Good afternoon. Good morning. Welcome to Sabancı Holding's Second Quarter Earnings Call. Please refer to our disclaimer page before we start. We also would like to thank all sell-side and buy-side for their support for us in the Excel survey. It is greatly appreciated.
I now would like to leave the floor to our CFO, Orhun Bey.
Thank you, Kerem. Good morning, good afternoon, everyone. Welcome to Sabancı Holding's second quarter of 2025 earnings call. We're very happy to be with you together today. We're also very happy to report another good quarterly performance. It has been quite a busy quarter from an agenda point of view, obviously, from Sabancı Holding's side, as well as domestic and international events. On the Sabancı side, as you see on page one, first of all, let me start by saying, and again, repeating, we have a change in our Chair. Güler Sabancı obviously, has left, and now Hayri Çulhacı is Sabancı Holding's Chair of the Board of Directors. This, we feel, is quite important, not only because we now have a non-family Chair in Sabancı Holding's Board of Directors, but also now the majority of the Board of Directors are composed of non-family members.
Secondly, as you know, Kıvanç Zaimler has been appointed as the Chief Executive Officer of Sabancı Holding in the second quarter. Obviously, this is something that has taken place towards the end of the second quarter of the year. We have some changes in our business units, which we feel today is a more streamlined way as to how we would operate to deliver on our long-term strategic targets. On the key development side, you know, we have announced our acquisition of the Pepper Solar Farm in Texas, U.S., with 156 MW of capacity, together with Cutlass, which came on stream last year, and then Oriana, which is coming on stream this year, in fact, as we speak. Our capacity in the U.S. has come closer to 600 MW. I'm pretty sure you're going to continue hearing from us about our investments in the U.S. on the renewable energy generation side.
We have already announced our capital commitments of about $395 million by 2027. In Türkiye, Enerjisa Üretim's generation capacity has surpassed 4 GW. As far as I know, it's 4.1 as of today, as more and more windmills are coming on stream from the YEKA capacity expansion project as we speak. As you see, in the second quarter, we were on full steam in terms of our delivery on our strategic targets. Financially, we did reasonably well. Of course, we've seen in the second quarter a combined revenue growth of real 4%. The same for the half and the quarter in that sense, pretty much in line with our annual growth over the past two years, a touch higher, maybe 3% to 4%. Pretty good.
Our EBITDA margin, you know, on a non-bank basis, on a combined basis, was up over 300 basis points in the quarter and, you know, close to 200 basis points in the first half. Of course, in the second quarter, we've delivered the TRY 1.8 billion of net income. I'm obviously going to come in a little bit more detail about that. We still have a very flexible and healthy balance sheet, and we have made sure our cash flow generation continued to be strong, basically, as we continue progressing toward our CapEx and expansion and growth opportunities. Our net asset value has come closer to where it was, reasonably close to where it was at the end of 2024 after dipping, especially at the end of the first quarter, start of the second quarter this year.
If I can give you a bit more color, first of all, on page five, what the background was in the second quarter. As I was saying, it was quite a colorful quarter in that sense because, as you've seen, first of all, the geopolitical risks continue to remain high, you know, between Russia and Ukraine or Israel and Gaza, Iran in that period, especially if you remember, obviously, the geopolitical risks continued to remain high. The trade policy risks were high. Needless to say, the tariff situation, although, you know, looking from today, seems a little bit more maybe clear. The second quarter, you know, it was really, really, the risk was really, really high because of the uncertainty of the global trade impact on the global trade in general.
On the commodity or energy prices side, as you see, and as we were saying earlier as well, this year, you know, we're towards the bottom line of the five-year range, as we've seen, which obviously is positive for many of the production businesses. In Türkiye, as you see, the second quarter has been a quarter where the monetary tightness was very strong. Even though the rates, the policy rate has come down, you know, starting from the end of the year, we've seen in the second quarter, the policy rate has increased, basically. Obviously, compared to the inflation, there has been a very significant real interest rate environment. It has implications on many, many businesses, basically. The difference between the inflation, CPI and PPI versus the CapEx or the devaluation continues, the devaluation continues to trail behind the inflation. That as well has implications on many of the businesses.
