Dogus Otomotiv Servis ve Ticaret AS

IST:DOAS.E

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Good day, and welcome to Dogus Otomotiv's First Quarter 2024 Earnings Conference Call on the 4th of June. Please note that today's call is being recorded. [Operator Instructions] At this time, I would like to hand the call over to Mr. Kerem Talih. Please go ahead.

[Kerem Talih, executive]

Thank you very much, Tim. Dear guests, welcome to the first quarter presentation of Dogus Otomotiv. My name is -- I'm Kerem Talih. I'm here with my colleagues, Ebrahim [indiscernible] support me during the presentation process and also [indiscernible] that you will be asking questions if you have any. So it was at the time that we were presenting the year-end results of 2023 that I was trying to give some insights of what's happening in the first 3 months of the year. So we are here [indiscernible] actual performance.

So starting with what's new from Dogus Otomotiv sites. Initially, I can -- I'm happy to be able to announce that we are enlarging our Dogus Marine business, like 4 years ago, the business field that we have started our operations in [indiscernible] of Turkey. Last year expanded to item. And recently, we have officially launched and opened the third service station in [indiscernible]. And also, the second heading is relating to the realized dividend payment amounting to a total of TRY 11.5 billion as announced about yearly performance of year 2023. And finally, as we have already announced to public in the disclosure platform, we got a distributorship agreement for the spare parts and services of the Wielton brand, which is a trailer brand, that we have already acquired the distributorship of it.

Coming to the performance of the first quarter, there were always a question marks or hesitations in the mind of everybody please focused on Turkish automotive markets, whether the performance of the year '23 is going to be sustained or not, which was a year of historically high [indiscernible] total market performance amounting to 1.2 million units sold within which Dogus Otomotiv as a representative of all Volkswagen Group of brands in Turkey has reached a level of sales performance amounting to almost 175,000 units, which was a very successful year, both in terms of sales performance and also profitability as well.

At the end of first quarter, we are still ahead of our targets, in which our total sales, together with Skoda, our wholesale performance is 6% better than the previous year and has reached a level of almost 39,000 units. Within this, the performance of our commercial vehicle sales is really going so strong, and we have expanded our yearly performance almost 50% and has almost touched about 9,000 units as being the distributor of VW Group till year 1994. By the way, this year, we'll be celebrating our 13th year anniversary, without Skoda, our vehicle part has reached a level of 2.3 million units, which is 6% compared to the previous year.

I will come into the influence of inflation accounting and the reconciliation of previous year's historic performance results as compared to inflation effects, but our net profit has reached a level of TRY 3 billion after tax, which is almost 50% lower than the previous year after the inflation accounting has been implemented.

Also, our income from associates that I will come in the following pages of the presentation is relatively lower than the previous year and in line with the decrease in profitability, our earnings per share is TRY 13.8. And as I already said, our total gross distributed dividend is TRY 11.5 billion and our year [ stock ] return is more than 183%.

At the end of first three -- sorry, at the end of first quarter, I can say that the market is performing much beyond expectations. As you can see in the presentation, the total performance of the market is 24% better than the previous year. And our performance is almost kept almost at the same level, which is quite lower than the performance of the market at a level of 3%, but I should underline -- double underline the fact that our strategy is, it has never been never only our stand-alone market share-oriented, but also profitability-oriented as well. And at the end of first quarter, at the end of March, as you can see, as compared to the year-end and as compared to the March 2022 figures, there has been a slight market share loss around 1.2% to 2.7% and is up again at the third position with a market share of 12.5%.

So [indiscernible] the presentation has been revealed beforehand, I'm going to skip the detailed information relating to segment basis. And then we have a look at the brand basis allocation. As you can see, Volkswagen passenger cars, Skoda and our light commercial vehicle segment are the volume and the leading brands within VW family. The total of which has reached to a level of almost 40,000 units, which is 6% better than the previous years.

Moving then -- I mean, this is the first days of June, so in a couple of days. The May -- cumulative May market performance will be announced within this week. But for the moment, we also have the statistical information of the performance of the first 4 months, namely April. And as you can see, the total market expansion has reached to a level of 382,000 units. And our sales performance is relatively to a level of 4% lower than the previous year amounting to almost 49,000 units. As I tried to note, we are still unable to be keen on sustaining our profitability, which results some -- both in our market share that we are aware of this information -- of this situation.

