Hello, good afternoon, and welcome to Sabancı Holding Third Quarter 2024 Financial Results Call. For those of you I haven't met, I am Şule Kardeşoğlu, IR Manager of Sabancı Holding. Kerem was supposed to be here, but he wasn't able to make it today. I have our CFO with me here, and before I hand over to him, please pay attention to our disclaimer. And please also note that this call will be recorded and uploaded to the IR website. And now it's my pleasure to hand over to Orhun Bey.
Thank you, Şule. Good morning and good afternoon, everyone. Just to be clear, Kerem is on a roadshow, so he can't make it today. However, I'm at the capable hands of my colleagues. Welcome to our third quarter Results webcast meeting. Again, you know I'm going to talk about what's happened since we last were together in the third quarter of the year, and looking from a 50,000 feet point of view, we're not reporting a net profit, basically. However, as you'll remember, when we were closing the second quarter call, we said we were expecting, on the non-bank side especially, the rest of the year to be markedly better than the first two quarters of the year, which I'm happy to report that we've seen. As you saw in the third quarter, on the non-bank side, we have a break-even bottom line.
That may not be very exciting, but nevertheless shows a very serious quarter-on-quarter improvement since the start of the year. Our EBITDA margin has expanded by 120 basis points. We had a massive cash flow, operating cash flow generation. I'm going to walk you through those details, and we still have a very robust level of cash at the holding company, which is a blessing and at the same time a little bit negative because it has implications on our monetary position, but nevertheless, as we plan to direct them to investments, that's our position as of the end of the third quarter. In the period, obviously, we continue to execute on our strategy of investing in net zero transition in the new economy. Çimsa, as I'm sure you must have followed, acquired a business in Ireland called Mannok. Bulutistan is acquired by SabancıDx.
That's expected to be one of the unicorns out of the Turkish market and one of the few cloud service providers. That's now part of Sabancı business and, of course, part of our growing digital business. We have been expanding capacity in the generation business in Turkey. On one hand, we have announced that we've secured a $1 billion funding for 750 megawatts of 1,000-megawatt expansion that Enerjisa Üretim is conducting. And at the same time, Enerjisa Üretim also does bolt-on acquisitions. So both are in progress and continue quite healthily. Outside of Turkey, we've completed the funding package of Oriana, our second project in the U.S. for solar, including the tax equity piece. So the whole package is now completed, and we expect that to become operational by the second quarter of next year.
And again, in our capital markets day, that was held in London, we've announced our medium-term targets until 2029. I'm not going to go through them today. On the ESG side, nothing necessarily changing, at least for the negative. On the positive side, obviously, Akbank has provided an additional TRY 126 billion of sustainable finance. I think that puts make up about 44% of our 2030 commitment. So basically, that is also in a healthy progress. Now, if I can take you, first of all, to the backdrop of our results. On the left top corner of this page, you see the energy and commodity prices, obviously. After 2021 and 2022, energy and commodity prices have been normalizing in 2023. So this year is not necessarily very different, which is obviously good for some of our businesses, like industrial businesses.
It's a relief for commodity and energy prices to remain low. Having said that, as we have electricity generation in our portfolio, that impacts that side of the portfolio negatively. But that's how the trend has been going since the start of the year. On the bottom left corner, you see the CPI versus the change in the FX basket rate. And obviously, the inflation has been significantly higher than the devaluation. Now, the significance of that, and I'm sure you must also be following that as well, the export-oriented businesses are underperforming only because of this change. And that is continuing and expected to continue until the end of the year. But we need to remember that when we look at the mobility side of our business, material technology side of our business, most of which are important exporters, that's a factor to remember.
And again, in general, this is what mostly impacts the bottom line. On the cost base, I think we have to highlight the fact that on the top right corner, the payroll increases are quite significant. So between the nine months of 2023 and nine months of 2024, we're looking at about a 71% increase. And of course, on the bottom right corner, we showed you the policy rate there with the monthly change of the basket. But just to remember that the interest rates are seriously higher versus last year, the same quarter, which is a factor to consider when we look at the bottom line of the businesses for this specific year. And when I say for this specific year, obviously, I'm referring to the disinflation program.