This is a backdrop of the second quarter. Again, let me underline, we're quite happy to be able to deliver good results in this otherwise challenging second quarter of 2025. If I can now take you to those results on page six. First, starting from the second quarter of the year, as I said, we've seen the combined revenues grow by 4%. It has grown the same in the first and second, in the second quarter and the first half, and the same for our bank and non-bank businesses. If you looked at the EBITDA, given the fact that we have been through a very serious monetary tightening period in the second quarter, of course, it has implications in the overall banking sector. I'm pretty sure you must have heard from our colleagues in Akbank talking about this.
However, if you look at the non-bank side, we're happy to say that we have delivered quite a significant absolute EBITDA growth, as well as a serious margin expansion. The margin expansion on the non-bank side was about over 320 basis points, frankly speaking. As far as the net income is concerned, with a very serious rebound, we've delivered TRY 1.8 billion of net income. Of course, now you see, for this quarter, the majority is driven by the non-bank businesses. If you look at the first half, we've seen now the first half, banks' contribution to combined revenue growth was much stronger, obviously, where we've seen a slight contraction in real terms in the revenue of the non-bank businesses. Nevertheless, if you look at the profit performance again, we've seen the non-bank businesses' contribution to be quite meaningful, where the EBITDA in real terms have grown by 17%.
Again, with a margin expansion of about 190 basis points. In the first half of the year, there has been a very significant rebound in our bottom line, even though we are yet to recuperate the impact from coming from the first quarter. Looking at the momentum of the business, I think it's fair to say that we're on the way to deliver in the rest of the year. I think it's important to note that we're quite happy to be able to deliver in this otherwise relatively challenging environment and obviously in the best position to deliver better when the conditions normalize in the remainder of the year. If you look at the cash flow generation, that's on page eight.
Of course, we are prioritizing the cash flow generation in our business and working capital management, obviously, in order to make sure that we maintain a healthy balance sheet for all of our group in general. Therefore, our operating cash flow has more than doubled in the first half of 2025 and reached just under TRY 30 billion. Our return on equity is still negative, as I said. Now, of course, a little seriously less on the non-bank side. As we hope to continue delivering better and better quarter by quarter, as you've seen, obviously, we expect to see changes happening here as well. If you look at our balance sheet, our net debt to EBITDA is at 1.7x . There is an increase year on year, as I'm sure you're following.
That's quite natural, you know, between Enerjisa Üretim's capacity expansion, Sabancı Renewables, new generation capacities coming on stream, acquisition of Mannok by Çimsa in the last quarter of 2024. Of course, we're seeing our net debt to EBITDA levels increasing. Nevertheless, these are still less than 2x net debt to EBITDA, which is our policy rate on the non-bank basis, as you remember. Our CapEx to sales, therefore, continue to remain, you know, reasonably high at 12.6% of non-bank net revenue in the first half of 2025. If we go to talk about a little bit of our NAV. Our NAV, as I said, is back, you know, to $9.8 billion, was $10.6 billion at the end of 2024, and dipped just under $9 billion in April. That was when I think we had our discussion with you about the first quarter as well.
Therefore, we've seen some rebound in our net asset value, even though, you know, the discount continues to be quite attractive at 49%. If you look at the share of the NAV, again, you know, banking and energy and climate remains to be the largest contributors to the NAV, although, you know, much comparable in the share, versus a few years back, basically.
With that, I'll hand over the discussion to Kerem, which will give a little bit more detail about each business unit. Kerem?
