Dogus Otomotiv Servis ve Ticaret AS

IST:DOAS.E

Earnings Call Analysis

Dogus Otomotiv Faces Profit Decline Amid Market Normalization

Dogus Otomotiv reported net profit of TRY 5.2 billion, a 58% decrease from last year, primarily due to inflation accounting and normalized gross profitability. Total turnover hit TRY 76 billion, down 10%. Despite stable sales volumes, margins dropped with gross profitability falling to 14%. The company achieved a market share of 13.7%, maintaining its third position. Capital expenditures are projected to reach TRY 4 billion. The Turkish automotive market showed a 3% growth, with Dogus Otomotiv's commercial vehicle sales exceeding expectations by 40%. Looking forward, the sales target is increased to 110,000 units, including Skoda's contributions.

Market Context and Performance Overview

In the first half of 2024, the Turkish automotive market exhibited a slight growth of about 3%, reaching approximately 600,000 units. Dogus Otomotiv's sales also mirrored this trend, reaching about 81,000 units, maintaining a market share of 13.7%. Despite this stable sales volume, the company reported a substantial decline in financial performance compared to the previous year, primarily due to a normalization of gross profitability from over 23% to approximately 14%. This shift caused total turnover to fall by 10%, totaling around TRY 76 billion.

Profitability Challenges and Adjustments

Dogus Otomotiv's profitability reflected the worsening market conditions, with a reported net profit of TRY 5.2 billion, indicating a staggering 58% decrease from last year's data. This drop was significantly attributed to inflation accounting effects and a notable decline in gross profit margins. The total EBITDA saw a major contraction, standing at TRY 10.4 billion, which is over 43% less than the previous year. The increased operational expenses, largely relating to inflationary pressures and foreign currency fluctuations, further burdened margins, with net profit margins sinking to 6.9%.

Operational Expenditures and Financial Management

The company reported a notable increase in operational expenditures, which rose by TRY 2 billion year-over-year due to inflation and increased foreign currency-based costs. Despite this, financing costs improved, decreasing by TRY 3.5 billion mainly because of reduced foreign currency losses this year. It's also worth noting that the corporate tax rate increased from 22% to 25%, contributing to a financial strain. The company's financial strategy appears conservative with a 14% decrease in financial liabilities, maintaining a low financial leverage ratio.

Outlook and Future Investment Plans

Looking ahead, Dogus Otomotiv expects gross profitability to recover. They predict total vehicle sales to approach a target of around 1 million units in 2024, needing an additional 300,000 units in upcoming months. Investment expenditures for the company are anticipated to reach TRY 5 billion, focusing on infrastructure development, digitalization, and electrification. This investment is split between the purchase of company and test vehicles and facility enhancement. The company also plans to issue bonds for up to TRY 2 billion to secure liquidity if necessary.

Sustainability and Corporate Governance Advancement

Dogus Otomotiv is making significant strides in sustainability, achieving a 30% reduction in Scope 2 emissions since 2021 and obtaining a 91% waste recycling rate. Additionally, the company's governance metrics have improved, securing one of Turkey's highest corporate governance ratings at 97 points, up from 85 points in 2012. This commitment to sustainable practices is reflected by their target of greening their investment strategy further in the coming years.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Dogus Otomotiv 2Q 2024 Conference Call on the 29th of August 2024. Please note that today's conference call is being recorded. [Operator Instructions]

At this time, I would like to turn the conference call over to the company's CFO, Mr. Kerem Talih. Please go ahead, sir.

[Kerem Talih, executive]

Thank you very much, Michael. Good afternoon. This is Kerem Talih speaking. I'm here with my colleagues from the related departments, and we are all welcoming you to the second quarter's financial and operational results performance presentation [ constructed ]. Yesterday evening, we have revealed our financial statements together with our audit report and we are happy to be able to share those results with you. Those results will be covering the performance of the first half year. But considering that, the market performance relating to July has already been known. I just would like to put a few words before I go into the details of the presentation.

Knowing that, at the end of July, the market performance has almost reached a level of 700,000 units, remembering several doubts whether the performance of the year '24 in automotive sector will be satisfactory or not after a historical high level of performance of a level at the end of 2023 with a magnitude of 1.2 million units sold. Since that, the market perception is going on a really very positive manner. And knowing that at the end of first 6, 7 months, we have almost reached 700,000 units, reaching to a level of more than 900,000 units or almost a level of 1 million units will be or seems to be possible, but not only the sales performance, but also profitability is also an important factor in our sector, knowing that after a historically highest level of gross profitability, both in terms of new vehicle sales and also in used cars. The Turkish automotive market is also experiencing a period of normalization that we have or we are approaching to the normalized levels of profitability that we will be trying to explain you in further details in the coming pages of our presentation.

