Letter From The Chief Executive Officer

We expect the discipline and stabilization process that started in the last quarter of 2018, to continue in 2019 with positive course in inflation, current account deficit and interest rates. 

At this point, Turkey is trying to overcome those complications to reestablish its balance. The solutions that we will produce through a shared rationale and a long-term perspective for our structural problems will help restore the balance.

Esteemed Investors, Valued Business Partners and Employees,

2018 was a critical turning point for the world and for Turkey.

The escalating wars of technology and economic leadership have moved the world economy towards more protectionist regional structures, while the global recession risk has started to be felt with the impact of trade wars and reduced liquidity. This has increased worries about the future. On a societal level, rising populism and social turmoil have created an environment of higher risk and uncertainty for all countries. The effect of these volatilities across the world has been felt even stronger in Turkey due to various geopolitical and regional risks.

The second half of 2018 was a particularly tough period for the domestic economy. However, in the aftermath of the August turbulence in Turkey’s financial markets, the economy entered to a process of balancing and stabilization. The appropriate corrective measures taken by the government’s economy management team, the tight monetary policy of the Central Bank, the announcement of the New Economic Policy and visible improvement in relations with the US also contributed to this process. As a result of these steps, inflation started to decelerate, the current account gap narrowed, and liquidity, market interest rates and the value of Turkish Lira all pursued a more positive course.

Despite these relatively favorable economic developments in the last quarter of the year, Turkey recorded a 20.3% inflation rate for 2018. In 2018, the biggest challenge for the Turkish economy has been the rising financing costs in paralel to the increased inflation. One of the major factors underlying the increase in financing costs was the depreciation of the Turkish Lira against the US Dollar and Euro in one year, by 39% and 33%, respectively.

We expect the discipline and stabilization process that started in the last quarter of 2018, to continue in 2019 with positive course in inflation, current account deficit and interest rates. As such, we consider that this deceleration in economic activity, which has started in the second half of 2018 onwards, will come to an end and our economy will start a recovery process.

At this point, Turkey is trying to overcome those complications to reestablish its balance. The solutions that we will produce through a shared rationale and a long-term perspective for our structural problems will help restore the balance.

As Sabancı Group, despite all the economic challenges, we completed fiscal year 2018 with success. As per determined target and one of the major priorities, strong balance sheet and cash management, along with our efficient and agile risk management approach that enables us to adapt to changing market conditions and our strong corporate governance helped us to complete the year successfully. In 2018, we continued to prioritize digitalization and technology initiative to enhance our competitive edge, productivity and growth in our existing business units. We successfully managed our operations with a flexible and agile management approach, strong shareholders’ equity, an ability to generate cash and highly competent human resources. Our focus on operational excellence and supply chain management has provided us with a significant competitive edge.

At Sabancı Group, in 2018, we achieved exemplary successes across all our business areas.

We completed the Enerjisa Enerji IPO, Turkey’s largest private sector IPO, with nearly five times booked, record high investor demand.

Enerjisa Enerji maintained its industry leadership position in both distribution and sales by delivering electricity to one out of every four people across Turkey. In 2018,
the Company successfully undertook capital expenditure totaling TL 1.6 billion, thereby increasing its Regulated Asset Base by four-fold over 2014 and strengthening its sector leading position in distribution network capex spending.  

Turkey’s largest private sector power generator, Enerjisa Üretim greatly improved the capacity utilization of its power plants in 2018 thanks to its focus on operational excellence. Enerjisa Üretim accounts for nearly 4% of Turkey’s entire electricity generation. We achieved significant gains in profitability with production optimization at our power plants. In addition, we created added value thanks to our commercial activities within the country and along the borders. In 2018, Enerjisa Üretim’s debt level was reduced significantly due to strong cash generation capacity. We are moving closer to our goal of preparing Enerjisa Üretim for public offering as improvements in the Company’s financial structure set an example for its sector.

Akbank continued to support Turkey’s economy in 2018 with its financial strength, stability and trust-focused banking approach and recorded net profit of TL 5.7 billion. The bank made a real difference in the industry with the syndication it signed in September. This transaction enabled the Turkish banking sector to re-access to the syndication markets, paved the way for foreign borrowing, and was followed by successful syndicated loans by other banks. Subsequently, the share issuance decision made in December and very high rate of 99,9% participation from the investors in the process reconfirmed the the trust of our shareholders in Akbank’s and Turkey’s future prospects.

