Dogus Otomotiv Servis ve Ticaret AS

IST:DOAS.E

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I would like to welcome you to Dogus Otomotiv Second Quarter 2022 Results Conference Call on the 19th of August 2022. [Operator Instructions] The format of the call will be a presentation by the management team followed by a question and answer session. So without further ado, I would like to pass the line to Mr. Kerem Talih, CFO of Dogus Otomotiv.

[Kerem Talih, executive]

Thank you very much, Tim. I would like to welcome all the participants in the name of myself, my team who are also online and also in the name of Dogus Otomotiv. We are back on stage with the results of the first half of the year.

And I can say, as a general overview of the automotive sector is still agenda in the newspaper stall today, relating to the unavailable to vehicles because of lack of supply, which is a global automotive sector issue, together with the rumors that the special consumption tax regime is going to be changed or not, plus some new regulations in used car sales that are trying to eliminate the unbalanced pricing scheme in the market relating to some limitations. And also, in general, in the macroeconomic area, relating to this highly volatile Turkish lira, which is quite important for all the automotive sectors, not only for domestic manufacturers, but also for importers as well.

So when we consider the performance of the total market as it has been at the end of first quarter as well, we are -- the market is still performing below the performance of the previous year, which is somehow 9% lower than '21 and has reached to a level of 370,000 units. And as a representative of Volkswagen Group of brands, our sales units has touched almost 52,000 units, which is almost 35% lower than the previous year.

As we have always been saying so. It's a matter of supply. And within this period, the downsize in our sales is a bit more than the performance of the market relating to -- mainly relating to vehicle availability and average sales price of our vehicles that we are prevailing in the market.

And can we just consider the output on who is leading the market. As you can see at the lower part under the heading of light vehicles, we have been placed just after Renault and Tofas Group at the third place, with a market share of 14.9%. And you can -- as considering that the presentation has been revealed beforehand, and we have also seen our detailed financials, I'm not going into the line-by-line details that you can already see through the presentation.

But as you all know, Volkswagen passenger cars are the leading brand group within Volkswagen Group in Turkey as well. And passenger car segment has been ranked with a market share of 9.2% as it has been placed at the top position in its respective segments.

And when we consider the allocation relating to the brands, as you can see, Renault Group has increased its market share to a level of almost 24%. Tofas has increased to a level of 15-plus percent. But we have certainly lost a 4.3% market share, as I have said, which is mainly relating from the supply of vehicles of the Volkswagen AG Group as a whole.

Relating to the light commercial vehicle segment. At the beginning, I must say that in this segment, we are normally serving to the market with 4 models, Caddy, Transporters, Crafter, that you can see at the box below, plus the Amarok. As you all known, the new model launch of the Amarok has recently been made last month. And it is going to be in Turkish market in April or May -- sorry, March or April next year. In that respect, it's not in the market from our side.

Also, in our Crafter model, there has been some supply obstacles as well. Short-speaking, out of these 4 models, we are just serving to the market with Caddy and Transporters. In that respect, we have lost some market share, and we have been placed at the sixth position with a share of 4.5%.

And then we just consider the sales performance per brand. As you all known, passenger cars are the leading one, more than 25,000 units at the end of June. And which is followed by Skoda, Audi at light commercial vehicles, respectively. And at the end of the first quarter -- sorry, first half of the year, we have sold more than 50% -- more than 50,000 units of vehicles.

Coming to the output of July, that has already been announced 2 weeks ago at the beginning of August. The market is still below the performance of the previous year, which has reached to...

[Technical Difficulty]

[Operator]

Apologies, we're just having some technical difficulties with the hosts' line. If you just bear with us a moment or 2, we'll hopefully repair the connection.

[Unknown Executive]

Yes. Wait a second, please.

[Operator]

Thank you for your patience, everyone. Please just bear with us another moment or 2, and we'll hopefully have the host back. Thank you.

[Unknown Executive]

Thank you for the patience. Mr. Talih will reconnect. So we need 1 or 2 minutes.

[Kerem Talih, executive]

Can you hear me right now?

[Unknown Executive]

Yes, Kerem. Yes, Kerem, we can all hear you.

[Kerem Talih, executive]

Sorry for the inconvenience. I was just saying that at the end of the first 7 months of the year, our sales volume has almost reached 60,000 units.

And next page. And when we consider the allocation of the market share as it has been in the -- at the end of first 6 months, our third position, just after Renault and Tofas Group with a market share of 14.3%, is almost the same.