One other impact of which is, as you have been following, the GDP growth was 5.3% in the first quarter, 2.5% in the second quarter. So we see a deceleration of economic activity. And that's our backdrop in general for 2024. Now, coming to the financials, if you look on a top-to-top basis, we see combined revenues in the first nine months growing by 5%, EBITDA contracting 46%. And our bottom line has turned from positive to negative. On one hand, obviously, and I trust you must be following from our colleagues on Akbank as well, the whole banking sector's performance this year is not necessarily very positive. With the disinflation program in place and the macroprudential measures in place, the net income margin generation this year is challenging.
Even though, as far as Akbank is concerned, the customer acquisition and expansion is pretty much in line with our expectation, that results in positive commission revenues that are generated. Nevertheless, we see a marked slowdown in performance of the banking sector in general. Leaving that aside, when you look at the non-bank business, you see the revenues contracting by 15%, EBITDA by 19%, and a net loss on the bottom line. Now, some of you, I'm sure, must have done the comparison versus the first half of the year, where we were showing a 17% revenue contraction and 28% EBITDA contraction and a very similar number on the bottom line as a consolidated net loss of our non-bank business. As I was trying to point out, the non-bank business performance has been improving since the second quarter.
That shouldn't be coming as a surprise because you've already talked about this and discussed about this as we were closing the second quarter call. When it comes to the bottom line, about 60% of the losses on the non-bank side actually comes from the monetary loss of the holding. If you exclude the holding piece and the impact of some non-operating elements, like the impact of the tax revaluation, that especially is influential in our energy business, operationally, the bottom line of the non-bank business actually goes north of TL 2 billion positively. Now, what I'm trying to say in a nutshell is the momentum in our non-bank business is positive. We were expecting this, and we see it now flowing into our numbers.
Just to show you in a bit more detail, the next page, we show you the third quarter, basically, where on the top line combined, you see a flat revenue, contraction of EBITDA and then a loss on the bottom line. If you look at the non-bank business, the revenue contraction is about 11%. EBITDA is almost flat, about 2% decrease, which suggests that the EBITDA margin has expanded by 120 basis points. We looked at the break-even bottom line on our non-bank business, and again, if we exclude for holding or other non-operating elements, obviously, we're looking at a positive number on the bottom line for the non-bank business on a consolidated basis, so in short, as we were expecting, the momentum on our non-bank business is turning positive.
The second half of the year we're expecting to be better than the first half, which is now flowing into our numbers. On the next page, you see the Return on Equity, which is coming down, of course, versus last year. And about it was 2.5% at the end of the nine months. But again, for some of you who are comparing with the first half, that number was very low, about 0.3%, basically. That, again, in addition to other elements, as I was suggesting, also gets impacted by the level of interest rates that have been increasing quite significantly versus last year. So this year, in that sense, is mostly transitionary. If you look at the net financial debt to EBITDA, it was at 1.1 time. Again, this was 1.3 times at the end of the first half.
And between the EBITDA generation and the working capital management, we've seen a very strong cash flow generation. You're going to see on the next page, where the operating cash flow you see on the middle is TL 40 billion versus 39. Now, again, at the end of the first half, what we're showing you was a contraction from 26 to 9. So basically, there has been a massive improvement in operating cash flow generation, which positively impacted the net EBITDA numbers. Obviously, our holding-only net cash position is quite high, about on a nominal basis, more than 100% compared to the same period end of last year. Now, as I said, that is also transitory. So we're not necessarily want to hold on to this cash. We want to allocate it, and it's going to be allocated into investments going forward.
