Review Of 2010 Operations

GENERAL OWERVIEW2010 was a successful year as we were able to return to the business dynamics of the pre-crisis days of 2008. The Turkish economy grew by a robust 9% during 2010. The inflow of portfolio investments as well as the expansion of loans allowed us to fully benefit from the growing local demand and we were able to achieve rates of growth that were substantially above most other markets. As a Group we managed to grow by an astonishing 45% and increase our turnover to $3.5 billion, the highest level in our history.
The primary factors which influenced our 2010 results can be summarized as follows:
  • The Turkish economy was the fastest growing economy among the developing nations, ranking third in the world. Despite the risk posed by the dependence on the European market of the country's export structure the momentum that was attained during the second half of 2009 was successfully maintained.
  • The primary sectors to which we provide service, including the automotive and white goods segments, grew markedly in relation to 2009 while benefitting significantly from the relatively low trend of the € /TL exchange rate, low interest rates on consumer loans and the intense price competition during 2010. Domestic production of passenger vehicles increased by 17% during 2010 and topped 1.1 million units, while production of white goods rose by 12% to 18.4 million units. Meanwhile, the construction sector's contribution to the GNP grew to as high as 17%. Consequently, our rates of growth in the flat steel and steel pipe markets increased to 33% and 15%, respectively.
  • Fluctuations in the supply/demand balances, as well as input pr ices, growing economic volatility and changing supply conditions, made the process of predicting steel prices progressively more challenging. Global steel prices began the year 2010 with a rapid climb. This rising trend continued steadily until June when the weakening tendency of the supply/demand balances created a retreat in prices befor e they remained steady for a while. There was once again an increasing trend during the last two months of the year even though there was no obvious rise in demand. As a result, a higher price platform was established as opposed to the previous year.
  • Implementations that create a differentiation in competition, high efficiency, and value added products and services, which increase brand value, became critical for companies after the crisis.
Our Steel Group was able to grow by 40% as a result of the rising prices, while our Distributorship Group companies likewise increased their overall business volume in relation to the previous year as their cumulative revenues climbed by 45%.

The Steel Group productively generated 53% of the overall revenues by processing 2.5 million tons of steel. Our steel pipe companies reported $707 million in sales income, while the flat steel companies increased their turnover to $1.150 billion, an increase of 46%.

As with the previous year, our distributorship activities managed to retain their 38% contribution to the cumulative revenues. The highest business growth rate during 2010, a vigorous 60%, came from our Automotive Group companies. As a direct result of the growth in the local market our BMW, MINI, Land Rover and Aston Martin national distributorships broke the annual sales record by collectively turning over more than 15,000 vehicles and motorcycles.

Both Supsan and Manheim Turkey took steps that were in alignment with their strategic plans to ensure their growth in the future.

The earth moving equipment and power systems divisions were able to take advantage of the developments in various sectors both in Turkey and Kazakhstan as their turnover increased by 30%. The s ales of earth moving equipment in the Turkish market nearly doubled over 2009 figures, topping 953 units. We attained record levels in our power systems sales both domestically and abroad, and maintained our leadership in the Kazakhstan market.

In the logistics sector our average growth rate since the year 2000 has been 20% annually. In 2010 we were able to generate $170 million in revenues from outside the Group. On the other hand, our cumulative turnover increased by 33%, to $264 million. With the completion of our $100 million port investment, which began back in 2008, we became the most important player in the Gulf of Gemlik region. Of significant importance, we made a strategic decision to implement the third phase of our port investment plan way ahead of schedule in order to upgrade our container capacity and handling technologies in order to better meet the needs of our strategic customers.

As growth and opportunities in the domestic market were significantly better than the international arena the ratio of revenues generated from exports and sales abroad in relation to the overall total contracted from 27% to 24%. The global decrease that was experienced in the line pipe projects of the Steel Pipe Group had an adverse affect on the export balances. Despite this, opportunities in the country and product segments were successfully seized in other steel products. Meanwhile, our companies operating abroad (i.e., earth moving equipment and power systems especially in Kazakhstan and our offshore logistic activities of Vobarno) were also successful in increasing their business volumes. Combined revenues generated from export and international activities grew by 28%, reaching $844 million.

