Letter From The Chief Executive Officer

As Sabancı Holding, we reviewed our past performance in light of global trends and scenarios in 2017 and worked on setting our roadmap and core policies for the next five years.

In 2017, we have expanded our expectations to go beyond net income, and crafted them according to the performance criteria shaped by the industry and competition.

Esteemed Investors,

Dear Business Partners and Employees,

2017, where we witnessed several political and economic developments, went in the history books as a year where consumer confidence in the economy began to rise, the business environment improved, and growth started to accelerate again.

While both developed and developing countries ended 2017 with a much better performance than the projections at the beginning of the year, certain political and geopolitical risks that emerged in a number of different geographies created uncertainty in an otherwise favorable outlook of the past year.

Major vulnerabilities in 2017 included the strained relationship between North Korea and the United States that increased tensions in Continental Asia; ongoing tensions in the Middle East; Chinese private sector borrowing that reached unprecedented heights; United Kingdom’s exit decision from the European Union; and populist movements that gained momentum each day in various parts of the world.

Despite those, a rapid increase in growth rates and upward revisions in the future economic outlook support the estimates that the global economic recovery will continue in the period ahead.

After a large number of extraordinary developments both in Turkey and in the region in 2016, 2017 also was not an easy start for our country. Political tensions in neighboring countries and volatility in foreign exchange rates stood out as the major developments that had the greatest impact on the business environment of Turkey.

Despite all those adversities, the Turkish economy performed extremely strong in 2017. Particularly, the 11.1% growth rate in third quarter ranked at the top of the G-20 countries. At this point in time, we are projecting that economic activity will sustain its momentum and the 2017 year-end growth rate will exceed 7%.

2017 was a successful year in terms of growth but was also challenging for the Turkish economy in terms of inflation. The Turkish lira lost 8% and 23% of its value against the US dollar and Euro, respectively. Devaluation in the Turkish lira also contributed to rising inflation, which stood at 11.92% at year-end 2017.

SABANCI HOLDİNG’S PERFORMANCE IN 2017 AND THE FUTURE OUTLOOK
We expect that the global economic recovery that began in 2017 will continue in 2018. Besides, we also presume that the financial uncertainties persistent for many years, the interest rate debates arising from the Federal Reserve and the European Central Bank, and geopolitical risks will remain as important items on the economic agenda of 2018.

Under this uncertain and vulnerable environment, it would be essential for the Turkish economy that the structural reforms are enacted expeditiously. Inflation, which exceeded the target by a large margin in 2017 similar to previous years, as well as high interest rates and volatility in foreign exchange rates stand out as elements that need to be addressed. Comprehensive steps to resolve these problems will also contribute to the sustainability of the momentum in economic activity. In addition, fostering a business environment that will create a competitive advantage in global markets and incentivizing high-value-added production will pave the way for sustainable growth rates that will ascend the Turkish economy to where it belongs in the global league while supporting social development.

As Sabancı Holding, we reviewed our past performance in light of global trends and scenarios in 2017 and worked on setting our roadmap and core policies for the next five years. Going beyond financial statements, we initiated a transformation to create a dynamic and balanced portfolio. We determined the role of each operating company within the Group’s portfolio, expanded our expectations to go beyond net income, and crafted them according to performance criteria shaped by the industry and by competition. Furthermore, we set our priorities as advanced technology, digital transformation, and recruitment and development of new generation skilled human resources to our Group.

Our portfolio includes companies that operate in high-growth-potential industries of Turkey. While taking the steps that will maximize our share in this growth on the back of Turkey’s strength, we are devising our long-term strategy for maximizing performance in industries that we perceive to have lower growth potential through transformation, geographical or product shifts, or a combination of all. While 2017 had been the year of planning, we expect to see the returns of these changes starting from 2018 onwards.

We are in the process of cultural transformation within our Group companies, which we manage under a strategic portfolio approach, where the performance culture stands at the forefront. With the focus on generating value for all stakeholders, we laid the foundation for a high performance culture in 2017 that targets longer term rather than short-term return. We began to redesign Sabancı as the “New Generation’s Sabancı” without deviating from the values that led us to success in the past.

As one of our top priorities in 2017, we finalized preparations for the initial public offering (IPO) of Enerjisa Enerji, the company that accounts for a significant share in Sabancı Holding’s portfolio. As the first step in this effort, to support the long-term value generation potential and increase the focus of our energy companies that have different priorities, pursuant to joint decision with our partner EON, we split our companies into two distinct business lines -power generation & wholesale trading and distribution & retail sales- in order to manage them more effectively. Energy distribution and retail sales operations are conducted under Enerjisa Enerji, while power generation and wholesale trading activities are carried out under Enerjisa Üretim Santralleri (Enerjisa Üretim).

We completed the IPO of Enerjisa Enerji, a company of great strategic importance not just for our Group but also for Turkey, with a record demand in February 2018. We wholeheartedly believe that this IPO will make an immense contribution to Turkey’s investment climate; help all stakeholders operating in the energy space tap higher quality sources of funding; and make the sector more disciplined and transparent.

