Tofas Turk Otomobil Fabrikasi AS

IST:TOASO.E

Q1-2025 Earnings Call

[Operator]

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Tofas Turk Otomobil Fabrikasi Conference Call and live webcast to present and discuss the First Quarter 2025 Financial Results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Cengiz Eroldu, CEO; Mr. Ahmet Tasangil, CFO; and Mr. Mehmet Agyuz, CFA, Investor Relations Manager.

Mr. Tasangil, you may now proceed.

[Ahmet Tasangil, executive]

Thank you for joining our call. In a moment, Mehmet Agyuz, our Head of Investor Relations will take you through the details of our results for the first quarter of 2025. But before that, I would like to provide some highlights for the results. Q1 financials were negatively impacted by several factors, namely high competition in local markets without any local producer advantage under current tax brackets, limited availability on some imported light commercial vehicles, our transition from phase-in phase-out of some production models and lastly, implementation of hyperinflation accounting.

On the other hand, our company generated cash with an operating cash flow of approximately TRY 5 billion in the first quarter of this year. Our export volumes in Q1 compared to the same period of the last year were affected by the phase-out of Fiorino production and by import restrictions in Algerian market. However, ramp-up of our new model, K0 is ongoing, and we will be launching new variants of K0 soon. As a result, we expect notable acceleration in our export volumes for the rest of the year.

More importantly, we are very excited about the road ahead for Tofas after the regulatory approval of our Stellantis Turkey acquisition. This acquisition marks the beginning of a new era for Tofas to potentially transforming the company to the next level. We expect the closure of the deal very soon. The acquisition will solidify our local market leadership with a total market share of almost 26% in the first quarter of 2025.

As a result, scaled economies would enable us to reap benefit of cost synergies as well as to penetrate into new business areas. In addition, we are also focused on the saturation of our plant and recently announced a EUR 256 million investment for the production of a new light vehicle. This model is expected to have an annual production capacity of 150,000 units, including [indiscernible] units.

We plan to start production of the new model in the third quarter of 2026 and expect to share more details when we finalize the contract with Stellantis soon. This investment mandate is the second step of our industrial cooperation with Stellantis after [indiscernible] allocation and our plant is well-positioned to secure additional production mandate in the near future.

I will now give the floor to Mehmet for the rest of the presentation, and then we would be glad to answer your questions.

[Mehmet Agyüz, executive]

Thank you. Good afternoon, and good morning, everybody. I will walk through our first quarter performance for the rest of the presentation. In the first quarter, Turkish automotive production declined by 9% reaching to 244,000 units. Our production levels were around 27,000 units, which were around 50% less than the prior year, and we constitute around 8% of the industry in the first quarter of the year.

In terms of production mix, it was stable compared to the prior year and passenger car production constituted 69%, whereas the remainder was composed of LCV production. In the first quarter, we shipped 30,000 units, which was 44% less than the prior year and better than our production. On the domestic front, our shipments were 37% lower, whereas our export shipments were 61% less compared to the prior year. We expect -- we are in the ramp-up stage, and we expect export volumes to recover significantly in the remainder of the year.

In terms of shipment volumes by business, the most significant change was observed in our export business, where LCV shipments composition increased by more than 100% and reached 86% of our export business. Moving on to domestic market; in the first quarter, domestic market declined by 7%, reaching to 276,000 units. Passenger car demand [ sales ] better than the LCV and contracted by 4% at 224,000 units, whereas LCV demand contraction was higher at 16%, reaching to slightly above 52,000 units.

You see the monthly evolution of the retail sales in Turkey. And after two consecutive years of record demand in local markets, in the first two months of the year, demand retreated slightly. However, in March, LV demand recorded a historic high figure for that month. And this was due to demand brought forward due to macro volatility with consumers anticipating price increases for the rest of the year due to the macro volatility observed in March.

Our shipment volumes in the local market stood at slightly above 23,000 units, which was around 44% lower compared to the prior year. And our PC shipments stood at close to 17,000 units, which was 35% less, whereas our LCV shipments were around 10,000 units less at close to 7,000 units. And the decline in the LCV side was mainly due to discontinuation of the Fiorino production at the end of first half of last year.

In terms of market share, Fiat brands stood in the third position with a market share of 8% in the first quarter. High competition in the local market with our less than competitive advantage as a local producer due to any lack of revision in the tax brackets continues to impact our market share as well as phase-in and phase-out of our production portfolio has continued to have a temporary negative impact on our market share. Including premium brands, Tofas market share stood at 8.4%.