Hopefully, the impact on the monetary position will get less because that, unfortunately, results in monetary losses. But that's a conscious decision that we're taking. CapEx already have been increasing. Referring to my remarks at the opening of the session of the investments that we have been undertaking, on the non-bank side, CapEx to net sales have increased to 12.6% from 9.4% the same period of last year. As we continue, I'm going to, again, show you the NAV piece. NAV, in dollar terms, since the start of the year, has grown by 7%. Well, if you look at the NAV discount, we still see a very high discount. I mean, it has improved from 52% to 45%. In fact, since we last spoke at the end of the second half, what we see, the minimum that we've seen in 2024 was about 36%.
So actually, we've seen a massive contraction. And part of the expansion that we see now, obviously, is a function of what's happening in the market in general. And if you see the NAV breakdown, I think, for those of you who have been following us and listening to us, one of the things that we are looking to hopefully deliver is a more balanced NAV composition. And between the energy and climate technologies versus banking and financial services technologies, these are now quite balanced in our portfolio. And again, our aim going forward is to make sure that we grow other parts of our portfolio as well from an NAV contribution point of view. And in that, of course, the digital piece, which is almost nonexistent today, is going to play an important part.
Now, with that, I will hand over to Şule, and she'll start her remarks to talk a bit in more detail about the segment financials. Şule.
Thank you, Orhun Bey. Let me first start with the bank. But before I start, please note that banking figures on the slide are based on BRSA financials as banks are exempt from inflation accounting for this year. Akbank's expertise in flexible balance sheet management, along with its rapid adaptation in navigating the tight regulatory environment, as well as sustained excellence in fee performance, continued to underpin its profitability in the third quarter. Despite sector-wide headwinds, including high borrowing rates and macroprudential restrictions, Akbank has remained committed to enhance its recurring revenues and ensure sustainable profitability. While identifying areas for sustainable growth, Akbank maintained prudence in risk management and cost control.
Akbank's active customer base exceeded 14 million in the third quarter, marking a net increase of 5.8 million since the end of 2021. This growth has solidified the bank's market position and set a strong foundation for long-term resilience. Moreover, Akbank's ongoing success in customer acquisition contributed to a remarkable improvement in the fee-to-assets ratio, which has increased by 26 percentage points over the past seven quarters to 84%, with even a higher quarterly figure of 91%, thanks to all-time high fee-chargeable customer base and strong progress. Additionally, with a total Capital Adequacy Ratio of 17.2% and Tier 1 ratio of 14.6%, Akbank continues to maintain a solid capital structure, providing a buffer against market volatility and supporting sustainable growth.
Its strong capital position, well-structured balance sheet to prosper in this inflationary environment, along with a low TL asset ratio of 82%, offers considerable potential for enhancing margins and profitability going forward. Moving on, our largest non-bank segment, energy generation business, despite the challenging market conditions, the company achieved a 10% year-on-year revenue increase in the third quarter, much better than in previous quarters and driven by higher generation volumes. Even though EBITDA performance improved, it was still below that of last year due to a combination of factors, including lower electricity prices and reduction in generation volumes, as well as declining trading activities in the current market, which is less liquid and more stable. On a more positive note, net income almost tripled in the third quarter compared to last year, driven by higher monetary gains and the lower corporate tax expense.
With regards to Enerjisa Energy, operational earnings in distribution business increased by 7% year-on-year in the first nine months, mostly driven by higher financial income and CapEx reimbursements. Operational earnings in customer solutions segments have significantly improved compared to last year, mostly driven by increasing the smaller PV projects. Yet, retail segment operational earnings declined as expected by 30% year-on-year due to lower sourcing costs in both regulated and liberalized segments. In the first nine months, investments stood at 9 billion TL, which is matching the seasonal CapEx pattern of the distribution business and in line with full-year targets. As a result, underlying net income declined to 3.1 billion TL on a year-on-year basis, fully in line with 2024 guidance. This development is expected due to lower earnings contribution from the retail activities and increase in financial expenses on a higher debt and interest rates.