So just to start with what is new stepping onwards from the -- what has happened after March. We have acquired a new distributorship in e-foil products with the brand of Aerofoil recently within our marine business in after-sales services. We will be selling those new products in our new facilities. And saying so, we have established new marine after-sales services workshop in Turkey in Gocek, the second one in Didim and recently, last month, we have launched the third first point in Bodrum, both of them are located in the Aegean Coast of Turkey within which both are plenty and many customers are -- we are available for their services.

The second point is in order to be able to create an alternative source for liquidation, if needed, we have applied to the Capital Markets Board for a license of TRY 2 billion after 3 years for us to be able to issue bonds. So our application is still in progress. In a couple of months, maximum, we are expecting the permission to be granted. But as I might have said before, this is just an alternative mean of liquidity availability and at that stage of market conditions, we will decide whether we are going to utilize this or not.

And finally, 2 weeks ago, we have revealed our first sustainability report in the integrated format. So from now on, effective from the reports of year 2021 that will be on table in year '25, we will be issuing integrated sustainability reports.

Coming to key takeaways. Our total sales performance, together with our Skoda brand is slightly higher to a level of 4%, more than the second year's performance to a level of more than 83,000 units within which our -- the performance of our commercial vehicle sales is really beyond expectations, and we have expanded our size there to a level of almost plus 40% that has exceeded 14,000 units. And at the end of June this year, our total vehicle park without Skoda in Turkey has reached to a level of 2.4 million units. In the last 1 year, we have added 140,000 new units to our customers.

Coming to financial highlights. I will come to the details of it, but our net profit is realized to a level of TRY 5.2 billion, which is 58% lower than the previous year. Here, we are having the effects of the inflation accounting that I will put in detail in the coming pages, but also the normalization in gross profitability is also a key factor at this point. Together with that, our income from associates is unfortunately at a negative level. I will also put the details of it. And within that, we are still keeping our capital expenditures and keeping our financial liabilities portion as compared to equity, 2% lower than the previous year that I must say we are still keeping a low financial leverage within the scope of the size of the balance sheet of Dogus Otomotiv Group at the consolidated level.

At the end of June, the market has increased 3% and has almost reached almost to a level of 600,000 units within which you can see that the passenger and the premium markets has slightly expanded, but the light commercial vehicles and heavy commercial vehicles have shrinked and downsized. And when you consider the performance of Dogus Otomotiv, you can see that we are just following the expansion size of the market, again 3% and our sales at the end of June has reached to a level of 81,000 units. And our performance on passenger vehicle market is a bit lower than the market itself, but in the premium segment, our sales performance is quite lower than the expansion of the market, which is relating to vehicle availability. But as you can see in both light commercial and heavy commercial vehicles in a market which is downsizing, we have increased our sales more than 30% and 8%, respectively, as you can see in the presentation.

And coming to the allocation of the market share. For many years, as most of you might have recalled our market share is rated at the third level at the consolidated level, together with the passenger cars and light commercial vehicles to a level of 13.7%, which is only 0.1% lower than the previous year. And we are, as you can see, following to Tofas/Stellantis Group and to Renault Group, respectively.

Considering that the presentation has been revealed beforehand, I'm not going into the details one by one. And I'm just trying to show you the marketplace performance. As you can see, our passenger car leader is the Volkswagen brand and has sold more than 31,000 units, which is followed by Skoda, light commercial vehicles and our Cupra brand, those are the 4 leading volume brands, as you can see, which is followed by Audi and Seat, Scania and Porsche, respectively. So the total expansion, as I have said, is 4% better than the performance of the previous year.

Knowing that the market -- the July performance is also as we realized, as I have said, the market has reached a level of almost 700,000 units, which is in the same size of the previous year. And respectively, in the related segments, Dogus Otomotiv performance is also going in parallel with the market and the brand performance allocation is almost identical to what has happened at the first half of the year.

And in terms of market share allocation, as you can see, we are keeping our third position in the market. And also at this point, I must note that the electrification development in the Turkish automotive market is going further. As you can see, Chery, the market percentage of which was 0 at the end of 2023, which was 4.2% at the end of last year, has reached to a level of 7.7%. And as you can see, they have acquired some market share, mainly from Tofas/Stellantis Group and also mainly from the other segments in the Turkish automotive markets.