As a result of the crisis management measures we have consistently implemented up to the present time, the ratio of our operational expenses to sales contracted from 8.1% in 2009 to 6.8% last year. The increasing competition in all the business areas in which we were actively involved during 2010 created a pressure on profit margins. The mentioned losses in profits were largely compensated for by our increasing business scale and efficiency in expense management as we successfully increased our pretax profits level by 23%. The fact that the Steel Pipe Group ended up with a loss, as a result of both the stagnation dominating the international projects segment and the unfavorable price competition taking place in the domestic market, certainly limited the increase in profitability within the Group.

The EBITDA level of our Group, which has been increasing at an average rate of 10% per annum, reached $245 million during 2010. In spite of the above target volume and profit actualizations of our other business areas due to the limited contribution of the Steel Pipe Group, the ratio of EBITDA to cumulative sales was actually limited to 7%.

In line with the 45% growth in sales at the end of 2010 our working capital increased by 20% over 2009 figures. The strategic decisions we implemented during the first quarter of 2011 to seize sales opportunities and benefit from rising steel prices had a significant influence on this increase. On the other hand, we are continuing the structural development in terms of the management of our working capital. We improved the average operating capital turnover speed by 25 days during 2010, to 97 days.

Including the $166 million worth of investments started in 2010, the combined volume of the investments we have initiated since 2000 has surpassed $1.3 billion.

We are continuing with investments which we feel are strategically important across the Group. The ground-breaking ceremony of Borusan Mannesmann Boru's new $100 million spiral pipe production facility took place in 2010. The plant, which is projected to go online during the final quarter of 2011, will be among the best of its kind in the world in terms of the technology used, production capacity, layout, production flexibility and strategic proximity to the port. With another $100 million in investment we were able to double our capacity at the Gemlik Port. As a result, the general cargo and container capacity substructures were increased to 5.7 million tons and 400,000 TEU, respectively. We intend to begin the third phase of our port investment during the course of 2011.

Concerning our newest strategic business area of energy production, the total volume of investments initiated to date, including the activities that took place in 2010, rose to $264 million. Our first completed venture in this area, the 60 MW Bandırma Borasco Wind Energy Plant, has begun production. The 50 MW Yedigöl-Aksu Hydroelectric Plant is expected to begin operation during the middle of 2011. We plan to invest an additional $214 million into our energy business during 2011.

Even though we closely monitored operating capital and expense management, we specifically increased our long-term borrowing in order to create funding for our investments. Our net borrowing level increased by 12% in relation to the previous year, up to $1.192 billion. Regardless of this development, the debt to net asset balances was maintained at the targeted optimum levels.
In contrast to the increase in our debt level, which grew in line with budgetary expansion, we were able to attain a 20% improvement in our financial expenses as a result of the reduced borrowing costs and, more importantly, by being efficient in risk management.

The concept of sustainability determined the course of every step we took towards the attainment of our business targets in 2010. Last year, we were one of the two companies from Turkey to join the World Business Council for Sustainable Development (WBCSD). Borusan was also among the more than 1,000 leading companies in the world to sign the "Cancun Declaration", which contains recommendations concerning changes that must be included in the new order so that the effects of global warming and climate change can be minimized. Furthermore, we were one of three private sector companies in Turkey to sign the Declaration thereby extending support for the plans to convert to lower carbon economies.

Within the scope of Borusan Group's environmental sustainability efforts, we began to focus on critical issues in 2010 such as energy efficiency, greenhouse gas emissions, waste management and water usage.

The attainment of our profitable 2010 results would not have been possible without the valuable contribution of Borusan workers who have made the real difference. The high level of success we achieved by making full use of opportunities to create new business dynamics during the crisis was also sustained throughout the growth phase. As a consequence we were able to establish the business structure and approaches necessary to adapt to global and local market dynamics in the future. Some of the main targets we have set for 2011 include the attainment of at least a 15% business growth and an even higher increase in profitability, the creation of innovative solutions to products and services, as well as the sustainment of efficiency and the strength of financial structure.

I would like to take this opportunity to sincerely thank all of our managers, employees, business partners and valuable customers who have contributed their efforts to the attainment of our successful business results.


SteelSince steel production is among the leading indicators of economic conditions, the record increase in output which has exceeded the precrisis levels is a clear indicator that global economies are in a state of recovery.

