Haci Omer Sabanci Holding AS

IST:SAHOL.E

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to Sabanci Holding 2020 Third Quarter Consolidated Financial Results Webcast. Thank you for standing by. [Operator Instructions]

I will now hand you over to Mr. Baris Oran, the Chief Finance Officer of Sabanci Holding. Sir, the floor is yours.

[Baris Oran, executive]

Thank you. Welcome to Sabanci Holding's 2020 Q3 results webcast and conference call.

The information that we will share today is based on the actual results and our judgment. As always, we do not accept any liability on the information or content discussed.

Following the resilient operational performance in Q2, our group has successfully captured the domestic market recovery in Q3. The combined nonbank sales posted a 24% year-over-year increase, while improvement in operational profitability has led to a 35% year-over-year growth in the nonbank EBITDA on a comparable basis.

The solid operational profitability pass-through bottom line more than doubled compared to the same period last year, which is supported by lower financial expenses and loan FX position.

Our balance sheet continue to remain strong. Our combined nonbank liquidity remained at TRY 12 billion. The solid improvement in operational profitability has translated into a strong cash generation. Operating cash flow almost doubled in Q3. Nonbank indebtedness also improved, as our net debt to EBITDA dropped below 2x by the end of September. Our FX position is TRY 311 million (sic) [ USD 311 million ] long.

Let me give you a brief update on what is happening on the ground. After the sharp slowdown until the end of May, we started to see a substantial recovery in the domestic market. The solid economic activity is still valid, albeit at somewhat lower pace parallel to the normalization efforts. The upward trend in the economy since the beginning of June indicates a V-shaped recovery.

In Q3, our local demand-driven businesses have done much better than the one that have an international exposure in different markets. According to what we can see, there is an uneven recovery around the world, spearheaded by Asia Pacific.

We continue to keep our alert level at the highest degree to preserve the safety and well-being of our employees, their families and our customers, with the relapse of the COVID-19 cases since the beginning of October. We also continue to remain vigilant to react and adjust rapidly for a possible demand slowdown.

[Sermin Mutlu, executive]

Our group's operating cash flow and net debt to EBITDA performance remained exceptionally strong in Q3. Operating cash flow sharply improved and reached TRY 3.5 billion, almost double compared to the same period last year. Despite challenging operating environment, we managed to lower our combined net debt to nonbank EBITDA value 2x by the end of September.

Moving on to Q3 financial performance. Our combined revenues were up by 11%, while EBITDA increased by 33% on effective cost control. Consolidated bottom line grew by a remarkable 75% year-on-year on a comparable basis, led by the operational improvements, effective refinancing activities and FX gains mainly at the holding level.

The solid upward trend in our nonbank ROE in the first 6 months of the year accelerated even further in Q3 and reached 16.7%, the highest level since 2014.

We would like to highlight once again that Sabanci Holding standalone net cash position remains at TRY 1.8 billion, which is fully composed of hard currencies.

Our total nonbank combined liquidity, excluding financial services and tobacco business, stand at TRY 8 billion, while total funds at insurance companies is TRY 4 billion.

Our long FX position remained unchanged by the end of September compared to the year-end 2019.

As I touched upon briefly on previous slides, our total comparable combined revenues were up by 11% year-on-year in Q3. Excluding the bank, comparable combined revenue grew by 24% year-on-year, with major contributors are energy, retail and financial services segments.

Nonbank combined EBITDA growth was 35% year-on-year driven by energy, retail and building materials segments on a comparable basis. Industrial segment performance was still challenging.

Nonbank comparable consolidated bottom line has more than doubled in Q3, with the contribution of energy and retail segments. Well-managed financial expenses and FX gains, especially at the holding level, have also played a major role in consolidated net income increase.

To deep dive into segments, let's start with energy. In Q3, energy segment recorded strong set of results, with the contribution of both distribution and retail and generation businesses. Distribution business income growth remained strong on 21% year-on-year growth in regulated asset base, higher CapEx outperformance on better procurements, CapEx hedges and higher theft detection activities. Retail business benefited from higher liberalized markets and sales volume.

Looking at generation's performance, Enerjisa Generation's revenue was up by 52% year-on-year due to higher generation volumes, especially in natural gas plants on increasing spark spreads, positive impact of FX-denominated renewable sales price, power purchasing agreement in lignite plants and higher trading volume.

The positive impact of strong revenue generation remained fairly limited on EBITDA due to increasing share of natural gas plants in total production volume. Despite one-off financing cost on EUR 650 million new financing, net income increased by 47% year-on-year, owing to strong EBITDA contribution.

In September, Enerjisa Generation completed EUR 600 million financing, the largest financing to date in 2020 in the Turkish power sector. The financing is a significant milestone for Enerjisa Generation, as it is a transition from highly secured sponsor-supported project finance portfolio to an unsecured corporate style loan without sponsor support. With this financing, Enerjisa Generation is now able to allocate its strong cash generation via dividends to shareholders.

Generation also managed to reduce its net debt to EUR 554 million as of end of September, which equals to 1.9x net debt to EBITDA.

