Welcome to Koç Holding’s 51st General Assembly Meeting.
We hereby present for your evaluation Koç Holding’s 2014 Annual Report. The first section of the report provides general information about Koç Holding, its goals, strategies and operations in 2014, 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 2014, 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 the communique numbered II-14.1 “Communique on the Principles of Financial Reporting in Capital Markets” 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 year-end 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 2014.
Overview of 2014 and Expectations for 2015
Efforts for leading the global economy out of the crisis and rebalancing continued throughout the year 2014. Despite attempts to resolve problems such as high levels of indebtedness and unemployment created by the crisis, low economic growth rates cast a shadow on the economic outlook. The world economy has yet to reach its pre-crisis growth performance and numerous countries revised their potential growth rates downward, resulting in an adverse impact on business confidence and fueling the vicious cycle of weak demand and low growth. In such an environment, the Central Banks of developed nations remain the key factor determining economic activity levels and financial market performance. Although the United States is a few steps ahead of other nations in implementing its crisis exit program, debates as to when the Fed - which ended quantitative easing in October - will start increasing interest rates leads to occasional fluctuations in the markets. On the other hand, the frustrating economic growth figures in Europe and Japan press the Central Banks of these countries, which have pulled interest rates down to almost zero, to adopt additional measures. Commodity prices, already on a downward trend owing to the weakness of consumption and investment across the world, fell rapidly in the second half of 2014 led by oil prices. The price of Dated Brent, rising to US$ 115 per barrel in mid-June, dropped to as low as US$ 50 as of year-end 2014. This sharp fall in oil prices pushed certain nations such as Russia, Iran and Venezuela - with already/struggling economies - into a dire situation, while net oil importers such as Turkey and India benefited from the price drop.
Turkey had a rather troublesome start to the year 2014. While mounting political tension and the upcoming elections in March and August increased uncertainty, global markets’ diminishing risk appetite towards emerging economies led to significant fluctuations in financial markets. In addition to these factors, which had a negative impact on expectations and business confidence, the Turkish government took certain measures in early 2014 to curb domestic demand, putting a brake on consumption and investment spending in the first half of the year. Political uncertainties started to wane after the presidential elections in August, the perception of foreign investors improved relatively from September onwards and the expectation arose that sharply falling oil prices in the last quarter would have a positive effect on Turkish inflation and the current account deficit, all of which fueled investors’ interest to Turkey towards end-2014 and bolstered financial markets. As these developments also halted the deterioration in business confidence, domestic demand showed signs of recovery in the last quarter of the year. As a result, the Turkish economy is estimated to have grown by 3-3.3% in 2014 as a whole, after having expanded by only 2.8% in the first quarter of the year.
In 2014, inflation hovered far above the 5% target set by the Turkish Central Bank. Certain tax increases in the beginning of the year, fluctuations in food prices and a weak TL all pushed up the inflation rate, which reached 9.2% in end-November, before closing the year at 8.2% partially due to the impact of lower oil prices. Inflation is expected to drop to around 7-7.5% in 2015 as a result of falling commodity prices, especially oil prices, and a high base year effect.
In 2014, exports increased primarily to Europe as imports decreased due to weaker domestic demand and falling gold imports, which brought down foreign trade and current account deficits while bolstering growth. In 2015, the contraction of the current account deficit is expected to continue as the impact from falling oil prices becomes more apparent.
Koç Group and KOÇ HOLDİNG
General Assessment of 2014
With its strong domestic and international position, Koç Holding is among the leading companies globally. In 2014, it was ranked 341st in the Fortune Global 500, as one of the world’s largest 500 companies.
Koç Group’s combined revenues correspond to 8% of Turkey’s GDP, while our listed subsidiaries make up 17% of Borsa Istanbul’s market capitalization. The total combined exports of our subsidiaries and our joint ventures make up nearly 9% of Turkey’s total exports.
Through our strategy of diversifying and expanding our global reach, we achieved market share gains in our existing markets, and also expanded into new ones. Our international revenues have grown steadily, rising by an annual average of 14.2% over the past five years.
2009 - 2014
Regional Breakdown of International Revenues (US$ billion)
Combined International Revenues (US$ BILLION)
In 2014, the main developments in our businesses were as follows:
Our energy companies increased combined sales revenue to TL 68.3 billion, an improvement of 4% over the previous year.
