Sabancı Holding's first quarter earnings call. Please refer to our disclaimer before we start. We are today with our Group CFO, Orhun Köstem, to run through Q1 financials in detail. Orhun Bey, the floor is yours.
Thank you, Kerem. Good morning, good afternoon, everyone. We're very happy to be with you again in one of our quarterly calls. Of course, this one, our first quarter is the smallest quarter. It's about, you know, give or take, 20% of our annual revenue. However, at this time, it has become quite an important one, given the fact that we will walk you through our inflation-accounted numbers. And also, the quarter that we're comparing it to, the first quarter of 2023, was impacted by the massive earthquake, which has certain implications on the base. So that's how I will try to walk you through our results for the quarter. First of all, I think it's fair to say that we have continued progressing of our strategic agenda.
And our solar project in Texas, Cutlass II, has come on stream with 272 MW of capacity. In fact, we were together with Kerem there last week. It's a massive, you know, project when you go and see it, and quite spectacular. The second one, Oriana, you remember, the construction continues at the moment, and we have also secured the funding of this. So hopefully, by the time that we report to you the first quarter results next year, we then would be talking about our up-and-running 0.5 GW of capacity in the U.S.. Çimsa, on the other hand, has completed its calcium aluminate capacity expansion, obviously, which makes Çimsa the third largest capacity globally. That's quite important.
Of course, in this period, quite recently, as you know, we have separated our materials business, basically, to technologies and mobility solutions, which we believe captures better our focus on these each different segments. On the other hand, our you know, progress on ESG also continues. Now, something which you haven't probably seen in the press yet, but Sabancı Holding yesterday has received an outstanding achievement for sustainability in the EFQM Global Awards, which makes us very, very proud. I'm pretty sure you're going to hear more about that, but that's a very serious achievement. And we're actually, as you see here, moving forward to implement a framework about circular economy, basically, that would be underway. And of course, we've launched the Sustainability Academy.
Financials, I'm going to walk you through certain details, but we, after implementation of the inflation accounting, Sabancı Holding has a very healthy financial position. We have doubled our cash available. We have upped our CapEx to sales, progressing towards our target of 14%. Our net debt to EBITDA is just under 1x. Our consolidated ROE is just under 6%, but there's more detail into that, and I'm going to tell a little bit more about this. We still have a long FX position of $324 million. In the next page, I'm going to show you the backdrop, from a macro point of view, what is taking place.
On one hand, the energy and commodity prices have continued to be favorable, especially in comparison to 2022, 2023, 2021, and that period. So it's important, especially in a year when the pricing ability due to hopefully decreasing inflation will be challenging. This is an important driver for, you know, protecting and leveraging our margins. And this is to say, the wage increase in general follows faster than the inflation. And, you know, it's not only for us, but I'm pretty sure you must be hearing from all the Turkish corporates that has an impact on everyone's financial performance. The Consumer Price Index as at the end of the first quarter was 68%.
Actually, it's a bit of an acceleration compared to the first quarter of 2023, whereas the year-on-year change of the basket effects was 65%. So pretty much in line with the CPI-based period. Now, moving forward, this is for you, so to say, a you know, 30,000 ft of what our financials look like. Of course, on a combined basis, our revenues were up in real terms by 6%. Our EBITDA was down by 17%, and it seems that our net loss have increased compared to the first quarter of 2023. In fact, since you know, the bank still makes the majority, especially of our consolidated results, it's important to note that for financial institutions, of course, the impact of inflation accounting results in a monetary loss.
What you see in Sabancı Holding's consolidated P&L as a monetary loss, a majority of that comes from the bank. Nevertheless, if we move on to the non-bank side, there are certain businesses there, like our insurance business, and Enerjisa Enerji, which still costs a monetary loss, basically. Now, if we start from the revenue piece, here on the non-bank side, where there is a 15% contraction, this is mainly, the biggest drivers of that are coming from our energy businesses. I'm sure you must have listened to what Enerjisa Enerji had to say earlier. I think this is a relatively slow start to the year, but no change as to our expectations for the rest of the year.