In materials technology segment, volume growth has accelerated in cement, driven by domestic sales, while contraction in exports and weaker pricing in the domestic market pressured revenues. The recovery in tire reinforcement hasn't materialized as competitive pricing at the global scale remained challenging. EBITDA performance improved, but still remained lower than the previous year due to price pressures within the overall segment and discrepancy between inflation and depreciation in exports. Yet, margins increased over 300 basis points in the third quarter compared to last year, thanks to favorable energy and fuel prices. Segment net income has more than doubled, mainly due to enhanced operating profitability, reduced financial expenses, and higher monetary gains, specifically achieved in the cement business. As a separate note, Çimsa's acquisition of Mannok, a UK-based company with an expansive product range, including cement-based products, insulation materials, and recycled plastic packaging, completed at the beginning of October.
This is the largest overseas acquisition in the history of the Sabancı Holding and will be fully consolidated under Çimsa with the fourth quarter results. In mobility solutions, tire business managed to increase its market share, particularly in OEM, during the first nine months of the year, despite the contraction in the overall market. However, segment revenues declined on an annual basis, affected by pricing pressures. The decline in EBITDA was primarily due to lower revenue generation. While operational efficiency and favorable raw material and energy costs helped to mitigate losses to some extent, the prevailing inflationary pressures continued to weigh on operating performance. Even though net monetary gains had a positive impact on net income, the impact of higher financial expenses resulted in 249 million net losses in the third quarter.
Financial services segment's inflation-adjusted top lines slightly dropped by 2% year-on-year in the first nine months, primarily driven by non-life business, despite the healthy growth in life business. EBITDA of both businesses demonstrated a notable increase in the third quarter, which is attributable to the continued success of the long-term Credit-Life Product and the robust ROP performance in life business, as well as a strategic focus on high-margin segments in non-life to improve Capital Adequacy Ratio. However, segment EBITDA dropped in the first nine months, mainly due to lower premium generation on lower financial income in non-life. As a nature of insurance business with high levels of monetary assets, the negative impact of inflationary accounting was largely reflected in net income level. Yet, this impact eased in the third quarter thanks to higher interest income in life business.
It is also worth mentioning that our life company has reinforced its leadership position in terms of private pension assets under management and Gross Written Premium in life and Personal Accident. Digital segment revenues dropped by 2% year-on-year in the third quarter, which resulted in 6% growth in the first nine months, despite the slowdown in the overall markets, thanks to the strong execution of omnichannel strategy and the strategic focus on digitalization and constantly enhancing customer experience in our technology retailer. E-commerce sales performance also remained solid. Gross merchandise value dropped 2% year-on-year to maintain a sustainably high EBITDA performance in a challenging pricing environment. In the third quarter, EBITDA recovered sharply compared to the same period of last year and brought nine-month figures to fourfold. The margin expansion is also notable thanks to ongoing cost optimization and effective inventory management.
Despite significant improvements in margins, segment net income heavily pressured by high financing costs and credit card expenses. Please also note that, as Orhun Bey mentioned, we raised our share in Bulutistan to 75.5% through the DxBV and started to consolidate under Sabancı Holding as of August 2024. Finally, on retail, the segment top line remained unchanged over the previous year, while EBITDA increased substantially, driven by ongoing cost optimization. The negative impact of high financial expenses continued to weigh on the bottom line, resulting in a net loss. With that, we can start Q&A session. And I think the first question we have is from Muharrem Gürsever. In the second quarter earnings call, we were expecting $500 million EBITDA from energy generation units. Is this projection still relevant?
In the second question, Umut Bey is also asking for, do you still maintain your $500 million EBITDA guidance for Enerjisa Üretim, given the around $200 million EBITDA generation in nine months 2024?
Yes. Thank you for this. I think I realize, first of all, if you look at our release, the details referring to Enerjisa Üretim's financials obviously are how it gets consolidated into Sabancı Holding consolidated results. So therefore, when we talk about dollar-for-dollar numbers that is generated by the current setup of the portfolio of Enerjisa Üretim, the outlook really does not necessarily change, obviously. We said it can produce about $500 million of EBITDA. This year, we expect, I think, at least to the tune of a 10% decline in the overall EBITDA that's generated by the business compared to last year.