Coming to the allocation on the brand basis, as you can see, again, the passenger cars Skoda, unlike commercial vehicles, are still performing so strong. And you can see the other brands allocation as compared to the previous year in the details. And at the end of April, we are again and still keeping our third position in [indiscernible] segment. We are following Tofas/Stellantis Group and Renault Group, we expected at the trade level of 13.6%. And in light commercial vehicle, we are always at the third or the fourth level. And we are -- this time, we are following Tofas/Stellantis and Ford Group, respectively. And at the end, we are still keeping our market share at a level of almost 13% at the end of April this year.

Coming to financial performance. Our 3 months revenue is -- by the way, all the figures that you are seeing reflects inflation accounting figures, both in terms of P&L and both in terms of balance sheet magnitudes, which means all the balances, either coming from the year-end or either coming from March 2023 is being indexed to the purchasing power parity as of March 2024. In that respect, our sales performance is 2% better than the previous year's first quarter, but our EBITDA is [indiscernible] lower than the previous year. In the coming pages, I will try to explain you the reconciliation between the figures of the previous year without inflation accounting and with inflation accounting. So in terms of making some comparison, we believe it will be easier for you to be understand. I hope this presentation will have for your better understanding.

At this point, we should also explain that after following the unfortunate earthquake in the southern part of Turkey in February in Kahramanmaras region, [indiscernible] as one of the leading automotive groups in Turkey, we have also taken the related responsibility and as they have already been publicly announced in the disclosure platform, we are going to carry some charity expenditures, one of which is the reconstruction of the historical three buildings in [indiscernible] province, amounting to TRY 500 million, which computes somehow 2% of our EBIT. So in that respect, the balances of the first quarter of this year carries a onetime effect of such a charity expenditure, I must say. In that respect, our net profit is 48% lower than the previous year.

In the coming pages, you will see the influence of inflation accounting, respectively, but not only the inflation accounting influences, but also, you are -- in line with the normalization in the automotive market, gross profit margins are normalizing, expense patterns are in line with the unfortunate adverse effects of inflation and to a certain extent under the influence of devaluation, respectively, I must say.

And our CapEx expenditures are at the level of more than TRY 450 million. And after the -- together with the consolidation of those real estate company -- investment company, our total asset has increased 5% and has reached to a level of almost TRY 82 billion, within which our working capital is also an important component of it.

So in this chart, there is a reconciliation of historical nominal net profit of the previous quarter, which is carried forward to the financial net profit figures of the first quarter of this year. When you just trace the audit report or the annual report at the end of first quarter last year, our net profit was TRY 3.9 billion and in the bridge presentation, the blue ones are the increases and the yellow one is the decreased effects of the figures.

So the inflation coefficient from March to March is 68%. So all the performance is indexed and has computed to an expansion in profitability amounting to TRY 2.6 billion. At the end of March last year, the 95% shares of those real estate investment trust company has been bought, but their privileged shares has not been acquired yet. In that respect, the consolidation was not made. But knowing that at the last part of -- sorry, in the beginning of -- when was it? Yes, in the last quarter of 2013, the privileged shares have been acquired in that respect in the consolidated financial statements TRY 311 billion, [indiscernible] profit contribution is stemming from the consolidation of those real estate company.

And finally, minus TRY 1.1 billion is a net influence, stemming from inflation accounting. Because, as you may know, in terms of balance sheet, in companies with a strong shareholding structure, indexation of the retained earnings and accumulated gain and loss and capital, so on and so forth, is generating, unfortunately, inflation loss and in the expansion of asset values, both in terms of inventory, fixed assets and subsidiaries and associates, the indexation is generating income outlook.

So we have a strong balance sheet in terms of assets. But considering that the stock turnover in the name of inventories is quite high. That is why our inventories are not generating sufficient income coming from inflation accounting that would be enough to eliminate adverse effects of inflation accounting effects stemming from the indexation of equity.