- Maintaining its policy of optimum production, Tüpraş reached a capacity utilization rate of 74.9% and a white product yield of 72.2% despite the maintenance work carried out prior to the launch of the Residuum Upgrade Project. The US$ 3 billion Residuum Upgrade Project has been completed, increasing the white product output capacity by 3.5 million tons. Expected to bring down the national current account deficit by approximately US$ 1 billion, the project employed 8,000 individuals in its construction and installation phases and created employment for 500 people upon commissioning.
- Opet maintained its second position in white in Turkish oil distribution market and its ninth year of sustained leadership in customer satisfaction. THY-Opet, in which Opet has a 50% stake, increased its aviation fuel sales volume by 15%.
- Aygaz maintained its leadership in the domestic LPG market. The Company expanded its auto gas distribution network by 6% and boosted its sales volume by 4%.
- Opet Aygaz Gayrimenkul A.Ş., established through a 50:50 partnership by Opet and Aygaz to sharpen their competitive edge, counted 18 stations as of year-end 2014.
- Upon AES’s decision to exit the Turkish market, its stake at our jointly owned power generation company Entek was acquired by Koç Holding and Aygaz. Entek has an installed capacity of 364 MW.
Combined revenues of our automotive companies increased by 7% in 2014 and reached TL 26.8 billion. As our companies maintained their strong positions, Koç Group’s leadership continued in the Turkish automotive market which contracted by 10% YoY.
- Production of the Group’s automotive companies totaled 471,000 vehicles, 40% of Turkey’s total production.
- We exported 331,000 vehicles, 37% of Turkish automotive exports.
- Koç Group Companies accounted for 23.4% of domestic sales, with Ford Otosan ranking 3rd and Tofaş 4th in the market.
- At Ford Otosan, 2014 was a transition year: the Company completed its investment program initiated in 2010 which boosted its production capacity as well as renewed its product portfolio. The new generation Ford Transit was launched in March and the Ford Courier in May, adding momentum to the sales performance. The Company’s commercial vehicle product lineup is the youngest in the market. Ford Otosan reached an export figure of US$ 3.2 billion in 2014, becoming the export champion of its sector for the fourth time in a row.
- Tofaş accounted for 19% of the total auto production in Turkey by manufacturing 222,807 units, and exported a total of 142,000 vehicles in 2014. With Tofaş’s decision to manufacture hatchback and station wagon models through an investment of US$ 520 million announced year-end 2014, the Company’s total investment in new models reached USS$ 1.4 billion. Exports of Doblo to North America started.
- In 2014, TürkTraktör sold 15,866 tractors overseas, and 30,027 tractors in the domestic market. The total production volume of 45,823 units represents the Company’s highest ever in its 60-year history. The Company inaugurated its new factory in Erenler, Adapazarı.
- Otokar closed 2014 as Turkey’s top bus manufacturer for the fifth time; the Company also preserved its position as a leading land vehicles manufacturer for the defense industry. In 2014, the Company posted turnover of TL 1,232 million, with exports of US$ 108 million.
- Having sold approximately 62,000 new vehicles, Otokoç has an 8% share in the overall automotive retailing market. The Company continued to grow in short-term car rentals and operational leasing, and expanded its international operation into Kazakhstan, its third overseas market after Azerbaijan and Northern Iraq.
Despite challenging conditions in both local and export markets, Arçelik increased its EBITDA margin from 10.4% in 2013 to 11% at the end of 2014. 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 contracted by 2% YoY in 2014 and reached 6.7 million units.
- Maintaining its undisputed leadership in the domestic white goods market in Turkey, Arçelik ranked second in the European market with its Beko brand.
- Beko is the market leader in the United Kingdom in white goods, and in Poland and France in free-standing white goods; as well as the fastest growing white goods brand in the German market.
- The Beko brand was launched in Singapore and Thailand.
- Arçelik constantly invests in its brand equity, and branded products accounted for 90% of its overseas sales.
- Arctic in Romania and Defy in South Africa preserved their market leadership by a large margin.
- A side-by-side refrigerator production line was opened in South Africa.
- The Company initiated its refrigerator manufacturing plant investment in Thailand.
- Arçelik-LG maintained its market leadership with a domestic market share of 50%, owing to its innovative approach and strong technological infrastructure, as well as a wide distribution and service network. At the 3rd R&D Centers Summit organized by the Ministry of Science, Industry and Technology, the Company’s R&D Center garnered the top prize in air-conditioning.