Thank you, Orhun Bey. Let me begin with the bank. Just to remind, the banking numbers presented on this page are based on BRSA financials as the banks are exempt from inflation accounting. Macroeconomic conditions in the second quarter were challenging for the banking sector. Akbank remained committed to enhancing its recurring revenues to ensure sustainable profitability. Akbank's proficiency in flexible balance sheet management allows it to stay aligned with regulations and respond swiftly to market shifts, while its sustained fee performance continues to be a supportive factor for profitability. Rebalancing and optimizing funding mix while increasing widespread consumer-only TL time deposits, deposit footprint enabled to keep it up, keep TL loan-to-deposit ratio at low level, which will support margin enhancements.
Moreover, Akbank's ongoing success in customer acquisitions contributed to its fee-to-OpEx ratio, which improved 13 percentage points since 2022 to 100%, thanks to an all-time high fee-chargeable customer base and strong cross-sales. This efficiency indicator proved the scalability of the operating model and the strength of non-interest income streams. Optimizing loan portfolio through a disciplined risk framework has enabled it to maintain sound asset quality supported by advanced analytic capabilities. Meanwhile, the share of stage two and three loans representing potentially problematic exposures remains low at 8.7% of the gross portfolio, while the coverage ratio stands strong at 32.7%, reflecting disciplined risk management practices. We can now turn to the core metrics of the bank. SWOT-adjusted net interest margin fell to 2% in Q2, as higher wholesale funding rates limited loan repricing impact due to rate caps and ongoing elevated reserve requirements delayed the expected margin recovery.
Looking ahead, its strong balance sheet, supported by extended TL maturity, optimized funding through increased time deposit share, and targeted securities portfolio management positions the bank well to capture margin improvement opportunities in the coming periods. Also, its prudent cost management ensures effective OpEx control while the bank sustains its long-term ambition in cost-to-income ratio to remain in the mid to low 30% range, in line with its historical averages. With a total capital equity ratio of 17.4% and Tier 1 ratio of 13.8%, Akbank continues to maintain a solid capital structure, providing a buffer against market volatility and challenges, and ensuring critical resources of sustainable and profitable growth. On financial services, life business gross written premiums increased 36% year on year, reaching over TRY 14 billion in the first half, with a 20% year-on-year increase in the second quarter.
Maintaining its leadership among private companies in both private pension assets under management and life and personal accident premium production, assets under management, excluding auto enrollments, grew 10% year on year to TRY 282 billion. In non-life, the selective and sustainable profit-driven approach continued, supporting the improvements in the capital equity ratio, which reached 170%. This strategic focus led to a 28% year-on-year decline in gross written premiums. Assets under management down by 13% in the first half. Segments, inflation-adjusted top line remained almost flat, with declining 1% year on year in Q2, driven by a contraction in lower premium generation in non-life business, despite the positive contribution from the life business. EBITDA increased significantly by 76%, largely driven by the life and pension business and supported by the reclassification of deferred income from a non-monetary to monetary liability.
This reclassification impacted the technical profit of the pension business and offset the impact of monetary losses under inflation accounting. Technical profit was also supported by volume increase on credit-linked life products. The segment's net income contribution turned positive, thanks to stronger profitability in the life and pension business and the offset from reclassification of deferred income from a non-monetary to monetary liability. Overall, financial services segment has a 10% share in Sabancı Holding's combined non-bank EBITDA and one of the main contributors to margin expansion in the second quarter. Let me continue with our largest non-bank segment, energy. Before getting into financial performance, let me first give you a quick overview of the operational landscape in the second quarter.
On the generation side, production volume increased by 30% year on year, mainly due to a low base of last year caused by the maintenance work at our natural gas plants. Yet, hydrologies remained weak due to ongoing droughts, which is a structural challenge for Türkiye, especially in peak seasons. Spot electricity prices were largely flat on a year-on-year basis, averaging $61 per megawatt, while the regulated price cap was increased by 13% to an equivalent of $85 per megawatt as of June and dollar TL rates. Spreads were partially weighed down by 24% year on year due to the increase in natural gas prices that took effect in April. In July, electricity demand picked up and spot prices climbed above $70 per megawatt, suggesting some recovery in momentum.