In that respect, the net influence of it is TRY 1.1 billion. And at the end, if I am clear enough in explaining this very complex structure, our historical performance, which used to be TRY 3.9 billion is now in our comparative financial statements is TRY 5.7 billion. So in this page, the opening balance is, again, the same TRY 5.7 billion in the total of the first two charts in the presentation or column is TRY 5.7 billion.

So let me just follow respectively, our gross profitability, in terms of nominal values, is decreasing TRY 1.5 billion because the gross profit as a result of the normalization conditions in profitability in the automotive sector, which is not only valid for Dogus Otomotiv but for the whole sector, which is decreasing from 22% to 17%. We are -- there is a negative effect of TRY 1.5 billion and also increased total operational expenditures amounting to almost TRY 500 billion is stemming from this charity expense, mainly, and change in our improved investment activities, which is not material, but changing the contribution of affiliated businesses and partnerships at a level of TRY 1.3 billion, which is an output of the normalization and also our associates and equity pickup subsidiaries are also having the adverse effect of the normalization in the automotive market.

For instance, Skoda is a good example of it. There are also having some decrease in their gross profitability. And also in [ Meiller ] Group of Companies, since they do also have a strong capital structure, inflation accounting is also serving to the disadvantage of the financial performance. And TRY 500 additional million is net of -- in the changes in the monetary gain and loss. And after taxation, our quarter and financial performance is almost TRY 3 billion.

Coming to margins, which is that we believe that one of the most important aspects and part of our presentation relating to the sustainability of margins. As we have always been trying to explain it, year 2023 and also year 2022 was totally exceptional years within which there is pent-up demand but also a lack of supply, which has created a market condition in Turkey, in which the value of used cars are sometimes from time to time, higher than the sales prices of new cars and those 22% -- than 22% gross profitability is under, I would name perfect [ stone ] conditions. But if you just consider the 10 years average of the gross profitability, we can say that it is around 10% to 12%. And having a performance at a level of almost 18% at the end of first quarter of this year is a period that the market, as I was saying, is normalizing.

So OpEx over sales figure has increased 3.8% to 5.2%, but only 2% of it is just coming from this donation after the earthquake. And EBITDA margin also should be considered is decreasing from 19.8% to -- when we just eliminate this 2% to 15.8%. And also the incidence of gross profit margin is taking growth in the reconciliation of EBITDA and EBIT. And our net profit margin, both in terms of loss -- I mean, both in terms of the difference or the gap coming from inflation accounting as compared to the previous year has brought us to a level of 17.1% to 8.8%, but also we should be aware that financial expenditures are also going up in line with increased interest rate levels in that market.

So having a look at the income statement. In fact, within the presentations, I have almost explained all the important and the relevant parts as compared to the previous year. In that respect, I'm not going to add any further detail, but I must -- relating to the financing cost, which has [ increased ] from TRY 600 million to TRY 400 million. The average cost of financing has decreased -- has increased from 20% to 47%, respectively.

In the next page, you can see the breakdown of our income and loss from associates, Yuce Auto, a Skoda subsidiary is also having the adverse effects or the normalization effects of the gross profitability. And as some of you may be aware, the Superb model, which was a leading model for Skoda brand, not only for Turkey, but in the rest of the world, has recently been launched at the end of April. So they were not able to sell this leading model. In that respect, there has some decrease in their profitability, both in terms of margin and also the influence of inflation accounting is also there.

And in vdf service, knowing that in their consumer finance company, the credit penetration is quite low or to be more open, one of the lowest levels as compared to previous periods and also the remarketing income in vdf Fleet in this operational rental company, the used car sales revenue is below expectations. And also, their strong equity position is serving for some inflation loss, which is quite important in their profitability as well.

Coming to the balance sheet. At this point, I just would like to emphasize that the size of the balance sheet has reached to a level of TRY 81 billion, under which those [indiscernible], our retail organization. And those real estate company is fully consolidated within that. And among financial liabilities, which has decreased from TRY 12.4 billion to almost TRY 11 billion, we have paid back the first installments of the EUR 150 million worth of borrowing from three banks, amounting to almost EUR 13 million in terms of capital. That is why the total borrowing is [ 12% ] lower than the previous year. And I have -- I don't have any -- I mean, sorry, at this point, I should also note the level of inventories. But at this point, I can give you the information that the inventory -- the average inventory levels in the automotive sector is almost equal to the 2-month sales performance.