Celebrating its 70th anniversary in 2014, total cash loans of Yapı Kredi reached TL 125.5 billion.
- Yapı Kredi’s 70th anniversary was also marked by the start of the Bank’s growth strategy aimed at strengthening market positioning and achieving long-term sustainable profitability.
- Yapı Kredi added 60 new branches to its network, bringing the total figure to over 1,000. The Bank increased its total workforce by around 1,850 to 18,500. Yapı Kredi also continued to reinforce its alternative distribution channels, adding more than 600 new ATMs to its network.
- As a result of these investments, customer acquisition was multiplied 2.7 times over the prior year to reach 600 thousand.
- Yapı Kredi increased its total cash and non-cash loan volume by 27%. Accordingly, the Bank increased its sector positioning by one notch up to 3rd place. The market share in total cash loans increased by 70 basis points to reach 10.2%.
- Total deposits volume grew by 22%, at a rate more than double the sector average, and Yapı Kredi’s market share grew by 90 basis points to reach 10.0%.
As for the other sectors in which we operate; our subsidiary in the food industry, Tat, continued to reinforce its position by rolling out youthful, modern and healthy products. Tat implemented a focusing strategy in consideration of market conditions, and sold the Maret brand and its facilities to exit the meat and meat products segment; meanwhile, Moova was acquired in line with the strategy of growing in the cheese segment.
DIY retailer Koçtaş, sector leader with 43 Koçtaş and 6 KoçtaşFix stores in 20 cities and 234 thousand m2 sales area, opened 3 new stores in 2014 and served more than 11 million customers.
Setur Marinas served yachters in 10 marinas. Tek-Art A.Ş., a Group company, won the Kalamış and Fenerbahçe Marina privatization tender in May 2014. During the year, Setur also signed an agreement for the acquisition of three marinas from Ülker Group, with pending approval by the Competition Authority.
Financial and Operational Results
Our Company strengthened its financial position and continued to achieve successful results in all areas of operation in 2014 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 8% YoY to
TL 133,467 million in 2014. After TL 3,372 million is deducted for consolidation eliminations and adjustments in accordance with international accounting standards and TL 61,473 million is deducted due to accounting of joint ventures by equity method, net consolidated sales revenue of Koç Holding amounted to
TL 68,622 million.
Koç Holding’s consolidated operating profit stood at TL 3,239 million, with consolidated profit before tax of TL 3,181 million.
Consolidated net profit for 2014 rose 5% to TL 4,214 million. Net profit attributed to equity holders of the parent grew by 1% YoY to TL 2,710 million.
At end-2014, Koç Holding’s total consolidated assets were up by 9% YoY to TL 63.9 billion. Total consolidated equity attributed to equity holders of the parent company increased 13% YoY to TL 20.3 billion of the end of the year.
Capital expenditures for the year reached TL 4.4 billion on a consolidated basis and TL 7.6 billion on a combined basis (excluding advances payments). The majority of capex was diverted to the automotive sector for projects related to new model and factory investments and fleet purchase. Energy sector followed with energy efficiency, operational efficiency and profitability enhancement as well as environmental investments and fuel station investments. Consumer durables was third with investments in new models and technologies that are environmentally-friendly.
Group companies generated combined international sales of US$ 18.7 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 Koç Holding’s TL 2.5 billion in issued capital is more than indemnified with its TL 20.3 billion total equity attributable to the equity holders of the parent as of 31 December 2014 and that the Company’s net financial debt/total equity multiple of 0.36 was sufficient to continue operations in a healthy manner.
Employment and union relations
Koç Holding’s employees, including its subsidiaries and joint ventures, numbered 85,517 at the end of 2014. On a sector basis, the highest number of employees was in the consumer durables sector, with 30% of total employees. The automotive sector employed 27% of the Group total, while the finance sector employed 22% of the total.
2014 was an active year for the Group companies in terms of industrial relations. The Collective Bargaining Agreement covering Arçelik, Arçelik-LG, Aygaz, Ford Otosan, Otokar, Tofaş and TürkTraktör expired on 31 August 2014. An agreement between the Employer’s Association of Metal Industries (MESS) and Türk Metal and Çelik-İş Union was concluded.
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 2015, Koç Group will continue to operate towards its objective of profitable and sustainable growth and maintain a 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