And also more importantly, LV market share of Stellantis brands stood at 25.8% in the first quarter. And in fact, the brands we purchased they improved their market share year-over-year, which shows the resilience and the competitive position of our brand portfolio going forward. In LCV market, Fiat brand maintained the second position, albeit with a lower market share of 12.6% in the first quarter.

Availability of the imported LCVs and the phase-out of Fiorino are the main contributors, whereas LCV market share of Stellantis brand stood at close to 44%. In fact, the other brands improved their market shares significantly in the first quarter. In passenger car, Fiat brand moved [indiscernible] to third position with a market share of slightly below 7%.

And in addition to high competition, also, you would be aware of the tax exempt sales to the disabled season, which tends to be quite heavy in the first quarter of the year after the announcement of the purchase limits by the government at the end of the year. And competition was quite aggressive in this market, and that also had an impact on our passenger car market share.

For the brands under Stellantis umbrella, the market share stood at 21%, which was 500 basis points lower compared to the prior year. Moving on to export business; in the first quarter, although now due to the transition, our export volumes are quite low, we shipped around 10,000 units less at 6,500 units in total.

And our LCV shipments were slightly lower compared to the prior year due to the continued ramp-up of our K0, whereas our passenger car shipments were down around 9,000 units due to the import restrictions in one of our key markets in the MENA region, which these restrictions started actually in the second quarter of last year. You can see the monthly evolution of our export volumes on this slide, and you can see a gradual ramp-up.

And in the coming months, we are foreseeing a notable acceleration in our monthly figures for this year. This is the regional breakdown of our exports and may not be very representative for the -- going forward as our export volumes are relatively low at 6,500 units. Nevertheless, in the first quarter, France became our biggest export destination with 38% of our export volumes, followed by Italy by 1/4 of our export shipments and Spain with 16% of our export shipments in the first quarter of the year.

Moving on to shipments by export and domestic markets by our model, you can see we shipped 6,500 units of exports, which is 10,000 units less, and this was mainly driven by lower passenger car shipments as K0 shipments mostly compensated for the discontinuation of Fiorino. On the right-hand side, our domestic shipments, we shipped 26,500 units in the first quarter which is around 16,000 units less compared to prior year. And most of that decline stems from the discontinuation of Fiorino.

As a result, in total, we shipped 33,000 units which is around 26,000 less compared to the prior year. Moving on to financial performance; 44% decline in our shipments translates into 48% decline in our consolidated revenue, whereas we generated almost TRY 700 million of EBITDA, which is around 90% less. However, showing a slight recovery compared to the fourth quarter of last year. And due to our high net monetary position, we recorded net monetary losses, which translates into a negative profit before tax of TRY 188 million in the first quarter.

You see the snapshot of our income statements here. Although we have taken cost measures in the quarter, the 48% decline in the revenues translates into higher declines on our operating line due to the fixed cost structure as well as the negative effect of the hyperinflationary accounting below the operating line. Our balance sheet, we continue to generate cash in the first quarter. As you can see, our cash and cash equivalents increased by almost TRY 5 billion, standing at TRY 26.6 billion.

We have shown an improvement in our net working capital, mainly driven by the receivables and the payables accounts, and we paid down around TRY 1 billion of debt with our long-term financial liabilities standing close to around TRY 30 billion. Moving on to investments; in the first quarter, we spent TRY 38 million of CapEx, which is on track with our plan and bulk of which around TRY 35 million of that constituted from our K0 investments as we are in the stage of introducing new variants to the market.

Moving on to outlook; we -- as a standalone, we decided to maintain our guidance of our light vehicle market outlook of 0.9 million to 1.1 million units and our domestic retail sales of 110,000 to 130,000 units and export shipments of 70,000 to 90,000 units. This translates into a production volume of 150,000 to 170,000 units with a CapEx of EUR 150 million. But I should note that, as you are aware that we are in the process of closing the acquisition of Stellantis Turkey, which will change this picture notably, and we will provide more details after the closure of this acquisition.

This marks the end of our presentation, and we would be happy to take your questions. Mina?

[Operator]

[Operator Instructions] The first question is from the line of Kilickiran Hanzade with JPMorgan.

