a. Risk Management

A significant portion of commercial risks are managed under the guarantee of the previously signed ‘take-or-pay’ export contracts conducted with Stellantis Europe S.P.A. for the allocation of a certain portion of annual factory capacity to export sales. These export contracts provide substantial protection to the Company against cost, profitability, FX and foreign market risks and help keep commercial risks to a minimum.

2023 was a year in which our company successfully navigated its home-market commercial risks. Even in the face of macroeconomic developments and supply chain disruptions, we once again demonstrated our resilience in our country’s expanding automotive market and remained its leader. Domestic retail sales were up by 33.2% year-on-year and numbered approximately 199.3 thousand units. The Egea Sedan continued to dominate the C segment, with a commanding 41% market share of it. The company is not exposed to any significant credit risks on account of its home-market sales.

The financial debt of the Company is composed of long-term bank loans that do not bear foreign exchange risk due to hedging, and are related to the Egea line revamp facelift project. Revenues and cash flows of these models and projects are covered under the guarantee of export agreements. Other financial debts apart from project loans are those of Koç Fiat Kredi Tüketici Finansmanı A.Ş. FX and interest rate risks were minimized through swap and derivative transactions.

A summary of key financial indicators and ratios for 2023 and 2022 is presented in the accompanying chart.

b. Activities of the Early Detection of Risk and Risk Management Committee

Early Detection of Risk and Risk Management Committee was established as per the Tofaş Board of Directors resolution dated 1 October 2012 in order to ensure compliance with Article 378 of the Turkish Commercial Code No. 6102, which went into force on 1 July 2012, and also to ensure efficient operation of the Board Committees. The Committee is responsible for early detection of risks that may threaten the Company’s existence, development and continuity, and takes necessary actions relating to identified risks, and manages these risks.

In 2023, 6 meetings were held under the Chairship of Ms. Neslihan Tonbul, with the participation of committee members Mr. Sergio Duca, Mr. Polat Şen (appointed to replace Mr. Melih Poyraz within 2023) and Mr. Giorgio Fossati.

Following its establishment, the Committee initially evaluated the Risk Management System in place at Tofaş Türk Otomobil Fabrikası A.Ş., and spelled out the principles of risk reporting. Reports produced in accordance with the set principles and the Committee’s assessments are being presented for the information of the Board of Directors periodically.

The Company management carefully considers the extent of the impact the Company’s operations, risks and financial, commercial and operational results stemming from the risks will have upon the Company, and manages the same proactively. For the purpose of systematically managing risks, the Company management takes necessary measures to define, measure, assess the risks and to mitigate/transfer them when necessary, and ultimately to monitor and report them.

Information was provided about the activities carried out in legal and regulatory matters and about working processes, and relevant considerations were taken into account in Committee meetings. Lawsuits filed against the company and provisions for these lawsuits are also closely monitored and brought to the agenda of the committee.

In 2023, various assessments were made in line with the financial data received from the suppliers taking into consideration various parameters used for determining the financial risks of suppliers (EBITDA %, Liquidity Ratio, Debt Servicing Ratio, ROE, Net Debt/Equity), and the findings were considered by risk committees.

Financial and administrative conditions of suppliers, which are critical to production continuity, are analyzed, upon which evaluation reports are generated. These activities are crucial for early diagnosis of a given supplier’s possible technical bankruptcy or inability to supply products; in such a case, the Board of Directors is informed and suggested countermeasures can be developed. On another front, global macroeconomic perspective concerning material input costs and current and projected price developments are watched closely The surge in energy costs fueled by developments taking place in 2022 continued to be closely monitored in 2023.

Risks arising from the impact of the February 2023 earthquakes on our production and distribution operations were closely monitored; measures were taken as needed to head off any disruptions.

Through the Direct Debit System (DDS), our Company effectively manages the debt payment risks of dealers, and minimizes the risks stemming from the remaining debts by way of credit insurance. When it is considered that these risky receivables are not likely to be collected, necessary provisions are reserved and the subject is followed through legal processes.

In 2023, the current situation, possible risks (cyber risks) and measures taken regarding the company’s IT infrastructure and applications were closely monitored and brought to the agenda of the committee.

NPL ratios and credit allocation policies are regularly monitored also at KFK, an affiliate of our Company, and risk management is carried out successfully.

On 1 March 2023, Tofaş Türk Otomobil Fabrikası AŞ (“Tofaş”) publicly announced the signing of a Framework Agreement with the Stellantis Group. This agreement outlines key principles governing Tofaş’s acquisition of shares in Stellantis Otomotiv Pazarlama AŞ (“Stellantis Otomotiv”). Following the completion of due diligence as mentioned in that announcement and in accordance with a Tofaş Board of Directors resolution, a Share Transfer Agreement was signed with the Stellantis Group under which all of Stellantis Otomotiv’s shares, operations in Türkiye, and brands are to be acquired by Tofaş. As one of the stipulations of the agreement is that the transfer of ownership must first be approved by Türkiye’s Competition Authority, a formal request for approval has been submitted and the Risk Management Committee is keeping a close watch on proceedings as they move forward.

Risk management at Tofaş has been organized in line with the Risk Management Policy and with the applicable legislation and so as to be reported to the Board of Directors. It is based on the principles of “protecting the Company assets and values”, “ensuring commercial, financial and operational confidence” and “sustainability of enterprise risk management”.

Additionally, the Company management is financially, commercially, operationally, and organizationally responsible for, and charged with, taking and implementing all necessary measures necessitated by risk management, internal audit and internal control activities.