Dogus Otomotiv Servis ve Ticaret AS

IST:DOAS.E

Earnings Call Transcript 2022-Q1

[Operator]

Arda, Please go ahead.

[Yavuz Arda Yildiz;Investor Relations Associate, executive]

Thank you, Michael. Ladies and gentlemen, thank you for standing by, and I would welcome you to Dogus Otomotiv First Quarter '22 Conference Call on 11th of May 2022. [Operator Instructions]

So without further ado, I would like to pass the line to Mr. Kerem Talih.

[Kerem Talih, executive]

Thank you very much, Arda. Hello, everybody, all ladies and gentlemen. I would like to welcome you to our presentation, and I just would like to say Hi to all of you in the name of my friends and in the name of the Otomotiv family. We are really very happy to be able to present you the operational and financial performance of Dogus Otomotiv Group at the end of first quarter 2022, in a way that both of our KPIs are much beyond expectations in terms of revenue, profitability, all margins, EBITDA and at the end, in terms of net profit of the company. And it's also a nice for all of us that in the edge of the summer to come without adverse effects of the COVID-19 and pandemic precautions and without health concerns, I think we are all feeling relatively much better as compared to the previous meetings we have had under COVID-19 precautions.

In the beginning of the presentation, we have just used new visuals of our new fancy Volkswagen Group models. Let me just jump to the new launches page, that in the last 2 meetings we are starting our presentation with this information because year 2020 and '21 was a kind of period that the new model launches were somehow suspended in that respect. This suspended influence has just caused the current year to be full of new launches.

Throughout the year, we will keep launching more than almost 25 new models. And currently, I can say half of these models that you can see on the page have already been launched by Volkswagen worldwide and respectively in Turkish automotive market. And most on well-known or fancy ones, and also the volume models are the T-Cross and the Taigo in Volkswagen SUV segment. And also we have the new Tiguan AllSpace, which has already been launched in the first quarter even before the plan. And also the new A3 and respectively, as you can see, the new Fabia have been launched in the market. And we are just running a successful new launch and campaign -- sorry, marketing campaigns, respectively.

Let me just consider the performance of the first quarter in terms of market development. As you can see, the size of the market is 23% lower than the previous year. Just to recall and to refresh our memories on the size of the market, year 2020 was the year that we have been strongly feeling the influence of the suspended demand, which was stemming from year 2019 and year 2020. During the period of 2020 and '21, some portion of this demand have already been captured, but relatively the volume of demand is somehow been balanced relatively. In that respect, the volume of the market is 24% below the market.

And in terms of Volkswagen Group, at the end of March, we have sold 21,000 units, which is 46% lower than the previous year and which is quite lower than the performance of the market because of the adverse effect of the supply challenges, which is stemming from chip prices and also the cable supply issues, which is stemming from the Russian and Ukrainian war developments, unfortunately. When you -- when we consider the market share in market segments, in the passenger car segment, as you can see, we have been ranked as the second just after Renault Group in passenger car segment. And in light commercial vehicle segment, we are placed at fifth, just after Ford, Tofas, Stellantis and Renault Group, with a market share of 5.9%. And when we just consolidate them all, we have been placed at a fourth position with a market share of 13.9%, respectively.

And when we just go into the details of the related market segment, initial passenger vehicle market. As you are all aware, in terms of models, Golf, Polo and Passat sedan and variant models. And in Seat, Seat Ibiza and Leon; and in Skoda, Superb and Kodiaq. In Audi A3 Sportback and sedan; and in Porsche, Macan SUV and Cayman are the leading models in their respective brands. And in the total market itself, we are just following with a market share of 16.3%. In the light commercial vehicles itself as it has always been the case, we are the transporter model, and then are the leading models of our -- of the Volkswagen Group itself, and we have been ranked fifth with a market share of 5.9%.

Having a glance at sales performance, the first quarter of year '21 was -- we have sold 33,000 units. And at the end of this quarter, we have sold 21,500 units. And as you can see, Volkswagen passenger cars and Skoda and Audi are the volume rents, as you can see on the table. Just having a look at what has happened in April, the marketing formation has just been rebuilt a couple of days ago. The total size of the market has just increased to 220,000 units. So we have just added somehow 60,000 something at the top of the performance of March.

And Dogus performance has just increased to almost 31,000 units, which was -- which is 40% below the performance of the previous year. And as compared to the performance of the market, as you can also see in the presentation. In the premium segment, we are just performing better than the performance of the development of the market because of which our Audi brand is just performing well in terms of providing new Audis to the market. But in passengers, light commercial and heavy commercial vehicle segment because of price index and because of model mix and because of availability of people, we are just a bit below the performance of the market itself.