[Hanzade Kilickiran, analyst]

I would like to make a follow-up on the potential project. I can understand that you don't want to disclose too much, but is it possible to comment what type of model this could be? And is it reasonable to assume that this may be a commercial vehicle that you had previously [Technical Difficulty] in Turkey such as [indiscernible] as a product it's going to sold in Turkey and MENA rather than Europe.

And the other question is for Egea; if the new model is going to be launched in the second half of '26, could there be an extension on the Egea contract so that you may not face [Technical Difficulty] in the production during this transition phase?

[Ahmet Tasangil, executive]

Thank you Hanzade for the questions. Starting from the first one, from a commercial standpoint we will just defer the full details of the project until we sign the agreement. So for the time being, we will keep only the volume that we mentioned in our public disclosures. And for the agreement, we are still discussing with Stellantis, and we hope to sign it soon. On the.

[Hanzade Kilickiran, analyst]

I apologize, but I mean, since this account has been done recently and it's for 2026 and there is no project within Stellantis for '26, could this be an old model?

[Ahmet Tasangil, executive]

We will disclose the details once we sign the agreement. We will not be -- you too long on this one. We will try to aim as soon as possible on this one. Going back to the Egea question, as we talked about it on the last time it's a topic that's on the table. We are discussing it. And it is on our agenda, and we will also announce it when there is a decision taken on that one.

[Operator]

[Operator Instructions] The next question is from the line of Ignebekcili Murat with HSBC.

[Murat Ignebekcili, analyst]

[Technical Difficulty] should we necessarily expect PC model or given the dominance or the aggressiveness of the Chinese competitors, could we just discuss the -- switch to commercial vehicles a complete change in plans.

[Ahmet Tasangil, executive]

Thank you for the question. Both of the options can be doable. As I mentioned, we are discussing and contemplating on this one. So the pipeline is not clear yet. Two options can be also possible and they are on the agenda.

[Operator]

Mr. Ignebekcili, that was your question?

[Murat Ignebekcili, analyst]

And just another question that comes to my mind is how has the profitability of -- I mean can you compare the profitability of an export project and a domestic project after the change of the [Technical Difficulty] in the last two years given the relative value of Turkish lira? Can you comment on that, please?

[Ahmet Tasangil, executive]

For sure, if you produce in Turkey and sell in Turkey, that's much profitable from our side as well. And it was the case in the previous years and will be the case in the coming years as well.

[Murat Ignebekcili, analyst]

So what I'm trying to say is domestic focus is not very easy to discuss, right? You obviously want to have that domestic exposure.

[Ahmet Tasangil, executive]

Sure, definitely. I mean that's -- we have a significant market share and to defend that market share, we also need a production that also caters to the domestic market as well.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no further audio questions at this time. We will now move on to written questions from our webcast participants. Our first question from webcast participants is from [indiscernible] with HSBC, and I quote, nearly 1/3 of K0 sales were on the domestic market in Q1. Should we expect a change in this ratio for the full year?

[Ahmet Tasangil, executive]

Thank you for the question. We expect significant change on that one as the ramp-up stage is ongoing for the time being. And as we mentioned in our guidance, the export volume is around 70,000 to 80,000 units. So we expect a significant change in favor of export volumes for K0.

[Operator]

[Operator Instructions] Our next webcast question is from [indiscernible] and I quote, can you give us more color on cost synergies? What should be expecting in terms of margins and new business potential?

[Ahmet Tasangil, executive]

Thank you for the question. I mean both on cost and revenue side, there will be many synergies. On cost side, such synergies will be in areas like logistics, purchasing and many areas in sales and marketing expenses. And on the revenue side, there will be also many areas as well like insurance sales and new business areas such as used car business and independent aftermarket for spare parts as well.

[Operator]

Our final webcast question is from with [indiscernible] and I quote, to which level do you think your total production volume will climb considering all the agreements and terminations with Stellantis? Will you be able to achieve CUR rates above 80%?

[Ahmet Tasangil, executive]

Thank you for the question. For the [ timing ], the capacity utilization rate is very low. And with this new vehicle, we will be having at least 70% capacity utilization rate as well. And for 2027, that was a target year for us, and we would like to achieve a full capacity utilization rate by that date with hopefully a new project that we will also announce in the meantime.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Tasangil for any closing comments.

[Ahmet Tasangil, executive]

Thank you, Mina. We certainly appreciate your time today and your interest in Tofas. I wish you a good day.

[Operator]

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