Financial services segment had another quarter with robust top line growth, high technical profits and strong ROE. On the non-life business, premium production increased by 30% year-on-year driven by strong performance in motor and nonmotor businesses. On the life and pension business, total protection premiums grew by 27% year-on-year on 35% year-on-year increase in credit linked growth and a 58% year-on-year growth in noncredit linked life protection, underpinning the diverse business market.

Increase in fund management income driven by higher pension volume and increasing net earned premiums on life protection made up 68% of technical income growth. On the non-life side, despite the improvement in net earned premiums, technical profits dropped compared to the same period last year due to flood and hail impact as of end of September. Combined ratios reached 100% in Q3 compared to 97% same period last year.

Despite lower financial income, high technical profit contribution from life business led to double-digit net income growth in financial services segments. Both businesses has a sizable floating cash and expanded their assets under management to sustain solid profitability going forward.

Moving on to building materials segments. Based on Turkish Cement Manufacturers' Association data, Turkish domestic cement demand was up by 15% year-on-year in the first 8 months of the year. With recovery starting in the local market since June, our cement business' domestic sales volume jumped by 34% compared to last year. Export volumes declined by 5% due to last year's high base and strategy to divert sales efforts to domestic markets on improved demand conditions. Consequently, total sales volume increased by 13% year-on-year.

The recovery in total sales volume and higher export prices as a result of TL depreciation led to a 24% increase in combined top line. Meanwhile, lower fuel prices compared to last year and higher export profitability led to a margin improvement in Q3.

On top of higher operational performance, lower financial expenses after refinancing of loans and higher FX gains positively affected the bottom line in this period.

On retail segments, the performance sharply improved in Q3. Segment's revenues increased by 36% year-on-year mainly driven by electronics retail with exceptional demand in this new normal era of online. Surge in PC sales was the key factor for electronics top line growth.

Revenue growth and disciplined OpEx management in electronics retail translated into stronger operating profitability in the segment, as IFRS-adjusted EBITDA doubled compared to last year.

Bottom line continues to benefit from lower financial expenses in the quarter as lower interest rates successfully offset higher indebtedness in both businesses.

Industrial segment's comparable top line dropped by 8% year-on-year mainly driven by Kordsa. Ongoing negative impact of COVID-19 on the aviation and in tire reinforcement businesses continues to depress the company's top line. Yet we see moderate demand recovery in our tire reinforcement business in Q3, and negative impact of shutdowns in Q2 started to disappear.

Brisa posted 12% top line growth driven by recovery on local demand, higher prices driven by TL depreciation and better product mix. Despite the negative impact from Kordsa and tobacco businesses, the segment's comparable EBITDA contraction remained limited at 7%, owing to positive contribution of Brisa. Favorable raw material prices, better pricing, product mix and higher capacity utilization supported Brisa's EBITDA growth.

Tobacco business profitability was negatively affected by adverse impact of FX-dominated costs. Bottom line growth of the segment sustained by Brisa's effective working capital management, which resulted in lower net debt and financial expenses, despite negative impact of Kordsa and tobacco businesses.

On banking, despite the challenging environments, along with rising funding costs, Akbank successfully managed to preserve solid core operating profit performance during the quarter, with a continued balanced asset and liability management without changing risk metrics. Fortress balance sheet and solid core operating performance enabled further reserve yields, while preserving best-in-class cost-income ratio.

One of the key actions taken during the quarter was the hedge of LYY loan's currency impacts. Akbank has fully hedged its loan against TL volatility and, therefore, currency volatility impact to mark-to-market calculations will be offset with foreign currency income. Its robust capital remains a source of strength with significant buffers, creating great competitive advantage to generate profitable growth going forward.

I would now leave the floor to Baris for further comments and closing remarks. Baris?

[Baris Oran, executive]

Thank you. We'll be focusing on maintaining a robust balance sheet and high liquidity and taking advantage of new inorganic growth opportunities and maintaining a vigilant stance against the recent relapse in cases.

Strong results in the first 9 months have not only proven the resilience of Sabanci Holding's diverse, mostly noncyclical businesses, but also underpinned its ability to capture economic recovery.

As promised, we will be communicating our long-term strategic and financial targets on the third week of November, and invitations will be sent shortly after this earnings call.

This ends our presentation today. And now I'd like to turn it to the operator, and we will be happy to answer any questions you may have.

[Operator]

[Operator Instructions] All right. So if we don't have any audio questions, just going once, twice, any -- all right. So we are going to move now to the written Q&A, Mr. Speaker, and if you'd like to kick off with that, the floor is yours.

[Baris Oran, executive]

Thank you. As of now, we don't have any written questions. If there are no further questions, I would like to thank all -- thank you all for your participation, and we'll keep you posted on our progress on our strategic direction as well as financial targets in the next couple of weeks. I hope to see you all in there in a digital platform.

Thank you, and you all have a great day.

[Operator]

And with that, we'd like to thank you for your participation. And this, ladies and gentlemen, concludes today's webcast call. We'd like to thank you for your participation. You may disconnect now.