Coming to financial performance. As you can see, our total turnover is almost TRY 76 billion, which is 10% lower than the performance of the previous year's 6 months performance. The main reason here, even though we have sold almost the same volume of cars, our gross profitability, which used to be like more than 22% to 23%, is somehow normalized and turned out to the level of 14%. This is the main reason of this variance in our total revenue. And as a natural output of it, the total EBITDA is at a level of TRY 10.4 billion, which is like more than 43% less than the previous year. Here within this, the increase in our operational expenditures that I will come to the details of which and also the normalization of our gross profitability has played an important role.

And respectively, our net profit is at a level of TRY 5.2 billion, but as you will be able to see in the next 2 pages, and influencing most of the variance is stemming from the inflation accounting indexation that we are adding up to the performance of the year '23 in the first half of the year. We still keep on increasing our capital expenditures at a level of TRY 1.3 billion at the end of the year, though this figure will be more than TRY 4 billion, both in terms of test cars, infrastructural investments, both in terms of hardware, software, IT, digitalization and also in our facilities as well. And as a natural result of it, our both working capital and total assets size is normalized in line with the expansion of those figures.

So Page 14 is an important reconciliation of the performance of the previous year because when you have a glance at the financial report of the June 2023, our profitability was TRY 9 billion, but in this year's June financial statements in comparative format, the figure is indexed to a level of TRY 12.4 billion. The most important determinant here is the inflation indexation, which is at a level of [ 72% ]. So all the performance -- P&L performance has been indexed and TRY 6.5 billion is mainly stemming from indexation and net profit, this is a plus figure.

But on the minus side, the important variance is coming mainly from the indexation of our shareholders' equity, which is minus almost TRY 5 billion, which is generating monetary loss. But despite to it from the asset side of our balance sheet, mainly from the indexation of our fixed assets and investments, subsidiaries, TRY 2.4 billion monetary gain is stemming from. So the TRY 2.6 billion is the net off between this positive TRY 5 billion and negative TRY 2.4 billion, which is serving to the disadvantage of the performance in the comparative format. So when we just add these figures, the historical TRY 9 billion is turning out to be TRY 12.4 billion.

On the next page, the previous one that I have already tried to explain is the performance of the previous year's first half year's performance. Now in this page, we are trying to explain you the movement from this historical last year's performance to a level of TRY 12.4 billion to the year-end net profit, and the important determinants are here, as you can see, the yellow ones are the decreases and the blue ones are the increases. So TRY 5.8 billion is coming from the decrease in gross profitability, as I have said, the gross profit margin, which used to be 24 new vehicle sales, which used to be 22%, has been realized at the level of 14.6%.

Our operational expenditures in the first half of this year has increased TRY 2 billion as compared to the previous year. So TRY 1 million of it, as you can see in the footnote and as you may recall, I have tried to explain this in the previous conference call, is relating to the donations under social cultural format to the -- for the compensation of the damages in the earthquake in Hatay region, which is amounting to TRY 1.1 billion. So as you can see, even more than the half of the variance is stemming from this onetime effect donation. And the remaining portion is the effect of the increase in the operational mix expenditures of the inflation, which is more than 70% on a yearly basis and also some foreign currency-based expenditures. Our income from affiliates and business partners is TRY 2.7 billion less, which covers some portion of some normalization in their business fields as well.

And also to add positive matters in our financing expenditures our financing costs are TRY 3.5 billion less than the previous year. And here, the major determinant is the foreign currency loss with a loss, which was more than TRY 2 billion, which was valid last year. But this year, as you know, since the currency rate is somehow stabilized, we are not having the adverse effects of this foreign currency loss. So the remaining part is the influence coming from monetary loss, knowing that we have a strong structured equity, which is generating monetary loss. And the change in taxation expenditure is mainly relating to the increase of the taxation rate from corporation income tax rate from 22% to 25%, unfortunately.

So coming to margins. As you can see, our gross profit margin, by the way, it's a combination of both new vehicle sales and also spare part sales. As I have said, we are experiencing a normalization. So 18.5% is still a very quite satisfactory gross profitability level for us. Within the [indiscernible] of operation over sales, which goes up to 6%, this TRY 1.1 billion donation is also influencing. So without it, the OpEx over sales would be around 4%.

So the deviation from 3% to 4% is mainly coming from the increase in our operational expenditures, mainly coming from increase in foreign currency and mainly from inflationary effects and respectively, as you would be following, our EBITDA and EBIT margins have decreased to a level of 13.8% and 12.6%, respectively, and 6.9% net profit margin is a natural output of it. As a perception to what is expected for the remaining half of the year, as we have already experienced in July, and we have almost completed August. Our gross profitability is still going and performing at a satisfactory high level above the figures that we have targeted for our budget studies.

