the LPG side, consumption decreased by 2% in the first 5 months of this year. Aygaz, the leading player in the LPG sector, focused on profitability, and its sales volume recorded 1% increase, thanks to its exports. For 2019, Aygaz expects 2% to 3% contraction in sales volumes while, for itself, market share is expected to remain flattish.

Accordingly, looking at the Energy segment's contribution to Koç Holding, we can see that its share in combined operating profit and consolidated net income are 29% and 11%, respectively. Net income contribution was impacted mainly due to the negative impact of plant RUP maintenance as well as tightened crude oil differentials and higher natural gas prices. Meanwhile, FX losses incurred in the first quarter of the year were recovered by inventory gains in the second quarter through natural hedge mechanism.

Let's move to Slide 5 and discuss the developments in the Auto segment. In 2019, Turkish auto market continued to be impacted by high interest rates and low consumer confidence. After 45% contraction in 2018 for the whole year, the first half of this year witnessed 45% year-on-year decline in market volume. In this period, for our auto companies focused on profitability in the domestic market by increasing sales in the more profitable segments. They are ways to take advantage of some government incentives for the auto sector, especially Tofas with its Egea passenger car. Accordingly, our market share in the domestic market increased by 4 percentage points to 26%.

On the export side, our group market share remained solid, especially supported by the strong performance of Ford Otosan. During this period, Ford Otosan increased its sales volume by 2% year-on-year, thanks to ongoing growth in the European commercial vehicle markets with support of sustained leadership. Tofas, on the other hand, witnessed 27% decline in its export volumes, but Tofas management kept its full year guidance of 14% year-on-year decline.

As you all know, more volumes than actual sales are guaranteed under take-or-pay contracts. Therefore, impact of the declining export volume on Tofas' profitably is limited.

Looking at the total revenue performance of Ford Otosan and Tofas, we can see 19% growth and 2% decline, respectively. International revenues were the main driver for both companies, supported by euro-based cost-plus contracts, and in the case of Tofas, also take-or-pay. These contracts allow our auto companies to remain resilient in periods of Turkish lira depreciation and domestic market slowdown. For both companies, International revenues contributed around 80% to 85% of their total revenues.

Regarding 2019 expectations, both companies maintained their exports and domestic sales. We expect around 35% contraction in the domestic market. Ford Otosan expects its retail sales volume to be around 40,000 to 50,000 units with 35% decline, while Tofas is 60,000 to 65,000 units corresponding to only 14% year-over-year decline, mainly thanks to the market share gains in the passenger car segment.

Regarding export, Ford Otosan expects volumes to hover around 340,000 to 350,000 units with around 5% year-over-year growth. Tofas, on the other hand, expects around 14% volume contraction to around 200,000 to 220,000 units, but the P&L impact will be limited, as we mentioned earlier, thanks to take-or-pay contracts, which are in excess of this figure. So all in all, solid exports contracts and cost discipline will ensure resilience for our auto companies in the second half of the year.

Let's also touch upon our tractor company, TürkTraktör. In the first half, demand was severely impacted by high input prices and low farmers' confidence. During this time, TürkTraktör domestic sales volume declined by 67% year-over-year. This was partly offset by strong export sales with 20% volume increase. Accordingly, TürkTraktör revenues declined by 18%, mainly supported by price increases and

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Profitability was also impacted to a great extent by weak demand dynamics in Turkey. For 2019, TürkTraktör increased its export volume guidance slightly upwards while maintaining domestic sales guidance.

Otokar, our leading bus and defense company, had a very successful start to the year, thanks to its bus exports to Bucharest and Amman municipalities as well as armored vehicle deliveries to United Arab Emirates. These orders have been the result of superior R&D capabilities and successful product of Otokar. In this period, export revenue surged more than 5x over TRY 1 billion, constituting 81% of total revenues. Accordingly, total revenues more than doubled in the first half as profitability was strong, thanks to the favorable product mix and currency impact. All in all, compared to a net loss a year ago, Otokar reported TRY 195 million of net profit in the first half.

In summary, we see solid performance from the Automotive segment of Koç Holding. Overall, the Auto segment accounts for 29% of our combined operating profit and 33% of our consolidated net income. The Auto segment's operating profit increased by 17% year-on-year despite the sharp decline in the domestic market. The main drivers of this positive performance were strong international revenues and export contracts as well as cost discipline. Accordingly, our Auto segment's consolidated net income decreased by 8% year-over-year, mainly due to the one-offs linked to the purchase gain on acquisition of car rental business in Greece by Otokoç in 2018. Excluding this one-off, the Auto segment realized 7% year-over-year growth in consolidated net income.