Generation capacity growth continues as well, has now reached 4.1 GW, driven by the progressive commissioning of wind projects under the YEKA-2 program. To fund new YEKA- 4 projects tendered back in March, net debt to EBITDA was pushed to 2.7x . Energy delivered stronger EBITDA year on year, driven by higher efficiency and quality earnings in the distribution business, despite lower financial income due to relatively low investments year to date and easing inflation expectations. Retail's contribution was relatively soft in Q2, while higher gross profit from energy efficiency projects in customer solutions supported the year-on-year EBITDA growth. On the investment side, the company expects to meet its 2025 CapEx target of TRY `21 billion to TRY 24 billion, representing approximately 45% growth compared to last year, while targeting the upper end of our underlying net income guidance, which was earlier announced as TRY 5 billion to TRY 6 billion.
Looking at the overall performance of the energy segment, top line grew by 9% year on year in Q2, while EBITDA margin expanded by more than 500 basis points, reaching 19%. The bulk of this improvement came from the generation business, which largely benefited from higher generation volumes and capacity utilization, together with increased capacity payments that support both net EBITDA and net income. In the distribution and retail business, net income posted a significant year-on-year increase, and excluding one-offs, the improvement remains substantial in underlying net income, mainly driven by a sharp decline in monetary losses. As a final note, bus operations are also reported under this segment, while its current contribution is limited.
On the material technology segment, starting from Q2, tire and tire-centric solutions have been included under this segment, alongside cement and tire and composite reinforcement businesses for a more integrated view of our financial verticals.
In the cement business, domestic market conditions were mixed, with subdued demand in Çimsa's operating regions, while ongoing reconstruction in earthquake-affected regions was supportive. Export performance and specifically international operations offered support, reflecting into segment's top-line performance, while the Mannok acquisition contributed EUR 18 million in EBITDA in Q2. The ongoing grinding investments in the U.S., which is expected to be operational throughout Q4, will support Çimsa's international operations. Although production costs slightly increased, Çimsa's diversified product mix helped cushion the margin pressure. In tire and tire-centric solutions, domestic sales softened across both OEM and replacement channels. That said, exports offset this weakness; however, effects inflation mismatch continue to pressurize on margins. On a more positive note, the continued shift toward premium products supported the overall sales mix, while pricing pressure persisted in both domestic market and exports.
In the tire reinforcements, despite multiple challenges, the business delivered margin improvement in the second quarter, supported by composite performance, together with efficiency and cost improvement in the tire reinforcements. The flood in Indonesia, reflecting on the direct impacts, the ongoing effects inflation mismatch in Türkiye and India, and global softness in tire reinforcement demand remained key headwinds, while composites were supported by growing sales to higher margin industries. In this quarter, no impairment has been recognized for the flood, which will be readdressed in the remainder of the year. Insurance coverage for this event is up to $50 million, including the business interruption for up to 12 months. Looking at the overall performance of the material technology segment, top-line declined by a limited 2% year on year in Q2, while EBITDA margin contracted by more than 180 basis points, reaching 12%.
Cement operations hold a larger share in the cement in this segment compared to tire operations, and much of the annual decline in profitability can be attributed to margin contraction in cement, mainly due to increased fixed costs. The decline in segments' net income was primarily driven by higher financial expenses, especially in the tire business. Meanwhile, monetary gains and tax expenses were relatively supportive across all operations. Finally, digital and other segments. In retail electronics in the first half of 2025, the panel market contracted by 5% year on year as weak demand and lower purchasing power affected revenue growth. Despite this challenging environment, gross margin improved by 2 percentage points to 14%, driven by a favorable product mix with a focus on high margin categories, disciplined promotional strategies, and effective inventory management.