And at the end of April, our total sales volume has just added additional 9,000 units in April, and we have reached a volume of 30,500 vehicles. So in general, I must say that in terms of sales targets, those magnitudes are within our targets and are in line with our yearly planning that we have done for year 2022, I must not at this stage. And in terms of competition, our market share has just improved considerably and our market share has just reached to 14.4%. And in the consolidated caption in light vehicle segment, we are just ranked at the third level, just following the Renault and Tofas Group. And as you can see, between Tofas and Dogus Otomotiv there is only almost 1% variance in terms of our market shares.

Coming to financial performance, I must at this stage, in general, say that, as I have said, not only in terms of weakest sort, I mean in terms of turnover also in terms of volume, in terms of profitability and also in terms of healthiness of our dealer network together with our strong financial and liquidity management systems, we are all in track of our strategy. And those financial performance beyond the expectations are the output of this sustainable strategy, I must note.

And as you can see, our net sales are -- has just touched to a level of more than TRY 7 billion, which is 17% better off than the previous year and respectively in line with our pricing strategy and as an output of the supply and demand determination, we are also very successful of adding up additional margins in terms of new vehicle. And in that respect, our EBITDA has just reached to TRY 1.3 billion and in line with our disciplined cost control mechanisms, our net profit has just increased TRY 1 billion after tax.

Our CapEx, I mean, even they have increased more than 200%. Those are normal levels for Dogus Otomotiv, and in line with the expansion of the volume and level of inventories, our total assets has just increased 25% and working capital is just following the size of the total assets as well. Coming to margins. As you can see, in terms of gross profitability, we have reached historical -- the highest level of gross profit margin, which is 20%.

I can presume or I can foresee that there would be questions in the Q&A session relating to the sustainability of this performance. And as long as the current volume of demand and as long as, I mean, within the -- within the contract circumstances of the top line, we would presume that in the months to come we will be managing our gross profitability in a very controlled manner. And as long as there has been no unforeseen macroeconomic and currency development in the market, those levels seems to be sustainable. But even we have not considered that amount of gross profitability within our budget. This is a combination of the current -- what competitors are doing as well and what we are doing in terms of our pricing strategy.

And operational sales -- expenditures over sales are also at very historical low levels just because of the magnitude of the turnover and just compared to the last quarter of the previous year, our operational expenditures have just increased 5%, but in such an inflationary and deflationary environment it is very normal that operational expenditures are increasing in line with inflation. And respectively, our EBIT and EBITDA margins are above 18%. And at the end, in line with our financing strategy. Just to refresh all the participants, we are just utilizing almost 96% of our total borrowings, which is around TRY 3 billion are all Turkish lira dominated. We are avoiding any open position and the strategy has again served for us to avoid any foreign currency loss and keeping deposits in terms of euro has just showed for us to have some additional foreign currency gain, which has also set for this good net profit margin at the end.

Having a look at the quarterly basis, P&L allocation. As you can see, as compared to the last quarter of the previous year, we have sold almost the same amount of vehicles at the level of 17,000 something units. And the net profit at the end is above TRY 1 billion. When we just consider the variances, there are 2 points that I just would like to note is the total operational expenditures in under IFRS rules, foreign currency gain and losses are also accounted in that respect. But I have -- just in the previous presentation as I have said, then we just eliminate the onetime effects like the bonus provision in the fourth quarter or the currency gain in the fourth quarter and also the currency gain in the first quarter of this year, the increase in the total operation expenditures are only 5%. And also as compared to the first quarter of the previous year, there has been almost very -- almost no change or very slight increase in our operational expenditures.

And also coming to the financial costs, I mean, within that -- within the scope of this, the size of the balance sheet or income history, our financial costs are almost kept on a very controlled manner as compared to the previous year -- sorry, as compared to the last quarter of the previous year. But when we consider that the cost of funding has just increased from an average 14% to 20% this year, our financing cost has just increased 76% as compared to first quarter of year 2021.

In this page, you can see the full year comparison of the P&L relating to the increase in the revenue at a level of 17%, which the increase in the euro-Turkish lira rate with a devaluation rate of almost 8%, has increased a significant growth. And also since we have in the new model year, the price increases of the new models have been reflected to prices. And the model mix has also -- is also an influencing factor, but also the disruptions in the supply process has enabled us to make relatively more profitable quotations, which has caused to increase our revenues to a level of TRY 7.2 billion.