In fact, the customer solution side of the business, in addition to distribution, is picking up quite nicely, and that's a very good indication, not only for the rest of the year, but going forward as well. And as a result, the energy prices are low compared to the first quarter of last year. Nevertheless, as you must have heard from us, in general, the EBITDA generation of Enerjisa Üretim, there are two important contributors to that. One of them is the trading, and the other one is the generation asset-based EBITDA. And the generation asset-based EBITDA, on a year, normally should be about $500 million. And this year is no different, basically.
On a year-on-year, there could be changes to the hydrology, wind or sun or et cetera, but that's a rule of thumb for you. We don't feel 2024 should be a different year, basically. In fact, we expect the generation asset-based EBITDA to grow in dollar terms, whereas the trading income is decreasing. In the past two years, as there has been very serious volatility on the energy prices, which were quite high, of course, that contribution was quite high. I think at best, we have last year made in excess of $100 million. This year probably, we should be able to make, you know, maybe about a quarter of that. So the fundamentals of the business is intact, you know, whatever we can guide you to.
However, the trading business is coming back, which is okay for us, because it's not a revenue objective driven, it's a capital return business for us, and we're happy with what we're seeing so far in the business. Other than that, of course, you must have also heard the building materials business, where the pricing is a challenge both domestic and internationally. So that's why, as I've tried to indicate, the energy and fuel prices in general in this quarter and rest of the year is important. Nevertheless, you see our EBITDA performance is, in fact, better than our top line, so we're posting an EBITDA margin improvement in the first quarter compared to the first quarter of last year on our non-bank business.
When we get to the net loss for the non-bank business, I will take you to the next slide, which I hope should explain it a little bit better, if you look on our return on equity numbers. On the left, on the left-hand side graph, you see our return on equity on an annualized basis for 2022, 2023, and the first quarter of 2024. And these are, of course, all inflation adjusted. The consolidated ROE moves from 19.8% on a year-on-year basis, and then 5.9%. Whereas the non-bank ROE moves from a massive 24.7% to 11.2%, and then to 9.4%. Now, the graph in the middle shows you the same ROE inflation-adjusted basis with certain items that are non-recurring.
For example, in 2022, you will remember the disposal of the tobacco business and the capital gains that we have received from that, or the sale of Kayseri and Niğde facilities in our building materials business. So if we exclude some of these, big, one-off items, then actually, you see that our ROE has been moving from a high single digit to low double digit on an annualized basis, which is, again, quite in line with our, expectations. For 2023, you see there is an uptick, and that's mainly because of the, incremental taxes that's attributable to the earthquake, which again, is quite difficult to guide, on an ongoing basis. In addition, as you've seen in my first graph, our capital expenditure is increasing. However, our net debt to EBITDA is not.
We're still under one time, so our balance sheet continues to be quite healthy. And speaking of the balance sheet, in the next slide, you see our cash that we hold at the holding have actually more than doubled compared to the first quarter of 2023. Which sounds quite nice, but under inflationary accounting, unless we make use of that, it penalizes us in our bottom line because it creates a monetary loss when there's 68% inflation. And that limits, of course, the monetary gain in general that we should generate in our non-bank business. So going forward, you should expect that, of course, to be converted into investment to be made good use of that. Now, operational cash flow that you see a contraction, which is more to do with the first quarter of 2023.
Again, if you remember, at the time of the earthquake, mostly some of the expenses were postponed, some receivables were extended, especially for our Enerjisa distribution business, which created a massive working capital change. So therefore, with the exception of which we don't see that to be a change quite abnormal. Now, this year, the free cash flow on an annualized basis may not be as high as the previous years, because as you look at the next graph, our CapEx to sales has been increasing from 8% at the end of the first quarter of 2023, to about 11.3% at the end of first quarter of 2024. Which is pretty much in line with our long-term guidance of 14% CapEx to sales of our non-bank business.