So having an inventory level of 11.6000 units and at the end of first quarter, 15.2000 units is totally in line with our budget and expectations, which is very normal inventory level, I must say. As you can see, in terms of financing costs, knowing that financial income from interest revenue is coming -- is increasing, the net of financing cost is decreasing. As you can see, our financial expense mainly stemming from interest expenses borrowings has increased 30%, which is a natural output of the increase in the interest levels in terms of Turkish lira in Turkey.

So our working capital is almost at the same level. So at the end of March, our net cash position has turned to positive in that the cumulative liquidity that is used to pay the dividend of the previous year has been dispersed in April and receivable turnover is quite [indiscernible] better than the previous year, and demand turnover has slightly increased to 5 days and payable turnover is in line with the development in these market conditions.

Relating to our strict strategy on sustainability management, I'm going to skip those pages, knowing that as compared to the explanations we have made in the last meeting, there is no significant changes and not match -- not much to add in that respect. I can only say that our Corporate Sustainability Rating score at the end of May this year is 83.6 that you can see the details within [indiscernible] presentation.

So coming to the expectations of this year. We were saying that we were planning to see the performance of the first quarter and more than that of the first 5 months of the year. And after knowing that the performance of the market at the end of May will be quite satisfactory, we have updated in our -- and increased our total market expectation to a level of 900,000 units and the sales performance of Dogus Otomotiv will be around 110,000 units, and Skoda is planning to sell 45,000 units and totally total yearly performance of Volkswagen brand is expected to be or forecasted to be 150,000 units.

So this is the end of my presentation. Thanks for your time for listening to us. So I'm more than be happy to reply to your questions if you have any. Thank you much.

[Operator]

[Operator Instructions] No questions at this point. So maybe I'll -- sorry, we have one question. No, sorry -- so we have a question from [indiscernible] from Istanbul [indiscernible].

[Unknown Analyst]

My only question is about margins. It came as surprise that numbers of sales are not decreasing currently, given the fact that May numbers already published, how do you see the competition in the market for following months, given the fact you mentioned the 10 years average is around more than 10%? Would you expect to get closer to that line or not?

[Kerem Talih, executive]

Thank you very much for this important question. I presume that you are aware, both seen in the advertisements in television and in written media or in the digital platforms that most of the brands in Turkey have started campaigns. But as I have recently repeated once more and as I have always -- we have always been trying to emphasize, our strategy is not only based on profitability, but also based on our market share as well. So we are definitely have no fresh [indiscernible] stocks. So for the moment, our current inventory level is, let's say, equal to the sales performance of 1.5 months, respectively. In that respect, knowing that the last 10 years average is 10% to 12% and at the end of first quarter, having reached a level of 17%, we are always saying and forecasting that the normalization in the market will continue, but the profitability performance in the remaining 6 months of the year is expected to be, again, higher than the historical average profitability performance for Dogus Otomotiv.

Knowing that, most of the competitors have imposed plans of campaigns, which means decrease in their profitability. We have just applied a couple of competitions -- for competition requirements, but we are totally not in need of some heavy campaign needs. And therefore, we are planning to sustain our profitability definitely beyond the performance of the historical average.

[Operator]

So I'm not seeing any more questions. Maybe I can just give it a few more seconds just to see if there's any more questions. And if not, perhaps I can hand over. We'll just give it so maybe another 5, 10 seconds.

[Kerem Talih, executive]

We are happy [indiscernible] questions. But again, [indiscernible] enough that all the questions have already been fulfilled. Hopefully.

[Operator]

Yes. Good job, Kerem. So yes, perhaps I can hand over to you for closing remarks.

[Kerem Talih, executive]

Okay. Thank you very much, again, in the name of my team. Thanks for listening to us and hope to see you again with the outputs of the semiannual performance of Dogus Otomotiv Group, and we wish you a pleasant day. Thanks for listening to us, and bye-bye.

[Operator]

That concludes the call for today. Thank you, and have a nice day.