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 FCA 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.

Looking at the domestic side, 2018 has been a successful year with respect to commercial risk management at our Company. Despite macroeconomic developments and challenging market conditions, our Company successfully preserved its market share. Light commercial vehicles segment, on the other hand, was significantly affected by the macroeconomic conditions in the second half of the year, and our Company retained its second position in the market.

Domestic retail sales was nearly 70 thousand in 2018, down 45% year-over-year. Egea Sedan model retained leadership in its own segment with a market share of 20.9%.

The financial debt of the Company is composed of long-term bank loans that do not bear foreign exchange risk, and are related to New Doblò, Fiat Egea line and the Fiat Florino 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.

Financial Indicators (TL thousand, unless indicated otherwise)	2018	2017
Total Net Sales	18,603	17,468
Net Profit	1,330	1,283
Total Assets	13,001	13,875
Ratios
Current Ratio	1.2	1.1
Profit After Tax/Net Sales	7%	7%
Profit After Tax/Total Assets	36%	35%
Profit After Tax/Equity	10%	9%
Total Debt/Equity	147%	165%

 

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.

The Committee held two meetings until the General Meeting, which was attended by Mr. Gökçe Bayındır, Committee Chairman and Independent Board Member, Mr. Libero Milone, Independent Board Member, and Messrs. İsmail Cenk Çimen and Giorgio Fossati, Board Members. As per the General Assembly resolution dated 15 March 2018, new Board Members were appointed and Committee members were recomposed under the Board of Directors decision no. 2018/11 dated 16 March 2018. Accordingly, Ms. Neslihan Tonbul was appointed as Chairman and Messrs. Sergio Duca, İsmail Cenk Çimen and Giorgio Fossati as members. Four more meetings were held which were participated by these Committee members. The total number of the meetings held by the Committee during the reporting period was six.

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. No private or public audits were conducted during the reporting period.

In 2018, 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.

As a result of the currency volatility experienced in the second half of 2018, documents showing their foreign currency positions were obtained from dealers and suppliers, and analyses conducted were shared with the Risk Committee.

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.

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.

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

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.

C. INTERNAL CONTROL SYSTEM AND INTERNAL AUDIT

An internal control system was built to cover (i) the Company activities and services carried out effectively, reliably and uninterruptedly in conformity with the existing laws and regulations, and (ii) controls made to maintain the integrity, consistency, timeliness and reliability and safety of the accounting and financial reporting system.

Tofaş Türk Otomobil Fabrikası A.Ş. coordinates and carries out an internal audit activity that will provide constant monitoring and assessment of the internal control system.

The Audit Committee has the primary responsibility for monitoring the internal control system and internal audit process. In addition, the Early Detection of Risk and Risk Management Committee takes care to address the related system in conjunction with risk management. The Audit Committee makes assessments to verify that necessary proactive measures are adopted in relation to the Company’s internal control system and internal audit activities, enterprise risk management, financial, commercial and operational risks, and foreseeable potential risks, and that the Company fulfills the responsibilities imposed by the legal regulations in relation to internal control, internal audit and risk management.

Committees’ statements and reports are directly presented to the Board of Directors. An internal audit activity is carried out that enables continuous monitoring and evaluation of the Company’s internal control system.

Accordingly it has been established as per the Turkish Commercial Code, Capital Market Law and Capital Market legislation, that internal audit activities and the internal control system did function solidly as at year-end 2018 and that there were no important problems about the processes so far. Furthermore, records indicating the healthy functioning of the enterprise risk and internal control systems were kept and it was declared that no important issues were found.

The administrative body maintains a positive opinion about the Company’s internal control system and internal audit activities. In the report presented to the Board of Directors, the Committee expresses its positive opinion about the efficiency, adequacy and appropriateness of the internal controls carried out to ensure efficient, reliable and uninterrupted performance of Company activities and services, and to guarantee the integrity, consistency, timely availability, reliability and safety of the data derived from the accounting and financial reporting system, as well as for the activities of internal audit and risk management systems in relation to the preparation of consolidated financial statements.

Furthermore; in this context, the Auditor Report about the Early Risk Detection System Committee prepared by the Independent Audit firm Güney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. (A member firm of Ernst& Young Global Limited) states that: “As a result of our activities we have reached the conclusion that; Tofaş Türk Otomobil Fabrikası A.Ş.’s Early Risk Detection Committee is sufficient in all significant aspects within the framework of the Article 378 of the Turkish Code of Commerce.”