But hence has an impact on will have an impact on our cash flow in general for 2024. But also that, together with the increasing, you know, interest rates, obviously, explains you the drop in the ROE on a year-on-year basis, which I believe is more reasonable to expect in this period where we're investing basically, but still healthy and in line with our expectations. Now, if you move forward, our NAV has grown by about 28% in dollar terms. And the discount to NAV has moved from 52% to 43%. Now, if you look from a good side, obviously, on the right hand, that the bank's contribution to NAV has accelerated.
In general, in this period, the banking industry, the valuations or the market capitalizations have moved. And of course, our NAV has benefited that, basically. But then it's followed by, you know, materials, mobility as well as energy and climate businesses. Now, the catch here is, I think it's good that the bank's market cap is increasing. It adds on to our NAV. And more importantly, I think, our insurance business value has been creeping into our NAV more in terms of its potential fair value versus its cost, which used to be our historical way of reporting. Now, this all adds very nicely on our NAV, but of course, also increases the potential to increase the discount.
Of course, between the NAV growth and the discount, it's then becomes our job to make sure that we catch up with that increase in NAV every time it expands. And as some of you may know, and as we have discussed in the past, our long-term incentives actually describes this on one hand, to grow the NAV, and on the other hand, to make sure that the market cap performs, you know, better in comparison to BIST 30, basically. And the way to grow the NAV, if you look at the next page, obviously, we would very much like to be able to see a balanced contribution from our business units to the NAV.
The banks and financial services still has a high share, but as you know, the share of the energy and climate technologies have grown quite significantly. However, going forward, we could argue the materials and mobility solutions piece, as well as the digital, has to catch up so that we could achieve our three to five year target of having a more balanced NAV contribution. And that's our aim to achieve going forward. Now, here, I would hand over to Kerem to walk us through the details of the segments, the financial details of the segments. Following which, of course, we will be happy to answer, receive any questions that you may have. Kerem?
Thank you, Orhun Bey . Please drop your questions to the Q&A section of the Zoom. Once again, you can use the Q&A section . Let me first start with the bank. Before I start, please note that banking figures are based on BRSA financials, as banks are exempt from inflation accounting for this year. Akbank's robust expertise in flexible balance sheet management, including quick adaptiveness in mitigating the tight regulatory environment, as well as sustained excellence in fee performance, continued to be supportive factors for its profitability. Regardless of the sector-wide challenges, especially in margin evolution, Akbank started the year as projected, with 25% ROE and 2.7% return on assets. Akbank's strong momentum in expanding the customer footprint persists. The bank added 600,000 new customers in Q1, reaching 13.7 million in total active customer base, with cumulative increase of 5.2 million since the end of 2021.
So defining its recurring revenues and the footprint, footprint for the long-term success in evolving markets. In addition to this, the bank keeps its leading position in capital with a robust 17% capital adequacy ratio, which will continue to provide the bank significant competitive advantage going forward. Continuing with our largest non-bank segment, in Enerjisa Üretim, revenues dropped by 48% year-on-year on lower electricity prices and lower natural gas volumes compared to last year. The decline in EBITDA was related to lower dispatch contribution and higher operating expenses. However, EBITDA generation from renewable assets remained solid, mainly supported by high hydro generation, thanks to favorable weather conditions. The contribution from Enerjisa C ommodities softened due to limited profitable opportunities because of lesser volatility and liquidity in the markets.
With regards to Enerjisa Enerji, operational earnings in distribution and retail business increased by 45% year-on-year, mostly driven by higher financial income and CapEx reimbursements, as well as the recovery of efficiency and quality-related earnings. Customer solutions segments, operational earnings has significantly improved compared to last year, primarily due to solar panel projects. Yet, retail segment operational earnings declined by 0.8% year-on-year due to lower sourcing costs, both in regulated and liberalized segments. As we mentioned in the headline of this page, our energy segment has initiated a new CapEx cycle. The segment's total CapEx to sales ratio surged nine percentage points compared to last year and reached 21% in Q1. As a result, the segment's net income declined, mainly due to increased financing costs and negative impact of inflation accounting on deferred tax assets.