That is primarily a function of how the economy is contracting or decelerating this year, not contracting, but decelerating this year, and the electricity prices are low. Now, having said that, I'm holding my breath at this point in time because the market does not necessarily improve or we get any relief from the market on that, and we will still lend, at the worst-case scenario, quite near $500 million of EBITDA. Now, if we miss that, and I'm going to come back to you and tell you about this when we close the year, I don't expect that to be no more than low single digits, basically, so more or less, we still expect to deliver something close there, but if you walk from the details that in our release, you need to add back the impact of the hedging, you need to account for the one-off items.
I admit, I acknowledge it becomes quite difficult to start from those numbers and get to something closer to 500. But on a like-for-like basis, when you do those adjustments, yes, this is more or less what we still can look at for the time being.
And next, we have a question. There were recently some news in the media claiming that Enerjisa Üretim's IPO is planned to take place in spring 2025. Do you confirm this? And the third question of Umut Bey is, how do you see the outlook for 2025? Do you expect a recovery in your business segments, assuming some easing in interest rates?
Yeah. Look, I'm formally, I can't talk about an IPO in the spring of 2025 because when it becomes formal, you're going to hear that. You already know the intention.
We already referred to the company's capability, which is in a great position today. As you heard from us, we are expanding our footprint, we're expanding the capacity, we're making bolt-on acquisitions, and yes, unfortunately, 2024 is a transition year in the economy where we have the disinflation program that slows down the economic activity with low electricity prices, and yes, hitting at least a $500 million EBITDA is not very easy this year, but I'm pretty sure we're going to get quite close to that at worst-case scenario, so on that basis, we'll still continue with the same intention. I can therefore neither confirm nor let's say reject any specific timing for the IPO. That won't be. I can't do that technically.
Now, the outlook for 2025, again, on one hand, we're going to see the disinflation program continuing, obviously, because the medium-term target continues to see a reduction in the inflation on a year-on-year, so that needs to continue. But hopefully, if we see the policy rates start coming down or some of the macroprudential measures getting eased or altogether being lifted off, that could result, back to the question, obviously, a reduction in the interest rates in general. And yes, of course, I mean, the outlook for next year has to be more positive than what we see this year. And that's, again, on a year-on-year basis. We've not finalized that yet. We're in the process of drawing our budgets, but that's more or less how the outlook should look like.
I'm happy to talk more about this when we get together again next time when we have a more clear outlook for 2025.
Thank you, Orhun Bey. Muharrem Bey has a couple of more questions. Under what circumstances would you consider resuming share buybacks? And the next question is, is there an asset diversification plan? There are some assets that the holding is not able to receive any dividends for years. Considering the capital allocation strategy of the group, what will trigger an asset sale?
Thank you, Muharrem Bey. One, as you remember, we did the share buyback, started share buyback at the last quarter of 2021. And I'm aware, and that's where you may be looking at, that the discount to NAV was also quite high at that time. That was about 50%.
The difference between now and then is, A, obviously, this time, the discount to NAV comes from basically the revaluation of the non-listed assets, mainly Enerjisa Üretim. So therefore, in reality, on a like-for-like basis, the discount has narrowed down quite significantly, and now only naturally is widening again. Now, we did a lot of heavy lifting when we first started the buyback program. But now the NAV has grown, I think, about from six to close to 10. Now it's about nine point something. And then we'll see how other parts of our business does, how our non-listed assets does. If we feel going forward that still requires some support from the share buyback, we can still reintroduce or restart the program, basically. But good for us that I don't expect us to do much of a heavy lifting as we did at that point in time.
As I said, the discount this year has come as low as 36%, even with this high net asset value, so hopefully, the portfolio will do much better at this time around. Thank you, Orhun Bey, and we move on to the next question from Orhun Bey, Ulvoşkunt. Thank you for your presentation. There's more from Hanzade. I think we already answered Hanzade Hanım's first question, but she also has a follow-up. Yeah. What is the comparable EBITDA realization in nine months? Yeah. Hanzade Hanım, hi. I was trying to refer to that. If you walk from the release on the inflation-accounted numbers that actually get consolidated into Sabancı Holding, it's a little bit difficult to move from there because when we talk about the guidance for that for Enerjisa Ü retim, we're talking about dollar-to-dollar figures, so you need to add back the impact of the hedges.