As I have already explained the points on the total operational expenditures and also financial expenditures have just increased as I have said because of the increase in the average cost of funding, which is fully Turkish lira denominated, which is totally in line with the performance of the market and you can also see the explanatory note at the bottom part of the presentation. Also, the performance of our associates are also very important. And the total performance is 55% better than the previous year.

As you can see, Dogus Sigorta, Yuce Auto and TUVTURK have somehow increased their performances. In our Skoda brand, we are really experiencing a very satisfactory and successful management and operational and market performance, which is reflected to this very satisfactory financial output and also in vdf Group, the performance is quite lower than the previous year, which is a result of the funding structure of vdf Group, that's the average increase in the cost of funding and also the competition with local banks has also caused for some decrease in their total profitability. But this is the case for vdf Consumer Finance, but relating to the vdf Factoring, VDF Service, I mean vdf Fleet and vdf Insurance, their profitability is also increasing sustainably.

Having a look at the balance sheet. As you can see, without increasing the size of the -- we have increased the revenues without increasing the size of the balance sheet. The number of inventories are -- has reached to 8,500 units from a level of 5,000 units, which is in line with our manufacturing program with the OEM. And as you can see, both the receivables inventories and cash and cash equivalents are, respectively, in line with this expansion.

And in liabilities, as you can see, the total -- the average level of 3 billion -- TRY 3.2 billion is in line with our strategy and also the increase in our trade payables are just in line with the increase in our average inventory levels. So as compared to the year-end, the size of the total balance sheet has just decreased, sorry, increased 24% and has just reached to a level of TRY 12 billion.

Coming to the details of the financing costs, which is an important component of our income statement. As you can see, the increase in the interest expense on borrowings is just stemming from the average increase in the financing cost of Turkish lira denominated loans in Turkish market, which was 14% last year, which has now increased to 20% -- more than 20% on average. And the increase in the commission network currencies is just coming from the devaluation effect.

And coming to interest revenue. Last year in the first quarter, we were keeping some Turkish lira deposits that were generating some interest income. But now we are just from the mid of last year, we have changed our strategy and we are just keeping foreign currency-based deposits. In that respect, there is a decrease in the interest revenue, which is in line with our financing is key.

And just a glance at the financial performance KPI, the working capital is 25% better than the previous year. I just would like to note that the net cash position is negative under IFRS, just to note in a couple of short sentences. We are also utilizing the currency risk hedged deposits in Turkish [indiscernible] for our Turkish participants. So these are with minimum 3 to 6 months maturity. In that respect, they are not regarded as cash. That's why our net cash position is negative. But when we just consider those deposits in bank, our net cash position is even not negative. And as you can see, our both receivable inventory and payable turnover has just increased, I say, volume of 50% as compared to previous year, which is in line with the development of the volume of our sales performance.

Our capital expenditures are moderate level and return on assets and return on equity is just increased considerably as a result of this successful profitability. When we just consider the new and recent material event disclosures, we have just added the new Cupra brand to our model range, in line with the strategy of the Volkswagen Group worldwide and also since Volkswagen Group has just spread its parts with Bugatti brand, we are also -- we are no longer representing as Volkswagen Group is not representing Bugatti brand, we are also not the Turkey dealership of Bugatti brand car and this is our material disclosures.

Relating to sustainability, I just would like to pass my word to Arda, so he will just brief us very shortly. Arda, please go on.

[Yavuz Arda Yildiz;Investor Relations Associate, executive]

Thank you, Mr. Kerem Talih. As you follow, Dogus Otomotiv sustainable strategy is integrated into stakeholder engagement oriented and nonfinancial risk management model. We have been reporting in accordance with GRI since 2009. We have been publishing the United Nations Sustainability Development Cost Index since 2017. We have completed our preparations for the transition to integrated report. We will publish our 2022 year-end and annual report and sustainability report in integrated format.

We will publish our 2021 sustainable report shortly for this year. On economic sustainability side, we focused on supply chain management on 2021 and '22. We invested $2.2 million in solar energy panels last year to reduce our environmental impact, especially to reduce our emissions from energy consumption. We aim to reduce our emissions by 45% when the installation of solar energy panels is completed. We also completed the integrated management systems installation in April 2022. First of all, we calculated our carbon print in accordance with ISO for the first time this year and we'll publish it in our 2021 report.