On building materials segment, top line declined by 8% year-on-year. Even though domestic volume growth remained solid, price adjustments failed to cope up with the inflation. Despite positive contribution from lower electricity prices, higher fuel and labor costs had an adverse effect on EBITDA. Segment net income dropped by 80% compared to last year, mainly due to EBITDA pass-through. Industrial segment revenues dropped by 3% year-on-year in Q1 due to price competition and lower volume in tire reinforcement business. However, segment EBITDA was up by 19% year-on-year, thanks to improving profitability in tire business and solid performance in our bus business, which we start to consolidate following the Exsa merger at the beginning of the year.
Lastly, net income increased by 6%-7% in the first quarter, as the negative impact of higher financial expenses were offset by positive contribution from deferred tax, tax liabilities based on inflation accounting. Financial service segment, inflation-adjusted top-line growth was 15%, driven by both life and non-life business. In the life business, AgeSA became the leader company and ranked as number one in the Turkish market in terms of private pension assets under management as of January 2024. AgeSA also maintains number one position in terms of gross written premiums in life and personal accidents.
Despite the growth in pension business, strong contribution from increasing volume of high margin crediting and standalone life products, EBITDA was negatively impacted by higher personnel expenses, the impact of valuation of deferred acquisition costs and deferred income reserves, which are indexed to minimum wage increase, and the increase in commissions paid on premiums. Net income was negatively affected by sizable monetary assets and net cash position. In a non-life business, despite the lower motor third party liability premiums, revenues increased by 11% year-on-year, thanks to favorable trends in health and non-motor segments. Despite the growth achieved in the non-motor segment, EBITDA was 52% below last year due to higher loss ratio and rising share of reinsurance premiums after the earthquake. The segment's bottom line affected negatively after adjustments with inflation, as insurance companies' balance sheet is highly dependent on monetary assets.
Digital segment top line increased by 27% year-on-year, with a higher contribution from electronics retail business, thanks to its omni-channel strength, wide product range, new customers and value-added service. E-commerce sales performance also remained solid, as gross merchandise value was up by 13% in real terms and reached TRY 3 billion in the first quarter of 2024. EBITDA increased by 26% year-on-year, thanks to strong top line growth in electronics retail business.
... The segment net income was negatively affected by higher finance, financing costs on high interest rates compared to last year. And finally, on retail segment, top line increased by 5% year-on-year, thanks to the growth in alternative channels. Disciplined cost management resulted in a major recovery in EBITDA margin, despite the negative impact of minimum wage hike by the beginning of 2024. However, net income was affected negatively by higher financing costs. So this concludes our segment information as well. So let's-
Thank you, Kerem.
Yes, thank you. As I wrap up again, in the first quarter of 2024, we continue with our strategic growth agenda. We continue with our progress on the ESG. In fact, we have, so to say, shifting gears, and we continue holding a healthy financial position. And we're quite excited about the rest of 2024. With that, we will leave the floor for any questions. Thank you.
Thank you, Orhun Bey . Please drop your questions to the Q&A section of the Zoom. Once again, you can use the Q&A section of the Zoom if you have any questions. Yes, we have a question from Umut: Thank you for the presentation. How do you see the output for energy generation, given the current low level of energy prices? Do you expect any increase in tariffs? And second, on the energy segment, I presume you expect strong EBITDA generation from energy generation in the rest of the year. How comfortable, comfortable are you that the prices will increase to achieve the targets?
Thank you. Again, these are two quite similar questions, so just wanted to make sure that we could address them at once. Now, if you look at the electricity prices in Turkey for the past two years, especially in 2022, after the Russian invasion of Ukraine, we have seen electricity prices reach as high as $120. This was obviously not necessarily quite sustainable. We, on a normal basis, if we project over a very long term, should expect the prices to be at around $80. You know, that's as a rule of thumb on a year-on-year basis. And today we're more like, you know, $60. So I don't think this is also, you know, sustainable.
Having said that, you know, it's quite difficult to crystal ball what could be the prices, energy prices, electricity prices for the rest of the year. We're aware, and we make our plans with the expectation that given the program to reduce the inflation, obviously such elements would be probably considered quite carefully by the government. However, as I tried to say earlier, normally we should expect our generation assets to post an EBITDA closer to $500 million. But obviously, for this year, the trading income is going to be reduced quite significantly, which again is okay, because we could guide you, and we could tell you what our generation assets could produce as EBITDA.