Relating to the financial performance, we are really very happy to be able to represent those figures to you, which has -- which was also the case at the end of first quarter. We are still having the historical high levels of financial -- historically, the highest level of financial KPIs. And our net sales has increased almost to 40% to a level of TRY 18.8 billion at the end of first half of the year, which is an output of the increase in the sales price of the vehicles in terms of euro plus the devaluation of Turkish lira.

And our EBITDA and net profit margin has just increased considerably, as you can see, to a level of TRY 3.5 billion and TRY 2.7 billion, respectively. And within this period, we are just maintaining our capital expenditures and the increase in the size of the total balance sheet to a level of almost TRY 40 million as a result of the increase in the working capital mainly relating to average per increase in the price levels placed in the receivables and liquidity plus inventories. And...

[Technical Difficulty]

[Operator]

Apologies. We're just having some additional technical problems here. Just bear with us. Thank you for your patience.

[Unknown Executive]

Thank you for your patience. Mr. Kerem Talih, you will be connected again.

[Operator]

Thank you for your patience. Please continue to bear with us.

[Kerem Talih, executive]

Can you hear me right now?

[Unknown Executive]

Yes, Kerem. We can hear you.

[Kerem Talih, executive]

Sorry for the inconvenience. I don't know why despite the tests we have made, there has been some problem in the connection.

Anyway, so let me come to the -- just after. Yes, we were just after the financial performance, we are in the margin slide. And as a result of our new vehicle sales and also spare part sales, our gross profitability has just reached to a consolidated level of more than 21%, which is stemming from the fact that well, the volume of demand in the market, considering that in the volatile economic conditions in Turkey, buying a vehicle is still and still is considered as an investment tool, and the level of demand is currently is currently much higher than the volume of availability that we can supply to the Turkish market.

And considering that the volume of our sales has increased considerably, the OpEx over sales is definitely much lower than the performance of the previous year at the level of less than 3%. And our EBITDA and EBIT margins are more than 18% respectively. And we have reached to the net profit margin of almost 15% which is the all-time high level at the end of our successful operation and financial performance.

When we consider the income statement, on a quarterly basis, at the end of the second quarter, we have acquired an additional profit at the top of TRY 1 billion at the end of the first quarter and TRY 1.7 billion at the end of second quarter. And performance of the second quarter this year is -- in terms of number of sold is more than 40% to a level of almost 24,000 units. And the volume of sales is almost close to TRY 12 billion.

The increase in our operational expenditures are mainly relating to the increase in advertisement expenditures and mainly increase in OpEx and also employee cost relating to the salary adjustments and increase in the tax records of our salaries in the beginning of the year. And relating to the financial income and expenditures, as you can see in the -- as compared, these 2 quarters are almost at the same level.

When we just consider the all P&L as compared to the previous year by the input of this high level of gross profitability, which is quite higher than the performance of the previous year despite the fact that we have sold 30% less than the previous year, our profitability is more than 200% higher than the performance of the previous year.

Our sales revenue has increased to TRY 18.8 million. And our total operational expenditures are almost 3% higher than the previous year. But at this point, I must note that the current currency gain is also considered within this figure.

Apart from that, within the body of all operational expenditures, of course, we are hit with the adverse effects of the yearly inflation, which is more than 80% these days and also foreign currency denominated expenditures have also increased in line with the devaluation of Turkish lira.

Our financial expenditures are 55% higher than the previous year. And the reason behind is the average increase despite we have decreased our financial liabilities to certain extent, the average cost of capital at the end of this half of the year is 21% for the Dogus Otomotiv, which used to be around 16% in the previous year.

Of course, the -- our profitability, the contribution of our associates are so valuable for us. As you can see, vdf is just keeping a level of contribution in our consolidated financial statements. And those Dogus Sigorta and Dogus Teknoloji now intend have relatively low portion of contribution. The performance of, definitely, TÜVTÜRK and Yüce Auto has considerably increased. Our Skoda sales are really performing very successfully in Turkish market. In that respect, we had the highest contribution out of Yüce Auto that I would like to thank those colleagues for their successful operations.

Considering the balance sheet, the size of the balance sheet, has also increased to TRY 13 billion, almost TRY 14 billion. As you can see, the working capital components like cash and equivalents, receivables and inventories are almost computing more than 85% of the total balance sheet. And despite the increase in total turnover, considerably, we have lowered our financial liabilities from TRY 3 billion to TRY 2.8 billion. And increase in our trade payables are in line with the increase in the volume and -- which is just balanced by the increase in trade receivables from TRY 1 billion to TRY 3.1 billion as well.