In the food material segment, despite weakened consumer spending, the share of alternative channels rose by 2 percentage points to 12% in the first half of 2025, helping to partially offset the top-line contraction, which is consistent with efforts to improve operational efficiency and profitability in the second quarter. In the digital segment, revenues rose by 49% year on year in Q2, while EBITDA improved by 85% but remained in negative territory. Despite operational improvement, financial expenses weighed on the segment's bottom line, and net income also remained negative. Segment's top-line increased by 4% year on year, supported by resilient revenues in retail electronics and food retail. EBITDA rose by 41%, mainly driven by retail electronics benefiting from mix and cost optimization efforts. However, both in food retail and in retail electronics, higher financial expenses pressured the bottom line, despite supportive tax impacts and monetary gains.
This finalizes our review on the segments. Now, I would like to leave the floor to Orhun Bey for final remarks.
Thank you, Kerem. As you've seen, different parts of our portfolio deliver different performance given the relatively volatile macro-economic environment. If you look at the portfolio as a whole, we can say it's quite resilient and delivers reasonably well. Secondly, of course, reading the P&L with inflation accounting could be relatively difficult given the monetary gains or losses or changes in deferred taxes and especially changes in interest rates from one quarter to another. Therefore, we are particularly happy, especially on the non-bank businesses, that the operating performance continues to remain very solid and strong. This, we believe, will be the base over which we will continue building our successive financial performance delivery. Finally, we're cautiously optimistic as the conditions continue to normalize, given the disinflation program in the second half of the year.
All of our businesses, including the bank, will continue to do good in terms of achieving better financial performance compared to last year. With that, we would move to answer any of your questions. Thank you.
Thank you all. Please type your questions to the Q&A section of the Zoom. Thank you. We have the first question. Is there any progress in the plant data center investments?
Cenk Bey, merhaba, and thank you for the question. As you heard from us time and time again, you know, we see a great opportunity between delivery of energy. That's where we believe we're good at. Of course, the demand growth in data centers. We will continue pursuing opportunities in Türkiye as well as in select places outside of Türkiye as well. We hope you're going to hear from us about the progress and developments on our data center initiatives going forward. Thank you.
Thank you, Orhun Bey. Please type your questions to the Q&A section of the Zoom. Once again, please type your questions to the Q&A part of the Zoom. We have another question from Cenk. Given the base effect impact of NRC rating's Q2 performance, should we expect some normalization in Q2 or Q3 to Q4?
Thank you, Cenk Bey. I think, you know, compared to last year, of course, this year, Energy's performance is relatively better. Having said that, in my opinion, it's too early to say everything is going to, you know, seriously normalize in the second half of the year. The reason I'm saying that is, you know, the operating conditions continue to be challenging. I'm sure you must have read, through our disclosure, that the, you know, hydrology is not, you know, great, as I'm sure you must be experiencing, you know, severe drought taking place, obviously. Obviously, you know, pricing is moving, especially in the first half compared to the first half of last year, you know, and I'm referring to the price cap and the increase in price cap in the first half of the year. Yes, you know, I can say we're cautiously optimistic in that front as well.
Again, you know, we will continue, you know, making sure that we follow the progress quite closely and deliver, you know, as best as we can, under the circumstances. Otherwise, as I tried to underline, you know, the business in general does well, even under these conditions. Of course, you know, we continue growing the capacity with the, you know, YEKA installation of the YEKA project. We're quite happy that we have a secure pipeline now, with this 750 megawatts that the company has, you know, acquired earlier in the year. I think, you know, over a mid to longer term, I think the prospects continue to be quite positive. Thank you.
Thank you, Orhun Bey. We have another question. What are the priorities under the new Chair of the Board leadership?
Thank you, Anzadeh. At this point, it's obviously fair to say that in broad terms, we don't expect any significant change in the direction of our business and the direction of our group. I'm also pretty sure there could be some small changes here and there as to how we execute as we continue delivering towards our longer-term vision. We would be more than happy to share with you, if and when such changes were to materialize once we finalize our strategic planning process, as we do every year, at the last quarter of 2025. Thank you.
Thank you, Orhun Bey. We have another question. Could you discuss your renewable business in the U.S. in the context of potential suspension of some subsidies? If economies deteriorate further, could you easily cancel some of your planned investments?
