Welcome to Koç Holding’s 50th General Assembly Meeting.
We hereby present for your evaluation Koç Holding’s 2013 Annual Report. The first section of the report provides general information about Koç Holding, its goals, strategies and operations in 2013, while the subsequent pages detail developments in our core business segments. The second part of the report contains externally audited consolidated financial statements and accompanying notes, as of 31 December 2013, and other disclosures required by the Capital Markets Board (CMB).
The financial results presented in this report have been prepared on a consolidated basis according to “Communique Regarding Capital Market Financial Reporting Rules nr.II.14.1.” in compliance with CMB’s Turkish Accounting Standards/Financial Reporting Standards (“TMS/TFRS”) and the formats specified by CMB. Apart from the items in the income statement already denominated in foreign currencies, such as exports, all other items in foreign currency have been converted using the yearly exchange rate averages. The balance sheet conversions use end-of-year exchange rates.
I would now like to share, on behalf of Koç Holding’s Board of Directors, our main assessments of the fiscal year ending 31 December 2013.
Overview of 2013 and Expectations for 2014
Weakness in the global economy continued in 2013. Regardless of the recovery observed in the economic activity in developed nations in the second half of the year, disappointing growth rates in developing countries, particularly in China, caused the global growth in 2013 to drop to an estimated 3% YoY, the lowest rate in the last four years. One of the most important developments in global markets in 2013 was Fed Chairman Bernanke’s announcement in May that they would reduce in stages the amount of liquidity provided to the market through bond purchases. The strong risk appetite for developing countries seen prior to this announcement began to waver in June, resulting in a decrease in capital flows to these markets and even from time to time capital outflows from these countries. Even though a short lived reprieve was experienced after bond purchases remained steady at the Fed’s September meeting, the decrease in bond purchases by US$ 10 billion at the December meeting led to a more troubled beginning to 2014.
Turkey lived through two different periods in 2013. From the beginning of the year to Bernanke’s announcement on May 22nd, both financial markets and real economic activity demonstrated a highly positive outlook. In this period, Turkey’s credit rating increased to investment grade for the first time since 1994 and with the influence of the positive sentiment abroad, strong capital inflows were witnessed, interest rates dropped to historic lows and the stock exchange rose to record levels.
At almost the same time as Bernanke’s announcements, street demonstrations began, igniting political tensions and creating a less than positive atmosphere. Turbulence in financial markets as well as weakening in consumer and business confidence limited economic growth in the second half of the year to a significant degree. Rising political tension in the last month of the year together with the Fed’s decision to taper bond purchases in December put the Turkish economy and markets under pressure in the final days of 2013.
Turkey began 2014 with the uncertainty of how and when critical domestic problems would be solved. In addition, from the beginning of 2014, the deterioration in the risk perception towards developing countries in the international markets increased the challenges for Turkey.
In such a climate, it is possible that a more negative view of 2014 economic expectations than previously envisioned will emerge. In this context, GDP, which is expected to increase by 3.5-4% YoY in 2013, may grow at a slower pace in 2014. Consumer price inflation, which reached 7.4% in 2013, is forecast to increase to higher levels in 2014. Interest rates, which declined to very low levels in the first half of 2013 and then began to rise at the end of June, are expected to increase further in 2014. It will not be a surprise if the Turkish Lira, which came under intense pressure in the last months of 2013 and rapidly lost value, remains under pressure in 2014. On this issue, in the event that the Central Bank implements a tighter monetary policy, it is possible that the devaluation of the TL will be partially compensated. While it is expected that economic growth will slow and that the current account deficit will narrow in light of a decline in imports due to the weakness of the TL, it is still possible that an increase in exchange rates and higher growth rates in the global economy in 2014 will propel exports higher and support an improvement in the current account balance.
Koç Group and Koç Holding
General Assessment of 2013
With its strong domestic and international position, Koç Holding is among the leading companies globally. According to 2012 year-end figures, it was ranked 217th in a listing of the world’s largest 500 companies.
Koç Group’s combined revenues are equal to 8% of Turkey’s GDP, while our listed subsidiaries make up 16% of Borsa Istanbul’s market capitalization. The total combined exports of our subsidiaries and our business partners make up nearly 10% of Turkey’s total exports. Not only have we increased our share of our existing markets, but also moved into new geographies. Through our strategy of diversifying and expanding our global reach, our international revenues have grown steadily, rising by an annual average of 4.4% over the past five years.