Among the most striking facts about the global steel industry during 2010 is the reality that a sizable portion of the increase in production originated not from developing countries, as was the case in previous years, but from developed ones. This situation resulted because developed countries had experienced a much more significant contraction in production during 2009. Despite the high rate of increase in steel production it is apparent that developed countries have not been able to attain the levels they enjoyed prior to the beginning of the crisis.

In 2010, the cumulative global steel output rose to 1.4 billion tons, an increase in 15%. Consequently, worldwide raw steel production increased by 7% in relation to the pre-crisis levels of 2008. Raw steel production in Turkey, meanwhile, increased last year by 15%, up to 29 million tons. With its combined output Turkey ranked 10th in the world in 2010 among the 65 largest steel producing countries and was once again ranked second in Europe.

During 2010 the Turkish steel sector continued its exports in an atmosphere of limited development in demand across global markets and under challenging competitive conditions. Iron and steel product exports dropped by 6% to $14 billion in value and 18 million tons in volume. The fact that the Turkish steel sector was able to increase production despite the drop in exports was the primary result of the robust rise in demand from the local market.

In addition, the start of production at our new facilities contributed to the 50% increase in flat steel output, which reached 6.6 million tons.

The total growth of the market reached 33% during 2010 as consumption in Turkey reached 2.2 million tons in cold rolled steel products and 1.8 million tons in galvanized steel products.

The PipeThe positive developments taking place in global markets were also felt in Turkey during 2010. The steel pipe sector grew in close alignment with the construction segment as reflected in its 15% growth. Surprisingly, this increase was primarily fueled by demand from residential projects rather than substructure and large scale ventures. In line with these developments, as well as rising exports, Borusan Mannesmann Boru increased its business volume in first quality products by 24%, up to 677,000 tons. The output of high value-added products including pressurized, special and spiral pipes comprised a 50% share of the total production.

Customer specific solutions helped increase our sales volume to developing export markets while a more lasting growth target was determined for existing markets. Nearly 41% of the business volume consisted of exports to 40 countries.

As a result, the 2010 revenues increased by 32% over figures from the previous year, up to $640 million.

The contraction in the high value added projects segment as well as the intense price competition among the standard pipe products in the local market resulted in a marked drop in profit margins. In 2010 the EBITDA margin stood at $8 million, was substantially below figures from 2009, which were 7%, or $34 million.

Since revenues are expected to climb by 16% during 2011 priority has been given to an increase in profits. Precautionary measures designed to prompt a return to profitable balances have been set in place since the beginning of the year.

Flat Steel
Borçelik had a rather successful year in 2010. Investments which were designed to increase market share and competitive strength were completed in accordance with the strategic plan. During the month of June the $140 million investment designed to increase production capacity by 50% was completed as the third cold rolled and third hot dipped galvanized lines were brought online. As a result of these investments Borçelik now has the highest steel production capacity in Turkey and is also the most modern galvanized steel producer in the country.

By rapidly providing for special products and demands, in 2010 the Company attained the best performance in international sales in its history. As last year's production resulted in a turnover of 1.3 million tons, sales increased by 25% over 2009 figures. Our market shares in galvanized steel and cold rolled steel were 29% and 19%, respectively.

A profitable growth was attained in 2010 despite the fact that profit margins fell as a result of increasing competition in the domestic arena. The EBITDA level increased by 21% to $85 million.

As a result of the activities taking place in its latest large scale investment at the Bursa branch, as well as its integration with Borçelik, Kerim Çelik reached an all time high in terms of goods shipped and turnover, which topped $241 million. The total volume of goods shipped, meanwhile, was reported at 380,000 tons. Kerim Çelik initiated a large portion of its purchases from Borçelik and was therefore able to guarantee on time delivery while providing its customers with the highest quality merchandise. When compared to the previous year, the EBITDA level of Kerim Çelik stood unchanged, at $7 million, mainly as a result of the expenses that originated from its new investment.