As I have said so, the -- in the net of financial costs, the most material item is the interest expense on borrowings which has increased 35%. As I have said a couple of minutes ago, the average cost of capital -- all cost of financing has increased to a level of 22% from 16% despite the fact that we have deleveraged our balance sheet to a degree of like TRY 400 million. And all the other components are in line with our general [ budget ], but here, there is not much to say on that.

And relating to the financial performance KPIs, our working capital has increased TRY 3 billion to a level of TRY 9.6 million. In fact, in the calculation of net cash position, I must note that in reality, I mean, of course, it is negative TRY 500 million. But within that, the new foreign currency-protected time deposits, which is the new product in Turkish banking system, is not considered in this calculation.

In that respect, in the series of our calculation, our net cash position is negative. But when we consider this foreign currency-protected time deposits, it's not a negative, I must note. And our receivable inventory and payable turnovers has increased to a certain extent, which is in line with the volume and the turnover of the working capital of the balance sheet is relatively higher than the previous year, which is, [ as I talked to ], market deterrent.

I'm not going one by one relating to these material event disclosures that has already been made by public in their respective time lines. In that respect, in the Q&A session, if you have any question, then I would be happy to explain them.

And at this point, I will just give the word to Arda, who is our Investor Relations specialist to give some information relating to our strategy and sustainability studies. Arda, please go ahead.

[Yavuz Arda Yildiz, executive]

Thank you, Mr. Kerem. The prominent topic of this period in our sustainability strategy was supply chain management. So we maintain our sustainability activities and strategy according EU Taxonomy and United Nations sustainable development costs.

For this reason, we have completed our significant processes such as integrated management systems, code of conduct and integrated sustainable report. In parallel, with our cooperation with the Volkswagen Group, we started to calculate emissions on authorized dealers in order to raise awareness of sustainability.

And I would like to highlight some points in our sustainability journey. As you can see in the presentation, our sustainability activities are mainly divided into 3 parts as social, economic and environmental. And on the economic side, we have completed the top line inspections on purchase process, and we have moved on to the second stage in Volkswagen AG's supply chain sustainability program.

And on the environmental side, we have completed the integrated management systems set in process. And last of all, we continue our investments in electric vehicle charging stations. At the end of July, we have about 300 charging stations. And our Porsche brand has the largest electric vehicle charging station network in the country. Thank you.

[Kerem Talih, executive]

Okay. Thank you very much, Arda. And in the last page, before the Q&A session, we just would like to inform you that our expectations relating to the size of the total market for the whole year 2022 is still kept at the same and at a level of almost 800,000 units.

The supply challenges for the whole -- I mean, the whole automotive sector worldwide is going to continue when we consider the obstacles relating to the tension between Russia and Ukraine and all the remaining stories that we all are very familiar during the 2.5 years period of time.

And our sales level is expected to reach to a level of 85,000 units. Without Skoda, then just at a yearly forecast level of 20,000 units. Volkswagen Group is going to be at a level of 110,000 units at the end of this year.

And we will still be investing in digitalization and sustainability and mobility. And we will be doing our best to represent all the growth-wise studies and developments, which are being led by the Volkswagen AG and its subsidiaries and as the 5th largest import group, Volkswagen Group, in the world.

So this is the end of our presentation. I do apologize for this technical problem once more. And let me have your questions if you have any.

[Operator]

[Operator Instructions]

[Kerem Talih, executive]

Knowing that we have just revealed a financial and operational performance much beyond the expectations and currently our share price has already reflected this financial performance that the share price is just at the level of more than TRY 100, maybe there may not be so many questions that -- but we will see.

[Operator]

[Operator Instructions] So our first question comes from Lutfu Gazioglu from HSBC.

[Lutfu Gazioglu, analyst]

Congratulations on the great results again. We saw a better availability, I think, in the July because we see an improvement in your domestic market share in July. How is August? Is this availability more -- is the availability better than July? Or in line with July? That is something...

[Kerem Talih, executive]

We can say that it is in line with -- in general, it is in line with life, but we must always consider that July and August are the heavy summer months, and most of the people are on vacation and they are out of town in that respect. These 2 months are -- and the third quarter itself is a kind of low volume quarter. And the last quarter of the year always compensate this low profile. But in general, the level of supply is unfortunate and definitely less than the level of demand in the market, which seems to be, in our agenda, in best scenario till the mid of next year.