2008 → 2013
Regional Distribution of Overseas Revenues (US$ billion)
Combined International Revenues (US$ Billion)
In 2013, the main activities achieved in our sectors were as follows:
Our energy companies increased combined sales revenue to TL 65.5 billion, an improvement of 4% over the previous year.
- In 2013, as a result of Tüpraş’s optimum production policy and effective use of conversion units, the white product yield in Tüpraş improved by 2%. At the end of 2013, the total investment in the Fuel Oil Residuum Upgrade Project came to US$ 2.2 billion with a completion ratio of 91.3%.
- Opet, despite limited growth in domestic white products market, raised its sales volume by 10% over 2012 and increased its market share to 19.1%.
- Aygaz maintained leadership of the Turkish LPG market. It renewed the brand and positioning of products in the autogas segment. Opet and Aygaz adopted a strategy of ownership of stations in key locations, in order to strengthen the competitive power of their brands and established Opet-Aygaz Gayrimenkul A.Ş., a 50%-50% joint venture, for this purpose.
- AES Entek increased sales revenue by 11% YoY, reflecting the contribution of Damlapinar, Kepezkaya and Kumköy hydroelectric power plants with a total installed capacity of 62 MW.
Our automotive companies, despite a sense of crisis in export markets, succeeded in raising exports by 11% YoY in 2013. Our companies maintained their leadership positions in the Turkish automotive market which expanded by 9% YoY in 2013.
- Production of the Group’s automotive companies totaled 531,000 vehicles - 47% of all domestic production.
- We exported 370,000 vehicles - 45% of Turkish automotive exports.
- Koç Group Companies accounted for 24.5% of domestic sales, with Ford Otosan as the leader and Tofaş in 4th place.
- Ford Otosan introduced the new Ford Fiesta and Ford Kuga as well as the newly manufactured Ford Cargo pickup models. It achieved record levels of exports, equal to 61% of Turkey’s total commercial vehicle exports. It completed the Yeniköy Plant in a record 16 months and commenced trial production.
- Tofaş increased export volume by 3% due to a strategy of diversifying export markets in light of the shrinkage of European automotive markets. It committed itself to new investment projects totaling US$ 880 million, including facelift of Doblo as well as manufacturing a new passenger car. Tofaş received investment incentives for these projects. In addition, it became the first Fiat factory worldwide to reach “Gold Level” in the World Class Manufacturing Program (WCM), which started in 2006.
- Otokar celebrated its 50th anniversary in 2013. Sales revenue jumped 40% YoY to TL 1.4 billion. The Company devoted 5% of its revenue to R&D activities and broadened its product range with new models.
- With a 49% market share, TürkTraktör maintained its clear leadership in the Turkish tractor market. In 2013, the Company took over the distribution for New Holland and Case construction equipment and laid the foundation for a new factory in Adapazarı.
* The effects of foreign exchange gains and losses arising from trade receivables and
payables and credit finance income and charges are deducted from operating profit
and the effects of income and expenses from sale of property plant and equipment are
added to operating profit in order to maintain consistency in the presentation with prior
years EBITDA calculation.
Despite challenging conditions in both local and export markets, Arçelik increased its EBITDA margin from 9.6% in 2012 to 10.4% at the end of 2013. In addition to its strong leadership in the Turkish market, Arçelik continued to raise its market share in many international markets.
- The Turkish white goods market grew by close to 6% YoY in 2013 and reached 6.85 million units.
- Arçelik retained its clear market leadership in Turkey, Romania and South Africa and increased its market share in many other countries.
- The Beko brand became the second largest in the Western European white goods market.
- Refrigerator production capacity of the Arctic factory in Romania increased by 25% to 2.5 million units per year with the addition of a new production line.
- Beko developed a cash register POS device that complies with the New Generation Cash Register regulations and introduced it to the market.
- Arçelik-LG Klima continued to lead the Turkish air-conditioning market with a 50% market share. It designed and started manufacturing new inverter models in line with regulations for residential air conditioning units that will come into force in Turkey as of January 1, 2014, parallel to the European Union.
* Excluding revenue from the sale of Yapı Kredi Sigorta
Yapı Kredi achieved return on average tangible equity (ROATE) of 25.7% in 2013 by focusing on business areas with high growth potential and profitability. The ratio stood at 16.7% when revenue from the sale of Yapı Kredi Sigorta is excluded.
- The Bank pursued its “Smart Growth” strategy by focusing on delivering the right product to the right customer at the right price and through the right channels. The loan/asset ratio, an indicator of customer-focused banking, rose to 62%.