During 2009 the global crisis had an adverse effect on both the automotive sector and luxury category products. However, 2010 was a period of recovery for most of the markets in the world. The retail sales volume of the BMW Group, including all vehicle models under the BMW, MINI, and Rolls-Royce brands, was reported at 1.5 million units. As a result of the 17% business growth the Company continued to remain one of the leading luxury class automobile manufacturers in the world. Land Rover, on the other hand, increased its global sales to 181,000 units, an increase of 26% over the previous year.

Favorable economic balances, low interest and foreign currency exchange levels, as well as consumer oriented marketing activities, all served to contribute to the growing demand in the Turkish passenger vehicle market in 2010. The market grew by 41% as sales reached 520,000 units. Simultaneously, retail sales in the luxury segment climbed by 50% to 41,000 units. The SUV market expanded by 42% in relation to 2009 as cumulative sales in that segment rose to 25,000.

During 2010 our retail sales of BMW increased to 12,034 vehicles, while MINI and Land Rover rose to 708 and 2,315 units, respectively. During the same period secondhand vehicle sales stood at 1,065 units and our turnover of motorcycle sales reached 351 units.

Therefore, our revenue for 2010 was $726 million, reflecting an increase of 60% in comparison to the previous year. As price reductions and low profit margins dominated competition in the sector the rate of growth in profits was slightly below that of the increase for unit sales. Our EBITDA level was $63 million.

The auto division received the award as the Borusan Group's most successful company of 2010 not only because of its exceptional sales performance but also for the increase achieved in customer satisfaction and market share levels.

SupsanIn line with the growth of the automotive sector 2010 was also a successful year for Supsan. Under the license of Eaten Inc. the Company managed to sell 6.4 million valves and had a turnover of $21 million. Combined exports to the U.S. and Italian markets climbed closer to 2.5 million units. The export volume of original equipment manufacturer (OEM) valves independent of Eaton increased to 200,000 units while the spare part valve exports reached 150,000 units.

Meanwhile, the new channel management strategy implemented in the domestic spare parts market reflected favorably on business growth. There was also an increase in the sale of products offered along with valves, including guides, inserts, valve cotters, camshaft, valve lifter, engine bearing and gasket set.

In 2010 Supsan received the Voice Of Customer (VOC) management and Simplified 6 Sigma company performance awards and became an example with respect to both strategic and operational excellence.

Manheim TurkeyAs the country's first multi brand secondhand automobile platform Manheim Turkey facilitated the marketing of close to 30,000 vehicles in 2010, 11,000 of which were sold at auctions. The number of member dealerships increased to 1,335 while the average number of dealers attending weekly auctions rose to 400.

The start of operations at the Ankara branch, as well as the 'on time' open bidding arrangement established at Istanbul İstoç, which is held three days a week, is expected to help with the attainment of the 61% growth target that has been set for 2011.

Earth Moving Equipment and Power Systems
The earth moving equipment market in Turkey grew by 6,560 units in 2010, a 122% increase over 2009 figures. Borusan Makina ve Güç Sistemleri surpassed the previously budgeted sales targets by turning over 953 new machines. The Company also maintained its market leadership role in Turkey by generating 23% of all the sector's revenues. There was, however, a small contraction in the market share with respect to the number of units sold as a consequence of the entry into the market by a locally produced earth moving equipment segment.

In Kazakhstan, Borusan Makina maintained its market leadership position among the distributors of earth moving equipment of western origin. The overall sales of this equipment increased by 56% compared to the previous year. The performance of the agricultural sector dropped to its lowest levels mainly as a result of both the crisis in the financial sector and the unfavorable climate conditions.

In electric power systems the highest level of sales for the past few years was attained via the Caterpillar and Olympian brands. By signing up for high revenue turnkey projects we took the necessary restructuring steps for the attainment of more comprehensive jobs. The number of projects relating to transoceanic large tonnage vessels, which were most affected by the crisis, was quite low. Investments in this business area were continued, however, as this segment is viewed as a long term strategic business area for Borusan Makina ve Güç Sistemleri. Along the same lines, the MaK engine distributorship was obtained from Caterpillar and the necessary structural activities were started.

The year 2010 was also a good one for Turkey in terms of secondhand and rental business. There was a 17% increase in revenues generated by the rental fleet, which consists of 165 machines. Plans are underway to enlarge the rental fleet by nearly 40% during 2011. The combined volume of secondhand earth moving equipment sales reached 350 and more than half of these were issued a Cat Certified Used (CCU) certification. By the end of 2010, the EBITDA level increased by 32% over 2009 figures, reaching $52 million.