As chosen to be the growth platform of advanced technology and high value-added products, Kordsa continued to develop inhouse value added technologies in composites sector not only for Sabancı Group but also for Turkey, while becoming a strategic player in space and civil aviation industry through its US acquisitions. With the positive contribution of revenue from the composite companies acquired in the USA, accurate market forecasts, efficient management of raw materials and sales prices, and FX based revenues, Kordsa maintained its sustainable and profitable growth in 2018. Our focus to grow in composites industry through Kordsa will continue in 2019.

Brisa – the undisputed leader of Turkey’s tire market – started production at its second factory located in Aksaray, thus launching the very first Industry 4.0 application in the tire sector. In 2018, the Company achieved remarkable results with its focused efforts in efficient supply chain management and posted
record-breaking figures in operational and free cash flow.

Our Cement Group companies were adversely affected by the sharp contraction in domestic demand and soaring FX-based costs in the second half of 2018. However, due to the strong export structure and highly disciplined cost management, the negative impact of this challenging environment was kept at a limit. With its deep expertise and extensive logistics network in white cement and special products, Çimsa ranks among Turkey’s export champions. In 2018, Çimsa boosted its exports by 16%, while Akçansa singlehandedly accounted for 12% of Turkey’s total cement exports. We also completed our investment at Çimsa’s Afyon facility.

Yünsa – the biggest integrated high segment worsted fabric manufacturer under one roof in Turkey – maintained its competitive edge in international markets with its domestic production.

Temsa Ulaşım Araçları, which extended its leadership in Turkey toward European and American markets, set up Temsa North America to bolster its operations in the US.

Our insurance business continued its strong growth in 2018. Combined sales in this business line rose
28% to TL 4.0 billion, while consolidated net profit at our companies increased 47% to
TL 157 million. At Aksigorta, we further strengthened our sector leadership with a focus on innovation and technology. In fiscal year 2018, the motor-own-damage, non-motor and health insurance branches continued to record profitable growth. The agency channel was further strengthened via growth in the traffic branch. At Avivasa, we maintained leadership in terms of asset under management size and boosted our market share with a 20% increase in life and personal accident premium production.

Teknosa maintained its market leading position in technology retailing by effectively executing an omni-channel strategy. In 2018, the Company took measures to mitigate the effects of the tough market conditions and the infrastructure projects that will support the future market position of Teknosa have been completed. At Carrefoursa, we posted significant improvements in our business results thanks to ongoing restructuring and efficiency boosting efforts. In addition, Carrefoursa significantly improved its debt level with the sale of Maltepe Park Shopping Mall in June.

In 2018, we took another major step forward in our digital transformation drive. Bimsa, which has a 43-year long track record of success under Sabancı Group, was restructured and renamed SabancıDx. We plan to turn SabancıDx into a platform that focuses primarily on intra-Group opportunities and collaborations to create more value, especially in technology-focused transformation and advanced data analytics. Over the long-term, our aim is to create new global brands with the products and business models that we implement in our own ecosystem under the coordination of SabancıDx.

Sabancı Group aims to extend this bright picture that we created in 2018 to subsequent years with ongoing cultural transformation and investment in people. With this perspective, we revisited and refreshed the values constituting the core of Sabancı of New Generation through a common understanding. Subsequently, we redesigned our models of conduct and competencies, which will make this transformation possible. We formulated our Leadership Model during the year. We designed Development Programs suitable for these new models. We launched these programs under the leadership of our top management. We established Sabancı Advanced Data Analytics Academy with the collaboration of Sabancı University and now have our first graduates. In 2019, we plan to continue developing and investing in Talent Management and all our business processes that involve people.

Thanks to the successful results we achieved, we outperformed our own expectations announced at the beginning of 2018. During the reporting year, the Group’s combined net sales amounted to TL 88 billion, up 34% over the prior year. Our combined operating profit increased 5% to TL 15.8 billion and our consolidated net profit totaled TL 3.8 billion.

I would like to extend my gratitude to all our stakeholders, especially our employees, who have contributed to our successful completion of fiscal year 2018.

Mehmet Göçmen
Board Member and CEO