Thank you. Given the current state of the big and beautiful bill, neither existing projects like, you know, Cutlass or Oriana, nor what I've just shared with you, the new capacity with Pepper Solar that's coming on soon would be impacting us as we still look to utilize up to 40% of tax credit opportunities in these projects. Again, over the long term, if you remember what our premise for our investments in the U.S. renewables were, we were not necessarily aiming to grow as a, you know, build and operate business. Unlike our position in Türkiye, we don't aim to be the largest energy generation unit. We would very much like to be able to deliver good portfolio returns over a lower cost of capital in the U.S. market.
We believe our projects, and the projects obviously that we would be able to deliver until the maturity of some of the tax incentives, we would be able to build a portfolio which potentially will yield even a higher value given their access to tax credits throughout those changes, which in our opinion should serve quite well with our long-term objectives in the U.S. Thank you.
A follow-up question. Do you expect higher electricity prices in the second half of the year, second half compared to last year? Do you have any estimates of EBITDA generation from the U.S. solar power plants?
Thank you. First of all, as you know, in the U.S., it's a fully liberal market. It's difficult to say exactly where the prices are going to go. I can say, obviously, compared to last year, we're enjoying a better environment this year. Also, we are changing how we operate so that we enjoy a year ahead market, as we price our outputs on a day-to-day basis. I think these would be some supporting elements for the remainder of the year. The businesses are EBITDA positive. I can't give you an exact projection for that. We're happy that the business continues to deliver, and hopefully, on the bottom line as well, we'll deliver positively. Thank you.
Thank you, Orhun Bey. If you have any questions, please type to the Q&A section of the Zoom. Thank you. Another follow-up question. Please share your outlook also for power prices in Türkiye.
Thank you. Look, especially on the generation side, this is important. You remember that back in 2022, the price levels have gone above $100. I think about $124 or something, basically, which was the highest, obviously, in the recent history. Having said that, this was, sorry, $148. I'm correcting myself, even higher than $124, on a megawatt-hour basis. Having said that, this was obviously not sustainable. We have seen after, and this was obviously driven by the Russia-Ukraine war. These dropped just under $100 to $97 in 2023. 2024 was more like $68 per megawatt-hour, basically. I think this year, frankly speaking, we don't expect anything really significantly higher than that in the rest of the year measured in dollar terms, even though there was a Turkish price cap increase. I think that should be at least a reasonably cautious outlook for the rest of the year.
Thank you, Orhun Bey. If you have any further questions, please type to the Q&A section of the Zoom. Thank you. Once again, if you have any questions, please type to the Q&A section of the Zoom. It seems there are no further questions. Thank you, everyone, for joining. Hold on. We have another question just popped up. How do you expect EBITDA to differentiate between non-bank and bank segments as the year progresses?
Thank you, Ahmet Bey, for the question. In the first half of this year, the non-bank has delivered about 51% of our combined EBITDA. Compared to 2024, this was more like 40%. Obviously, the non-bank business delivered, the non-bank's contribution on EBITDA was higher. This is especially in the second quarter, driven by the changes in the monetary tightening, which impacted the whole banking sector, and therefore our bank operation as well. I think for the rest of the year, one of the biggest drivers or parameters of this is how the current disinflation program is going to continue, how the policy rate changes are going to continue. As I'm sure you must have seen today, the inflation report by the central bank obviously suggests a reasonably tighter outlook for the monetary conditions.
I think, I'm pretty sure that on the non-bank side, we will continue delivering, as I said, on our operational performance that we've built in the first half of the year. On the banking side, as I said, it's very much driven by how the monetary policy and the execution of the monetary policy is going to continue in the second half of the year. Thank you.
All right. If you have any questions, please type to the Q&A section of the Zoom. Let's give a couple of more minutes. It seems there are no further questions. Once again, thank you again for joining. I hope to see you in various occasions, and then in third quarter earnings results.
Thank you very much. Goodbye for the time being.
Goodbye.