On Slide 6, we can look at the Consumer Durables segment. In the first half of 2019, white goods sales in Turkey decreased by 9% year-over-year due to weak private consumption, while special consumption tax cuts during the period had a positive impact on the markets. On international markets front, in the first half, West Europe recorded a slight increase of 2% and Eastern Europe remained strong with 5%. White goods exports in the sector was up by 1% year-over-year.

Looking at Arçelik figures, domestic revenues increased by 20%, thanks to outperformance of the market with 10% growth in unit sales. Arçelik realized significant market share gains in this period. On the international sales front, which constituted 67% of total, revenue growth was stronger at 36%, mainly due to FX impact as well as some organic growth and acquisition of Singer Bangladesh. In this period, Arçelik managed to increase its price index, especially in Western Europe.

In terms of profitability, strong sales performance and stable raw material prices were among the positives of the first half.

Looking at the key risk metrics, Arçelik managed to maintain them at sustainable levels. The company's working capital-to-sales ratio was almost flat at 28.4% on strong performance in terms of receivables and good inventory management. Leverage also stayed at comfortable levels with a net debt-to-EBITDA ratio of 2.4x, while the company successfully rolled over most of its debt year-to-date.

Regarding 2019 expectations, the domestic market is foreseen to decline by 15% year-over-year, mainly due to the termination of the special consumption tax cuts at the end of June 2019. Revenue growth is expected to be around 20% to 25% on solid positioning in the domestic and international markets, consolidation of Bangladesh operations as well as currency impact. EBITDA margin expectation is revised down by 1 percentage point to 10.5%, mainly due to weaker outlook in the second half of the year.

Overall, the Consumer Durables segment operating profit increased by 29% year-over-year and contributed 12% of the group's combined operating profit. This performance was driven by solid international revenues with pricing focus, supportive raw material prices and domestic volume growth despite a contracting market.

Finally, let me also briefly talk about the Finance segment and the development at Yapi Kredi on Slide 7. Yapi Kredi's net income was flattish at TRY 2.4 billion, while pre-provision profit posted 25% year-over-year growth and the return on tangible equity was realized at 12.5%, while the bank applied a conservative approach in terms of cost of risk.

Cost growth was below inflation year-on-year at 17%, thanks to cost discipline, while revenue growth stood at 22% on double-digit growth in both fees and net interest income. Accordingly, cost-to-income ratio decreased by 1.6 percentage points year-over-year to 36.6%.

In the first half of 2019, total loan growth was 5% year-to-date, while Turkish lira loan growth stood at 9%, supported by TRY 8.4 billion credit guarantee funds utilization. Deposit growth was 10% year-to-date, where the bank gained market share in value-added segments such as TL small ticket and demand deposits.

NPL ratio increased slightly to 5.9%. Total coverage ratio stood conservatively at 6.1%, which remains highest among peers.

In terms of capital, the bank undertook 2 important initiatives in last 1 year, a capital increase of TRY 4.1 billion in June 2018 and an AT1 issuance of $650 million in January 2019. Following these transactions, together with internal capital generation, capital adequacy ratio and Tier 1 ratio stood at 15.6% and 12.8% by June end, respectively, comfortably above minimum requirements with a buffer of more than 300 basis points.

Yapi Kredi Bank has confirmed its full year guidance. Accordingly, in 2019, the bank expects around 15% TL loan growth and mid-teens deposit growth. In terms of profitability, the bank expects return on tangible equity at low teens, incorporating flattish NIM margin, solid fee growth, below-average inflation cost growth and cost of risk below 300 basis points with continuation of its prudent risk appetite.

Overall, the Finance segment operating profit and consolidated net income declined slightly. In terms of shares and total combined operating profit and consolidated net income, it has the highest contribution amongst our sectors with 30% and 39%, respectively.

If we move to Slide 8, we can talk about the overall results of the group incorporating all of the segment trends we just discussed. On a combined basis, Koç Group registered TRY 160 billion in revenues, TRY 9.5 billion in operating profit and TRY 5.7 billion in net income. Consolidated net income amounted to TRY 2.2 billion with 14% year-over-year decrease. Excluding the one-off gain of Otokoç in 2018, the decline in our consolidated net income would be 10%.

On Slide 9, we can see the breakdown of the consolidated net income performance. The biggest contributors were Finance and Auto segment followed by Energy, Consumer Durables and other segments.

I would like to wrap up our presentation on Slide 10. In summary, we recorded a sustainable performance in the first half of 2019, mainly thanks to our diversified portfolio structure and our disciplined risk policy. Value creation is always a key priority for us. Going forward, we have the potential to further diversify our positioning, both domestically and internationally, through our investments while maintaining a sustainable and efficient level of cash.

This concludes my presentation. And now we are ready to take the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) 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.

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Gizem Poyraz Bodur, Koç Holding A.S. - IR Manager [2]

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Okay. So thank you so much for everyone for participating. We look forward to seeing you at the next call, if not sooner. Goodbye.

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Operator [3]

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