Review of 2018 Operations

In 2018, we witnessed a year in which the global economy saw a period of growth driven under the leadership of developed countries. However, this growth felt somewhat precarious due to trade disputes, tightening monetary policies in the US, and other uncertainties, including Brexit. This perceived fragility caused a significant slowdown in global trade and, correspondingly, prompted the Fed to suspend its steps for implementing tight monetary policies in the final quarter of the year, which created a general willingness for resolution of commercial conflicts through dialogue. In Turkey, 2018 was a year of tough economic and geopolitical developments, marking the period as one of the most challenging in recent memory. Volatility observed in the financial markets as of the second quarter of the year, a resulting escalation in inflation, and stagnation in economic activity denoted the year. In the second half of the year, financial markets steadied somewhat, thanks to precise and rapid measures taken in the economic policy. We noted that, despite the crisis, Turkey’s economy maintained the potential to achieve annual growth of 2.6 percent.

At the beginning of 2019, we faced a global perspective much different from the sunny outlook of 2018: weaker global economic activity, expectations of lower trade growth, and even recessions in developed countries were all strong possibilities as we entered this year.

However, this outlook – which prompted a delay of tight monetary policies in the developed countries - may also cause developing countries to become relatively more attractive. In our country, we believe this situation creates an opportunity to integrate the economic measures passed in Turkey with policies that target permanent reforms and address economic imbalances. We expect and hope that a main item on the agenda will be the potential of Turkey’s economy to progress, in line with extensive reforms to be applied in 2019, as well as reinforcing the country’s ability to withstand risk.

As Borusan Group – and despite all the challenges we encountered in 2018 – our turnover increased by 2% in US dollars and we reached a sales volume of USD 4,797 million, as well as reaching an EBITDA of USD 352 million. We also maintained our growth in the export markets; our overseas sales rose by 22% when compared to the previous year, accounting for 35% of our consolidated turnover.

Global raw steel production reached 1.809 billion tons in 2018, representing a 5% increase year-over-year. While growth in production rose in all regions except Europe, China, the world’s largest steel producer, increased its production by 6% to 928 million tons compared to last year, now accounting for more than half of the world’s steel production. Turkey, with a production of 37.3 million tons, ranked eighth among the largest steel producers worldwide.

In the steel sector, protectionist measures, which have escalated in the last years, peaked in 2018. The Section 232 investigation initiated in April 2017 against steel, with the claim that it is threatening national security in the US, was concluded in March 2018 and a tax of 25% was imposed on most countries. With the increase of this rate to 50% in August, the Turkish steel sector entered a rough period. A quota application, implemented with the preliminary ruling enforced in July within the scope of the Protection Measures Investigation, was initiated by Europe following the measures taken by the US, and limited Turkey’s access to some of the most important export markets.

Fluctuations in foreign exchange rates, especially acute in the second half of 2018, and the economic slowdown, had a negative impact on the automotive and household appliances sectors that we serve. The automotive sector, with a decline of 9% year-over-year, produced 1,588 million units in 2018.

While domestic market sales faced a major drop of 35%, export sales supported the sector. The household appliances sector experienced a similar decline in domestic sales, but elevated export sales - a production of 28.5 million units – enabled achievement of 2017 levels.

Despite the issues within the sectors it serves, the Borusan Group Steel companies completed 2018 successfully. With their total turnover reaching USD 2.4 billion, they accounted for 50% of the Group’s consolidated turnover.

Borusan’s flat steel production company, Borçelik, increased its turnover by 8%, achieving a turnover of USD 1.3 billion in 2018 with its Kerim Çelik brand. While protectionist measures in the steel sector had an impact on the US, one of Borusan’s major markets, Borçelik carried out 19% of cold rolled steel and galvanized steel exports of Turkey in 2018. It exported to 22 countries.

Borusan’s steel pipe company, Borusan Mannesmann, increased its first quality product sales by 12% in 2018 year-over-year, reaching 833,000 tons. While the majority of this growth was due to pipes with high added value, the Company also boosted its gross profit by 10%.

Obtaining 75% of the total sales of first quality products from export markets in 2018, Borusan Mannesmann continued to expand as a global player.

In addition to this, Borusan Mannesmann was awarded a pipe procurement tender for a 368-kilometer section of a natural gas pipeline project in Texas, US. This project, with a contract value of USD 173 million, is the Company’s largest-ever tender win. The Company successfully produced all natural gas pipes at its plant in Gemlik, Turkey. The plant utilizes the most up-to-date spiral pipe manufacturing technology, and the deliveries were completed on time.

After a successful year, Borusan Mannesmann increased its turnover by 29%, reaching almost USD 1 billion.

Borusan’s distributorship companies, the Borusan Otomotiv Group and Borusan Cat, achieved a turnover of USD 1.9 billion in 2018. The distributorship companies contributed to 39% of the Group’s consolidated turnover.

While the overall passenger automobile market contracted by 33% in Turkey in 2018, the luxury segment shrank further, by 38%. This downturn in demand, as well as Decree No. 32, which directed that automotive sale and lease agreements be concluded solely in Turkish lira, were the toughest developments for our Group in 2018. Yet, by benefiting from appropriate financial instruments in our automotive business, we managed to obtain a foreign exchange gain. In 2018, we reached sales of 15,671 vehicles with the BMW, MINI, Jaguar, and Land Rover brands and 1,000 motorcycles with the BMW brand. In addition, the Company sold 8,148 units in the used automobile segment, attaining a 11% year-over-year increase compared to 2017.

The Borusan Otomotiv Premium Leasing company, which offers long-term leasing of BMW, MINI, Jaguar and Land Rover brand vehicles, expanded its vehicle fleet in 2018 by 19% to 4,060 vehicles, reaching a turnover of USD 115 million.