[Lutfu Gazioglu, analyst]

I have another question, last question. On 2023 outlook, especially on margins, because we saw an improvement in your margins consecutively since 2020. So how can you manage to maintain these margins in 2023 given that -- if we assume a better availability will be in 2023?

[Kerem Talih, executive]

As I have said so, it seems that till the middle of next year, and by the way, if there is no additional burden out of this tension between China and Korea, then this supply obstacles seem to be in the agenda, minimum till the end of next year -- the mid of next year, I'm sorry.

So in general, since -- till middle of next year in best case. But definitely, in general, we are hoping to be able to -- hoping that the OEMs will be able to manufacture more. But I mean, we -- as we all are reading the agenda and newspapers. Today, for instance, I have just read in Bloomberg, just in China, because of low level of rains, the electricity manufacturing is lower than expected.

In that respect, the automotive industry is going to have some obstacles. When we say automotive industry, it's not the carmakers, but also the spare part manufacturers and chip manufacturers and so forth. By the way, just for general information, chip industry is really a heavy and heavy water consumer. It is one of the heaviest industry that utilizes water as an input, and this global warming issues are definitely a general trend, which made all of us to make precise forecast related to the years to come.

But to be able to -- I mean, as a specific reply to your questions, as long as the current level of demand is on the market and when we consider the degree of supply, which is not catching up the level of demand so far. This level of profitability seems to be at the current level, I can say.

[Operator]

So we have another question from Cemal Demirtas from Ata Yatirim.

[Cemal Demirtas, analyst]

Kerem, congratulations for very good results. I think the standards of Dogus increased significantly lately. And I hope you can sustain to some extent. My question is about the income from associates. We see some increase even quarter-on-quarter and also year-over-year. How should we think for the rest of the year and for the following years, especially related to TÜVTÜRK, what -- how do you see the outlook for the rest of the other -- maybe the following years?

[Kerem Talih, executive]

Okay. Let me go to the related slide that we can see the income allocation by entity basis. For TÜVTÜRK, we can say that their performance for the remaining of the year, we have a minimum at the performance of the first 6 months, but mainly for Yüce Auto. For Skoda brand, since they're also having this high level of gross profitability and due to lack of -- for Skoda vehicles as well, they will -- they are also planning to -- they seem to be maintaining the same level of profitability. So minimum additional TRY 200 million or even above millions of Turkish lira is going to be added up to our consolidated financial statements.

And related to The vdf Group, since their main income is driven from financing activities, considering the high level of interest rates in Turkey, they are also being challenged with competition. In that respect, vdf Group will be keeping its steady state level. But main players in this area will definitely be, #1, Yüce Auto and then TÜVTÜRK, which will be the second highest profit contributor in our consolidated financial statements, I can say.

[Cemal Demirtas, analyst]

And another question, in media, we are hearing that there are some regulation actions in the secondhand car sales. And there's just -- there's -- not news flow, but there is a noise about that among auto sales, who is buying those cars and et cetera. How do you react to those news flow? Or maybe you can differentiate, if you did anything significant or anything just could be anything, could be counter-theories about those, I believe.

[Kerem Talih, executive]

Maybe -- what -- the rumor with this 6,000 kilometers and 6 months rule has just turned out to be in legislation. But if you can be -- if I may ask more specific on what type of rumor you have heard, maybe I can comment.

[Cemal Demirtas, analyst]

Specifically, that maybe, Kerem, may that one limitation. Because they were saying that in this environment, people are buying the car and maybe, like, stocking some inventories and then so just a clarification that these sales are not real. We discussed it before and I understand they're real, but just to understand how this is going.

[Kerem Talih, executive]

Yes. How it will go. For commercial entities, they're forbidden to sell vehicles, which is less than 6,000 kilometers and younger than 6 months. And for many players, mainly galleries in the market have such kind of vehicles, but they are able to liquidate them till the end of September -- till the mid of September, sorry, so the 15th of September. So what we are hearing in the market that -- is this. And -- but you can also see in the newspapers -- in the news that they are just selling these vehicles to their friends, family members, because this rule is only -- is ruling commercial entities, not individuals. So they are just going to sell those vehicles till the mid of September to their parents, to their friends. And then, they will be easily trading the current inventory in the market.

But when we just consider in the general used car market, when we just consider the level of demand, the average sales prices have already decreased to a level of 5% to 10%, that we also are experiencing a level of decrease in the demand for the new vehicle sales. But considering that in anyhow, the level of demand is higher than vehicle availability.