You need to account for one-offs, as I was trying to refer to. Compared to last year, this year, again, we'll definitely see a slowdown in the EBITDA. But as I was trying to say exactly, I'm holding my breath because although the market is not necessarily supporting us, we still are going to lend somewhere quite close to $500 million EBITDA mark. If we're lower than that, and I told you that we were going to be at around those levels anyway at the end of the second quarter, I think we're not going to miss that, not more than a low single-digit %. So we're pretty much on track, but I'm happy to come back to you and report back once we close the year. But again, if you walk from the inflation-adjusted numbers that you see in the release, it's quite difficult, and I admit that.
I referred to you to our teams to actually get to the components of that.
Thank you, Orhun Bey. Going back to the Umut Bey questions, what do you think about Trump and his approach to renewable energy? Does it affect the U.S. markets or your investment efficiency? Thanks.
Thank you, Umut Bey. Look, again, there has been obviously a lot of talk and commentary about what Trump, President-elect Trump, could do in terms of the renewable energy and the Inflation Reduction Act when he comes to the office. For us, I think one thing is certain that's going to happen is with President-elect Trump's policies of making America first or great, obviously, the energy demand in America will not necessarily slow down and will continue to grow.
Of course, I'm pretty sure if you're following up on the impact of AI on the general cloud computing, that energy requirement continues to grow. I think the AI piece adds up somewhere between 8%-10% to that demand every year. So the energy demand is going to be there on one end. I'm pretty sure it's going to be everyone is going to try to meet that with supply coming from every source, including renewables. So that demand will hardly change. For us, I think the real thing was, as you remember, we have been leveraging tax equity at the start of our investments that justifies our cost of capital. Otherwise, it becomes quite difficult to justify Turkey market risk investing there. Now, the tax equity piece has been introduced long before the IRA, basically.
It's not necessarily relevant to what happens to IRA. So if you put those two together, we don't necessarily expect a significant change. And I have to tell you something from what I've been hearing from the commentary as well. Our investments are in Texas, in solar, and there are other big investments in Texas as well in terms of the solar because there's massive land. And our facility is like nine football fields large, and there are larger facilities there, which provides labor work to that region, which primarily votes for Republicans. So I hardly expect any change coming from those positions going forward, frankly speaking.
The next question from Sultan Bey is almost similar with the one Umut Bey asked. It's again about the government policies in the U.S. and its impact on our Sabancı Renewables operation.
The next question from Ögeday: Are you currently benefiting from Biden-era green energy subsidies? If so, how will you be impacted if they are rolled back under the new administration? It's again.
Well, yes. I mean, thank you for these questions. Obviously, there is a change in the U.S. However, as I was trying to explain, at the risk of repeating myself, we don't see a change in the energy demand in the U.S. It can even increase with what Trump says he wants to do. With the inclusion of AI, etc., that requirement will further increase. There will continue to be a demand for energy. And with every resource available, I'm pretty sure that they'll try to continue meeting that. It's not the renewable energy piece. It was tax equity that we were pointing out that makes it interesting.
But that component has been introduced long before IRAs. So basically, we don't expect a massive change into this. And in closing, I was saying where most of these investments are being made in renewable are usually coming from places that also votes for Republicans. So I don't necessarily expect any serious change in those positions.
Thank you, Orhun Bey. We do not have any more questions on the line. Dear participants, if you would like to ask questions, please type it to the Q&A box. I guess no more questions. Orhun Bey, I think now it brings us to the end of the Q&A. Thank you.
Yes. Thank you, everyone, for joining us. We hope to be able to report back to you after the closing of the fourth quarter, which I hope will continue showing you an improvement on a quarter-by-quarter in our business.
Many thanks for participating, and see you until next time. Thank you.