In 2022, we have been following the developments in the world and our investments in electric vehicles and charging stations will continue. We will provide sustainable trainings to our entire authorized dealer network. We aim to increase our digital literacy rate in our operational units. At Dogus Otomotiv, our expectation for the automotive market in 2022 is 790,000 units, and our expectation for -- excluding Skoda sales volume is 90,000-plus units. Geopolitical risks and semiconductor supply capacity will be the determining factors in evaluating these expectations. Thank you.

[Kerem Talih, executive]

Thank you, Arda. And I think we are at the end of the presentations. Thanks for listening to us, and we are more than happy to answer your questions if you have any.

[Operator]

[Operator Instructions] Our first question comes from Mr. [ John Yurchan ] from Wood & Company. Please go ahead, John. Your line is open.

[Unknown Analyst]

Thank you very much for the presentation and congratulations on your excellent results. I have 3 questions, if I may. The first question is related to the margins. How sustainable do you think your gross margins are, especially in the passenger car segment and the other segments. These 2 segments gross margins are the all-time high levels and do you think will they be sustainable throughout the years -- throughout the year?

And my second question is regarding your expectations from income from associates. When we look at the details of the income from associates, although we see a 55% year-on-year increase in the income level, it is mainly driven by Yuce Auto, and we've seen some kind of highly volatile picture in the earnings streams of Yuce Auto. Could you please provide some color on this? And how should we look forward in terms of the income contribution from Yuce Auto going forward? And secondly, why did we see a subdued performance in TUVTURK even though we've seen that the fees have increased by 36% on a year-on-year basis. But if I look at the net income growth, it was somewhat subdued.

And my third question is regarding your net working capital management practices. What are your expectations regarding your net working capital -- net working capital to sales ratio throughout the year? At the end of 2021, we've seen net working capital sales ratio was at its all-time low level and now it's normalizing. In this quarter, it's mainly related to the inventory levels, as you mentioned, and you presented in your presentation. At what level do you think net working capital or sales ratio will normalize in 2022, maybe in 2023 as well. These are my 3 questions. And I would appreciate if you could provide your thoughts on these questions. Thank you very much.

[Kerem Talih, executive]

Thank you. Starting with gross profitability, let me also jump to the related pages in the presentation. As we said, this quarter is historically the highest level. And as I tried to explain, within the current level of demand and the availability that we can generate, which is in line with the manufacturing capacity, which was somehow -- which is ruled by the semiconductor supply crisis worldwide, which is just shadowing the whole global automotive sector and Volkswagen Group and respectively, our Turkey plus performance as well. I mean, I must say that this gross profitability is definitely quite almost 20% more than the performance of the previous years. But as long as the currency performance is around those levels, which we can say that in the current quarter, which is the second part of the year, our gross profitability seems to continue like this because when we just consider the performance of April and May, we can see that with the current level of prices, our sales performance is just going very satisfactory.

Of course, as long as demand is at this volume, but we were able to acquire more vehicles or, of course, which is also -- I mean, as you would appreciate, the price index level is also determined by the competitors, not only by our own decision. As long as the practices of the competitors are also in line for the short term or for the remaining part of this year, we can't think that our gross profitability will definitely be not lower than the performance of year 2021, which is like 15%. And at this stage it can be sustained, I believe.

Relating to the performance of associates, the performance of Yuce Auto is also -- the story is almost like the same because they are also performing very successful sales results and also good profitability. But I mean, TRY 80 million within the volume of total associate revenue is somehow half of the figure, but I'm also executive participant in their Board meetings. Their performance for April and May is also going as successful as the output of the first quarter. In that respect, we can foresee that the successful profit contribution of Yuce Auto continue like this because it's not only the price level of Skoda is generating good profit contribution, but also the demand for Skoda brands in the market is really very satisfactory, considering that because the Skoda worldwide has just launched many new SUVs, new sedan vehicles and their marketing activities and sales campaigns are really very successful, I must say.

Coming to the -- your last question relating to the working capital. In fact, our financial strength is just coming from. We are just hitting the balance sheet. I mean, without increasing the -- I mean, the -- the increase in the working capital is definitely below the expansion in our total revenues. We are somehow increasing more than 40% of the total revenues. But with the increase in our working capital turnovers, we are just keeping our working capital on a very controlled manner because this is also a determining factor for our financial liabilities as long as we are just keeping the working capital at this stage.

We are just keeping our total funding level at the level of TRY 3 billion. So -- but as you can see, I mean, not as you can see it, just to inform you in detail, almost more than 40% of our working capital is coming from cash. So -- but in line with our disciplined financing strategy, we are just keeping some deposits. But in fact, we can deleverage the total borrowings. This is a financial decision that we are just keeping some cash in hand just to be on the safe side, as you would appreciate, the volatility in the Turkish liquidity market that things may change very rapidly from day 1 to 2.