Enerjisa Üretim took the first step to augment its portfolio with solar energy in 2017 and started commercial operations at two solar farms, a 2 MW facility in Bandırma and a 7 MW plant in Karabük. The TufanBeyli lignite power plant, which became operational in 2016, continued to improve its efficiency and increased its share in domestic energy resource utilization in meeting Turkey’s energy requirements. Our goal in the upcoming period is to improve the financial strength of Enerjisa Üretim, Turkey’s largest private sector power generator with the 3.6 GW balanced and high-efficiency generation portfolio, and prepare it for an initial public offering.

Our Industrials Group companies successfully managed the volatility in commodity prices, reached high levels of capacity utilization and increased their profits on the back of a global demand growth driven by rising export performance and strengthening domestic demand.

In keeping with our advanced technology focus, our Industry Group company Kordsa ventured into a new and strategic area for our Group. In 2017, its announced its decision to acquire Fabric Development Inc. (FDI) and Textile Products Inc. (TPI), suppliers of state-of-the-art specialty composite applications for the commercial aviation industry, for approximately USD 100 million. When this deal is closed, Kordsa will have acquired the leading companies in the composite technologies market that are projected to grow at an annual rate of more than 10% in the next five years within the aviation industry. Kordsa aims to reinforce its market presence in the United States while becoming a strong player in the commercial aviation supply chain.

Embracing innovation as its corporate culture, with its R&D Center that was certified at the İzmit Plant and commenced service in 2017, Brisa aims to increase its domestic production percentage from its current level of 94% and boost its exports. Additionally, the company’s second production facility in Turkey, the Aksaray Plant that had the groundbreaking in 2016 equipped with next generation technologies, commenced operation with an investment of USD 300 million and successfully started production in early 2018.

Temsa, continues to work on its plan to become a part of “Smart Cities” that will shape the near future of the public transport globally. The first electric bus produced within this scope was presented to our President during Innovation Week event.

Our Cement Group companies, despite the negative effects of increased energy and commodity costs on profits during the first half of 2017, had a successful performance operationally and financially. They maintained their leading positions thanks to disciplined cost management and rising demand from the second half of the year on. Çimsa, with a USD 240 million capex, built the new Afyon Cement factory equipped with state-of-the-art technology; completed the convertible kiln modification of the Eskişehir Plant to produce both white clinker and gray clinker; and increased the production capacity of the Niğde Factory. Akçansa continued to participate in Turkey’s largest infrastructure projects as a business partner in 2017 thanks to its market and customer-oriented manufacturing approach.

At Yünsa, the stock optimization and organizational restructuring processes that was started in 2016 continued in 2017 as well and sustained its targeted focus towards operational excellence. With these targets, the operational profitability of Yünsa continued its improvement in 2017.

In our Retail Group companies, the network optimization and operational efficiency initiatives that we implemented in 2016 began to bear fruit in 2017 where operating profits increased significantly on the back of improved customer traffic, average basket size and customer conversion rates. As operational excellence and efficiency continue to be among the priorities of our retail companies, the top priority will be given to omni-channel strategy, new projects that will support digital growth, and initiatives which will enhance customer access, particularly in the technology retail segment.

Insurance was another business segment where our performance improved in 2017. Our insurance companies managed the bancassurance channel successfully, significantly increased their market shares in the critical traffic and life insurance segments, and maintained the leading market position in the private pension system. As they boosted profits beyond expectations thanks in large part to effective claims management and rising financial income, they also increased business process efficiency with the Robot Transformation Project (automation project) that was a first roll-out in the Turkish insurance sector.

Continuing to support the Turkish economy at an increasing pace with its robust financial structure and resources, Akbank posted TL 6.0 billion consolidated net income and as a result increased its net income by 24% compared to the previous year. Akbank, which rolled over syndicated loans from previous years with record demand and was recognized as “The Best Bank in Turkey” by the world’s leading financial publication group Euromoney for the eighth time in 2017, continued to be a “pioneer and exemplary bank” in the industry with its technology and digitalization applications. As the bank’s total spending in technology topped USD 500 million in the last five years, the percentage of the bank’s customers using mobile banking stands above the European average.

In addition to all these, we set out our vision of making advanced data analytics an integral part of all of our processes within the next 5-year term. Our Group companies will lead digital transformation in their respective industries in the period ahead. New business lines and business models created by digitalization and data analytics will be our focus. We will strive to maximize our Group-wide competencies to realize this vision.

As a result of our successful results across all industries, we outperformed our own future guidance that we shared in early 2017. The Group’s combined net sales reached TL 66 billion, up 22% compared to the previous year. Sabancı Holding posted TL 15 billion in combined operating income and consolidated net income of TL 3.5 billion. In the same period, we continued to invest at full pace in accordance with our trust in Turkey’s future and our global growth vision. We invested TL 4.5 billion in 2017. I thank all of our team and shareholders for their contributions to these successful results.

Mehmet Göçmen
Board Member and CEO