In comparison to 2009 results, the after sales service revenues in Turkey and Central Asia gained by 13% and 53%, respectively. The ratio of after sales income to fixed expenses climbed from 74% to 85%. The recovery of the mining sector in Kazakhstan, as well as the implementation of maintenance and parts services that were deferred during the crisis, played an especially important role in these developments.

LogisticsThe negative effects of the economic crisis began to slowly dissipate during 2010. During this time the logistics sector began to feel the positive effects of increased business volume not only from foreign trade but also the domestic market, and capacity utilization rates increased accordingly.

The year 2010 was the first year the increased capacity resulting from the completion of the port expansion investment was utilized and $43 million in revenues were generated from port activities. As a result of the EBITDA that was created, the duration of the return on investments was much faster than the previously set targets. Investments were continued in line with the growth strategy in foreign countries and, in particular, as a result of the expansion in third party logistics operations a 33% actual growth was obtained in 2010.

On account of the expansion investment that was implemented the general cargo, container and vehicle handling capacities at the Gemlik Port were increased to 5.7 million tons, 400,000 TEU and 250,000, respectively. Following the outlay, docking space increased to 1,400 meters while the terminal area was extended to 280,000 m². The 2010 port revenue and the EBITDA levels continued to remain higher than the feasibility estimates. In light of the rapid increase in capacity utilization rates steps have been taken to hasten the third phase of the investment.

Along with present subsidiaries in the U.S., Europe, North Africa and the Middle East, becoming a powerful regional player in the third party logistics services was determined to be our most important goal. With this objective the International Transporting services were positioned as a strategic business division in 2010. Through organizational structuring and investment we have set a target of taking on a more dynamic role in transportation activities, especially between Europe and Turkey.

Borusan Lojistik's brand in international markets is Borusan Logistics and $3 million was invested last year to strengthen its country structuring. Also, last year we began the groundwork to form a company in Kazakhstan in 2011.

The ratio of revenues Borusan Lojistik generated from sales outside the Group increased from 60% in 2009 to 64% last year. Meanwhile, the EBITDA level increased to $38 million, up 28%.

EnergyLast year was an important one in terms of the privatization and liberalization process of the Turkish electricity markets. The privatization process of electricity distribution regions was expedited and, accordingly, auctions were held for the 11 distribution companies, which were separated into three groups. The official privatization announcement for the electricity production sector is expected to be made during 2011.

Likewise, 2010 was a significant year with respect to both the completion of construction at energy power plants and the establishment of critical functions and processes at the newly formed Borusan EnBW Enerji. Perhaps the most important step taken last year was to increase the existing 45 MW production capacity of the wind energy farm in B andırma (RES) by a total of 15 MW. So, by the end of 2010 the combined electricity produced by the facility increased to 199 GWh and generated $15 million in revenue.

The construction of the Yedigöl Aksu hydroelectric power plant (HES), which will have a production capacity of 50 MW, continued in 2010 and it is scheduled to become operational in 2011.

The combined asset size of Borusan EnBW Enerji grew to $292 million by the end of last year. In addition, the long-term project financing provided for the investments at Bandırma (RES) and Yedigöl (HES ) were successfully initiated.

Borusan EnBW currently has two primary targets in the short term, namely, converting present projects in its portfolio to investment and expanding its present portfolio by adding new projects through purchases and securing auctions.

In accordance with our strategic plans we are still targeting to increase the energy production portfolio to 1000 MW in the short term.

As a consequence of our 2010 results, we are beginning a new year where all business segments are once again focusing on important growth targets and profitability. During this time strategic investments will continue as operational and financial discipline will have the utmost priority.

This is the first year of the growth and development targets that have been determined as a part of our 2015 strategic plans and we are confident that 2011 will be a significantly more successful year than 2010.

This plan calls for new investments and methodologies in all our business segments which will, undoubtedly, help us grow and become stronger as we aim for higher profitability and a turnover target of $6 billion. I am confident that each of the planned objectives is exciting and uniting all Borusan employees and I wish our Group success during this exhilarating journey.

Executive Office
Agah Uğur