In that respect, we are not going to decrease the size of the working capital within the rest of the year, I can say. But this is just for being on the sales side. So I can say that's easily TRY 2 billion out of this TRY 8 billion can be eliminated by using the cash in hand to pay some debt and -- but this is our financial strategy to be on the safe side.

[Operator]

Our next question comes from Mr. Vladimir Bespalov from VTB Capital.

[Vladimir Bespalov, analyst]

Hello, congratulations on good numbers. My question is about your guidance for the full year and maybe on the current situation. First, could you tell us how many vehicles do you have in inventories right now? You had 8,500 vehicles at the end of March, right? But the sales nature were quite good. So -- and maybe could you provide your view on how confident are you in getting enough vehicles to meet the guidance of 90,000 units sold throughout this year? And maybe could you provide some color on how do you expect these supplies to happen over the year? And maybe what is the plan B if you don't get vehicles in this amount?

[Kerem Talih, executive]

For the moment, our inventory is relatively lower than the level of first quarter -- at the end of first quarter, which is around 40 days, 3,000 to 3,500 units. But our yearly manufacturing plants have been set and agreed with Volkswagen Group, which is at the level of as at the end of the presentation, my colleague Arda has just told. Without Skoda, we are aiming to reach the level of more than 90,000 units. For the moment, we have already increased 25,000.

And for the moment, under the circumstances of I mean, supply challenges, Volkswagen Group has just confirmed the manufacturing of this amount. And are more important than that, as you would appreciate, the current level of demand in the market is in line with what we have planned forward. So we have not planned to acquire more vehicles than the demand level of the market. We are just trying to find the optimized levels that will sustain our profitability and which will not create any burden on the financing of some obsolete inventories. In that respect, we are totally in line with our plans and the remaining of the year seems to be in line with our -- what we have planned so far.

[Operator]

Our next question comes from [ Mr. Phyllis Epstein ] from ActivoBank.

[Unknown Analyst]

I don't have any questions.

[Operator]

[Operator Instructions] We have a question from Mr. Lutfu Gazioglu from HSBC.

[Lutfu Gazioglu, analyst]

Congratulations for the amazing results again. My question is as a follow-up for the -- your guidance of the total market, total motor vehicle market. You made a minor adjustment, downward revision. What was the reason of it? Because I would expect you to do this revision in -- with [indiscernible]. It seems that in my opinion it was a little bit earlier.

[Kerem Talih, executive]

I get you. Thank you very much. In fact, we are just trying to keep our expectations as much as updated or realistic, let me say. So for the moment, we have the manufacturing plan and supply program of the OEM of the Volkswagen Group in hand. And as -- then we consider the market performance at the end of April, our forecasts and our historical experience just shows that it would be one the 20,000 to 30,000 units less than the previous levels.

As you may know, remember, it was 810,000 units or 820,000 units in the previous meeting that we were taking. Now we have just reduced to 790,000 units. So this is what we have forecast so far. I cannot say that the update is early or late. This is what we have adjusted recently. By the way, in May and June we always revise our budget. We just consider all the determents starting from the size of the market to the cost of following through in our profitability, OpEx, CapEx, so on and so forth. And we got board approval at the revised overall budget, let me say. And we are just in the beginning of these studies, and that's why knowing that we have updated the size of the market that we can announce it maybe in June. We just put it earlier in the presentation. This is just a choice.

[Lutfu Gazioglu, analyst]

Okay, thank you very much. I have another small question, if I may. What is the current -- your market share evolution in May because we saw that in March you gained market share in the domestic market and in April the market share declined by 150 basis points. So how is it in May?

[Kerem Talih, executive]

In fact, in May, we gained some market share. We were fourth at the end of March, and we are at the second level after Renault. In May, the sales performance is just going as good as April. So I hope, let me say, I hope, because at the end it's not only us, many other brands in the market are just playing their tools. We will -- we will try to keep our market share at least second or let me say, third level. Thank you very much, Kerem. Your welcome.

[Operator]

Thank you very much. I see no further questions at this point. I'll pass the line back to the team for the concluding remarks.

[Kerem Talih, executive]

Thank you very much for all the participants for your patience and listening to us. We hope to see you in the -- I hope with the same successful level of figures of the second quarter. And we all wish you a nice day. Thank you very much.

[Operator]

Thank you very much. This concludes our call today. We'll now be closing all the lines. Goodbye.