The trading contribution is dependent on the market volatility, and again, it's a capital allocation and a return on capital, issue for us, so we would be quite happy to have a reduced income on years like this. That doesn't unfortunately answer your question, because again, as I said, it's difficult to guess, but it could be. But all I say is, we expect to deliver quite closely, quite close to our normal, EBITDA bandwidth in terms of the output of our generation assets.
Okay, another question: When should we expect Enerjisa IPO to take place? What is the timeline on this project?
Yeah. Thank you, William. I think, you know, if we have that much of a clear timeline, probably you would hear. For the time being, though, I can say again, we feel that the business is in great shape. As shareholders, we will need to align, obviously going forward. And I believe, it's more than what how the business takes shape, it's, it's more about how the markets could take shape. And I'm not going to speculate about the potential valuation of Enerjisa Üretim. I'm pretty sure you must follow, as I was trying to say, how it's now contributes to our NAV compared to what it used to be a few years back. We would very much like to, you know, if we do, we do something at the best possible market conditions.
And then we'll see when that happens. So, you know, it's more like, you know, an issue of getting ready and capitalizing on the market conditions, but there's no, you know, specific announced timetable for that yet.
Second question is on U.S. investments. How much CapEx is allocated for the solar investments in the U.S.? How much EBITDA may it generate through the operation, and is this going to be a fully consolidated?
Thank you, Hamza Bey. Now, first of all, let me start with the easier one. Yes, it's going to be fully consolidated because, as you know, in Sabancı Climate Technologies, which is a parent company of Sabancı Renewables that runs these, you know, businesses in the U.S., is a wholly owned subsidiary of Sabancı Holding, so that's full consolidation. Now, how much CapEx is allocated? It's a... I'll tell you how it works. You know, if you take Cutlass, where the generation capacity is about 272 MW, I think the overall CapEx was around, you know, $350-$360 million give or take.
When we started the project, we started assuming that, of that CapEx amount, roughly, 1/3 equal installments would be shared by, you know, capital, debt, and tax equity. But when we finalized the project, it was more like, 50% was tax equity, you know, debt and capital was 25% each. So therefore, our estimate for the amount of capital we use going forward is a little bit conservative when you look at how we can achieve. So for the time being, you could assume we spend about, you know, $120 million, to own a generation asset of, you know, 272 MW.
Here, in terms of the EBITDA contribution, I think, you know, if you look at the full scope of our EBITDA, these, in the first instance, at least, the projects that we plan to own and operate, they contribute, you know, as high as maybe 15% more, all of which obviously, this time would be FX, obviously. But the real, of course, returns there, would be also, as we can expand our base. That's for you, our initial phase, up to, let's say, 1 GW, which can increase our overall EBITDA from the generation business by another 15%. And if you take the expansion of Enerjisa Üretim's capacity increase in Turkey, that's another 20%.
We expect, of course, hopefully, a very reasonable uptick in our EBITDA coming from our generation businesses, Turkey and outside of Turkey.
The third question is on banking industry. What would be the normalized ROE once the inflation stabilized below 25%?
Yeah, that's a difficult one, I have to tell you. I mean, and I'm pretty sure our colleagues at the bank would be much comfortable answering that. All I can say, if you followed what Akbank had to say, you know, last year and before that, when they started inflation accounting, that they were looking at, I think, at least high single digit ROEs or low double digit ROEs, which could be some guidance, Hamza Bey, but I believe that's a very good question to be discussed with our colleagues at the bank.
If you look on a consolidated basis, as I said, for, you know, Sabancı Holding, and I can tell you that over a longer term, basically, we could argue that, as I said, our without any, let's say, without any one-offs or non-recurring items, we should expect our consolidated ROE to be, you know, low double digit to high single digit. The non-bank business does something quite similar to this, currently, and, you know, we don't expect to see anything, you know, lower than this when we project this ahead.
Thank you, Orhun Bey. If you have any further questions, please type on the Q&A section of the Zoom. Thank you.