Borusan’s Automotive Group garnered a turnover of USD 927 million in 2018.

While Turkey’s construction equipment market contracted by 40% to 6,288 units in 2018, Borusan Cat managed to expand its share in the market with the sale of 1,004 pieces of new construction equipment. The Company reached a record in used machinery sales in terms of number and turnover with 858 units. In leasing, it continued offering customers the machinery and equipment they require from a single location, with the assurance of Borusan. The Company further expanded the product range in 2018, and addressed more than 20,000 requests from over 1,700 customers across 3,500 construction sites.

Borusan Cat maintained its leadership in all markets, especially in Kazakhstan, where it operates in the mining sector. Kazakhstan achieved 10% growth in 2018 compared to the previous year, in which spare parts and service sales had a record high.

Borusan Cat’s successful dealership operations in Turkey, Kazakhstan, Azerbaijan, Georgia and Russia increased its consolidated turnover to USD 964 million at the end of 2018.

Borusan Lojistik enjoyed a successful 2018, increasing its turnover to USD 565 million.

Maintaining its position as a sector leader, Borusan Lojistik continued to provide services to Europe, North America, Russia, the Middle East, the Far East, Central Asia and other countries through a wide network of agencies and partners. The Company increased its efficiency and market share in Europe by opening the first Borusan office in Germany. A pivotal project was implemented in road transport, opening a new path extending from China through Turkey and Europe.

In 2018, the Company utilized its capacities even more efficiently, with work volumes of 3.3 million tons in general cargo operations, 245,000 TEU in container operations, and 275,000 units in vehicle operations at Borusan Port.

eTA (etaşımacılık.com), founded in 2012 by Borusan Lojistik as an innovative brand, increased its turnover in 2018 by 5% (YoY) to USD 12 million. The total number of shipments reached 55,000.

Borusan Manheim, Turkey’s first “multi-branded used car platform” and a part of Borusan Group’s expanding automobile distribution network, reached a turnover of USD 6 million in 2018. Borusan Manheim, which comprises 7,800 member dealers and 1,650 corporate members, managed operations of approximately 120,000 vehicles during the year and sold 20,602 used cars in auctions.

As Turkey’s largest engine valve manufacturer and the leading engine valve supplier for the top car brands, Supsan sold 6.9 million units and achieved a turnover of USD 22 million in 2018. The share of non-valve products in the Company’s total turnover increased to 26% during the year.

Borusan EnBW Enerji with a total installed power of 495 MW and total portfolio size of approximately 1,200 MW, continued its investments into renewable energy in 2018. As a result of the tender for the Çanakkale Saros WEPP and Kırklareli Kıyıköy WEPP projects, the wind turbine supplier was selected. Both projects are expected to be completed in 2020. In June and December 2017, 10 new projects of 395 MW power were acquired under wind capacity allocation tenders organized by Türkiye Elektrik İletim A.Ş.; the processes and procedures for permits to implement these projects were continued successfully. Harmanlık Wind Power Plant in Bursa, commissioned by Borusan EnBW Enerji in 2015, was recognized with an award in the Wind category at the 2018 Energy Awards of the 24th ICCI Environment and Energy Exhibition.

As Borusan Group, we made investments of USD 104 million in 2018. We managed our assets, which reached USD 4.6 billion in 2018, without foreign exchanges losses, even in the face of severe fluctuations in foreign exchange rates. The Company was also successful in balance sheet management and operating capital requirements, reducing our net financial debt by USD 122 million under USD 1.4 billion.

In 2018, our Group maintained its steady focus on innovation, digitalization and R&D in order to achieve the transformation determined in line with the year’s strategic targets. We invested approximately USD 8 million into current start-ups and new products in 2018, gaining major successes as a result of these ongoing investments. ParcaPazari.com initiated in mid-2017, brings together distributors and repair shops in the automotive and construction equipment spare-parts sectors; the platform reached more than 3,000 members and over 300,000 products, growing approximately by 40% on a monthly basis throughout 2018. Online Al Sat (onlinealsat.com), an online auction platform for the secondhand vehicle market, offers access to authorized dealers across all provinces of Turkey; the platform reached more than 2,000 active members and 25,000 vehicle listings in 2018. The Group’s five new products in the flat steel industry grew by 45%, delivering a turnover of about USD 81 million in their third commercial year. We reached a sales volume of about USD 170 million with 32 different new products and services we developed in the pipe sector.

123 digitalization projects, with a total investment of USD 9 million among the Group, continues to be at the core of our customer-focused transformation. With the addition to our portfolio of 85 new projects designed to improve operational efficiency, enable growth, and create competition and cost advantage in 2019, we plan to expand our total investment to approximately USD 14 million. Crucial targets focused on digital transformation were defined for Group companies after this year; these include the establishment of common platforms required for tracking portfolio and success criteria among the Group. Portfolio update management and governance methods were effectively implemented, and digital and information technologies management positions were defined for Group companies.

We invested approximately USD 10 million into research and development in 2018, aiming to develop technologies that will lead to innovative and competitive product and processes with high added value, in line with our strategic targets. Following Borusan Lojistik, Borçelik, and Supsan, we established the Borusan Cat R&D Center. As of the end of 2018, the Group has evolved into a transformative organization that includes an R&D company, five R&D centers and over 200 R&D personnel.

With the expectation that market conditions will remain challenging in 2019, as Borusan Group, we will continue to manage our current business in an optimal manner - improving our competitiveness, obtaining cost advantages by using state-of-the art technologies, and demonstrating our strong cost management discipline.

I would like to thank our shareholders, customers and colleagues for their enduring support, strength, and contributions to the value of Borusan.

Agah Uğur*
Group CEOs
Borusan Holding

* Retired as of December 31, 2018.