- Its deposit base increased by 24% YoY to TL 88.5 billion, driven by the expansion of foreign currency deposits.
- In 2013, the Bank opened 21 new branches to increase the number of branches to 949. It served its 9.7 million customers through ATMs, Call Centers, Internet and mobile banking channels in addition to the branch network.
- In July, Yapı Kredi sold its insurance subsidiary for TL 1.3 billion. Parallel to the sale of shares, it signed an exclusive 15-year bank-assurance partnership agreement which ensures that insurance and pension products will continue to be marketed and sold through YKB’s distribution network.
As for the other sectors in which we operate; Koçtaş, sector leader with 41 stores and 218,000 m2 of sales area, opened five new stores in 2103, spreading its presence to 21 provinces to serve more than 10 million customers.
Tat maintained its market lead in tomato paste, tomato products, ketchup, pasteurized milk and premium pasta and introduced a total of 36 new products to the market under the Tat, SEK, Maret and Pastavilla brands.
Financial and Operational Results
Our Company strengthened its financial position and continued to achieve successful results in all areas of operation in 2013 due to a diversified and balanced portfolio structure, strong cash position, prudent risk management and productivity-raising practices.
Koç Holding’s combined revenues increased by 6% YoY to TL 123,478 million in 2013. After TL 3,154 million is deducted for consolidation eliminations and adjustments in accordance with international accounting standards and TL 54,142 million is deducted due to accounting according to joint ventures’ equity methods, net consolidated sales revenue of Koç Holding amounted to TL 66,182 million.
Koç Holding’s consolidated operating profit stood at TL 3,727 million, with consolidated profit before tax of TL 3,055 million.
Consolidated net profit for 2013 rose 7% to TL 4,000 million. Profit attributed to equity holders of the parent grew 15% YoY to TL 2,680 million.
At end-2013, Koç Holding’s total consolidated assets were up by 21% YoY to TL 58.8 billion. Total consolidated shareholder equity of the parent company increased 11% YoY to TL 18 billion by the end of the year as a result of profits earned and capital movements.
Capital expenditures for the year reached TL 4.4 billion on a consolidated basis and TL 6.4 billion on a combined Group basis (excluding advances payments). Majority of capex was diverted to the energy sector for projects related to energy efficiency, operational efficiency and profitability enhancement as well as environmental investments and fuel station investments. Automotive follows energy with new model and fleet investments. Consumer durables was third with investments in new models and technologies that are environmentally-friendly.
Group companies generated combined international sales of US$ 18.6 billion.
The Company’s capital was reviewed under Article 376 of the Turkish Commercial Code to determine the extent to which it is unsecured. It was ascertained that of Koç Holding’s TL 2.5 billion in issued capital is more than indemnified with its TL 18 billion total equity attributable to the equity holders of the parent as of 31 December 2013 and that the Company’s net financial debt/total equity multiple of 0.33 was sufficient to continue operations in a healthy manner.
Employment and union relations
Koç Holding’s employees, including its subsidiaries and joint ventures, numbered 80,996 at the end of 2013. On a sector basis, the highest number of employees was in the consumer durables sector, with 30% of total employees. The automotive sector employed 28% of the Group total, while the finance sector employed 21% of the total.
2013 was a buoyant year in many main sectors and Group companies in terms of industrial relations. Collective Bargaining Agreements at Arçelik, Arçelik-LG, Aygaz, Ford Otosan, Otokar, Tofaş and TürkTraktör expired on 31 August 2012 but talks to reach new agreements were postponed due to the November 2012 enactment of the Unions and Collective Bargaining Law. Negotiations between the Turkish Employer’s Association of Metal Industries (MESS) and the respective labor unions began later and were finalized during 2013. Similarly, separate collective bargaining agreements at some of the workplaces of Tüpraş, Yapı Kredi, Tat, Ditaş and Aygaz were renewed in 2013 without any difficulty.
On behalf of our Board of Directors, I would like to express our appreciation to our valued shareholders, customers, suppliers, industry and business partners, and unions, for your continued trust and support, and my thanks to our employees for their dedication and outstanding contribution.
In 2014, Koç Group will continue to operate towards its objective of profitable and sustainable growth and maintain maximum focus on risk management. We will accelerate our investments that create further employment opportunities and increase our efficiency.
With sincere respects to our valued shareholders and their representatives,
Mustafa V. Koç
Chairman of the Board of Directors