In new car sales, we are still keen on maintaining these margins. But for used car sales, it may have some negative effect on the margin, which, for the last 2 years, which was enormous that in time, there is potential that this profit margin is going to be more reasonable, I can say.

[Cemal Demirtas, analyst]

And 1 last question, maybe -- it's a general question and maybe -- sorry if I missed -- if you answered. It's related to the semiconductor issue. And the availability issue, and nobody has a clear answer. But at least the indication, we are receiving it from Volkswagen. How do they see the picture?

Are you going to see a gradual improvement? Because it has been almost 2 years. And we were hearing that there was a problem in Taiwan and the U.S. is trying to do something. There's -- something is making some fintech, kind of things. So at least, as a channel check, what kind of indications you are receiving on that front?

[Kerem Talih, executive]

Yes. Thank you very much. This is an important and very valuable question. I must say that it is not on the Volkswagen AG itself, but none of the players in -- the automotive market, globally, is not, unfortunately, able to make a precise assumption on the way that they are going to overcome this chip supply obstacles.

For the moment, even from our side, we don't have precise information on the volume of year 2023. But as you have heard so, they are going to increase the availability of chips and in line with it, availability of vehicles on a gradual scale.

And till mid of next year, the vehicle availability will definitely be much better than this year. This is the information that we really have in our pocket right now. Maybe in November next year, we may be able to precise -- speak about more precise figures relating to the volume of next year. As long as we have more precise and more information.

But this China tension, Korea and so on and so forth is really a very, very important issue since their chip manufacturing capacity is 65% worldwide. This is an obstacle, not only in the automotive sector, but many, many sectors including electronics, so on and so forth will be indefinitely in big trouble. I hope which would not be the case.

[Operator]

And I think we also have a question from Esra Sirinel from Is Yatirim.

[Esra Sirinel, analyst]

Can you hear me?

[Kerem Talih, executive]

Yes, I can hear you.

[Esra Sirinel, analyst]

Congratulations for very good results. Well, I'm wondering about your preliminary expectations for 2023, because we know that the major demand drivers for 2022 were the post sentiment, both from the consumer side as well as from the fleet companies. And also, there's an investment material for automotive from the consumer side. Do you expect these drivers to continue in 2023? My first question is this one.

And the second one is, well, we are following from the press. There is difficulties for consumers to reach the credit loans. I'm wondering about the share of loan finance in your sales. So I'm wondering about whether it has a negative impact on your sales volume. I mean, just the share of cash purchases or loan purchase. That would be very helpful to understand.

[Kerem Talih, executive]

Yes. Thank you very much. As I was trying to explain the previous question, as I have said, it is difficult to give a precise picture for the year to come. Since -- I mean, without knowing the manufacturing capacity of the producers, the OEMs mainly. But in general, considering that -- I mean next year, we are going to hopefully, the elections in the mid of the year.

And till now, we are foreseeing that the value of Turkish lira is trying to be -- will try to be at a certain level. And the money inflow to the market, I mean, by means of some instruments of Central Bank, will continue. And there may be some [ publish ] in our projects of the authority in that respect. We see that it is not going to be a major obstacle. I'm just putting that as supply issues, which is out of our control.

Till the mid of next year, things may continue as what has been the case in the second half of this year. The major determinants will be, of course, the vehicle availability and whether the automotive sector globally has overcome this chip shortage or not, so we will see that.

Relating to the portion of credit sales. For the moment, it is 25% at the end of first 7 months of the year, which used to be, a couple of years ago, more than 30%. And in general, we can -- I can definitely say that our cash purchases are definitely our highest historical portion because, I mean, in this inflationary environment, everybody -- I mean, if considering that the cost of funding is relatively and definitely higher than a year ago, people are just investing in cars. I'm not saying they are just spending in cars, but they are investing in cars since they would be able to, I mean, preserve their savings. And plus, they will be just -- having been more busy.

In that respect, for a period of time, I can say that a portion of credit sales in our total sales will be around 22% to 25% as a forecast.

[Operator]

Thank you very much. I'm not seeing any more questions. So perhaps I could hand back to Kerem and Arda for closing remarks.

[Kerem Talih, executive]

Okay. I'm -- once more, I would like to thank all the partisans for your time in listening to us. So I'm just wishing you'd have a very nice weekend and hope to see you again with our third quarter also. Thank you very much for listening to us, and bye-bye.

[Operator]

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