So in fact, in those couple of last 4 slides, I have already tried to explain you the major variances and [indiscernible] of P&L. And as you can -- in this page, you can see the detailed breakdown of our financial performance, which has resulted to a level of TRY 5.2 billion. Our total sales volume without Skoda, of course, together with Scania is almost same as the previous year, but the gross profitability is 5 -- as you can see, TRY 5 billion lower since the normalization has decreased its [ trend ] from more than 23% to 18.5%. I have already explained the variance in the total operational expenditures. And also in financial expenditures, you see that there is a quite amount of savings. The influencing factor here is the influence of the elimination of the foreign currency loss and also the advantage of demand deposits that we are getting from banks within which, of course, in line with the policy of the Turkey Central Bank, our financial expenditures have -- interest rates have increased, respectively.

Coming to the performance of associates. As you can see, there are a few points that should be noted. I would like to start with VDF Servis. VDF is a combined structure with 4 companies, namely consumer finance company, insurance broker services, VDF fleet and VDF factory, which is definitely the 4 important continental products in our service scheme and strategy. Unfortunately, considering that they are booking some provisions in their operational rental segment, knowing that the used car prices has decreased significantly this year, the provisions has unfortunately provided negative results for VDF Servis and also knowing that interest rates are quite high, which is more than 5% on a monthly basis, the penetration rate of credit sales among total sales has decreased to a historical low level to a level of around 15%. In that respect, unfortunately, VDF Servis is generating negative results. And also in Yuce Auto, they are also -- they are still positive, but they are also experiencing the normalization influences of the Turkish automotive market.

Coming to balance sheet. As you can see, the total size of our balance sheet is 8% lower than the previous year, and we are still keeping our strong equity position. As you are all aware of cash trade receivables and inventories are -- I mean, the working capital instruments are almost compassing more than 60% of the total balance sheet of Dogus Otomotiv. And the liquidity is 50% lower than the previous year just because we have paid the dividends and also trade receivables is relatively lower, which is in line with the performance of the market and inventories are increased to a level of 11,000 units to 18,000 units, which is totally in line with our plans that we are trying to keep an inventory level to the sales volume of the forthcoming 2 months. So this figure is even lower than the inventory level that under normal circumstances that we should be keeping.

And in financial liabilities, you can see that there is a 14% decrease, which is relating to some -- I must, at this point, refresh you that this is the consolidated financial liabilities mainly stemming from the [indiscernible] structure of Dogus Otomotiv and together with Dogus Gayrimenkul Yatirim Ortakligi. There has been some several debt re-service which has caused this variance as well.

Coming to the breakdown of our financing costs. As you can see, our financing income, which is stemming from interest revenue has increased more than to a level of 240% to a level of TRY 1.2 billion. And our interest and borrowing expenditures has increased from TRY 900 million to TRY 1 billion, which is a result of the increase in the interest rates, which is in line with the market. And as you can see, the decrease in the foreign exchange loss on borrowings has also served for our advantage. The remaining figures are the natural results of our financial operations.

So at this point, I will leave the microphone to my colleague, Arda who is responsible from Investor Relations. He will be guiding you through our strategy on Dogus Otomotiv sustainability.

[Yavuz Yildiz, executive]

Kerem, thank you. Hello, everyone, and greetings from the Investor Relations department of Dogus Otomotiv. So I would like to start with sustainability strategy of our company.

As you can see in the screen as well, our sustainable strategy mainly consists of 6 core elements as customer focus, operational excellence, employee participation and development, sustainability commitment, innovation and digitalization, and last of all, stakeholder engagement. As you can be aware, these points are highly correlated and link each other. And the main priority of our strategy is to create value. And thanks to our efficient process strategy and process management, we have been creating value for more than 15 years. Additionally, our sustainability strategy is really important to understand our sustainable process management and sustainable process management of Dogus Otomotiv will be determinative to reach future goals, foresights and practices.

So in the slide, I would like to underline the highlights of our integrated sustainability report for the year 2023. So for instance, about performance indicators, we reduced our Scope 2 emissions by approximately 30% compared to 2021. And our waste recycling rate is 91%, which is reflecting our increased focus on circular economic principles. About economic impact, approximately 7% of our total sales came from sustainability-focused products in 2023. About supply chain sustainability, we achieved approximately 13% reduction in carbon emissions from our logistics operations. About sales and service network, thanks to ISO standard and its best practices of Dogus Otomotiv, we increased our energy efficiency approximately 30%. And last of all, we have realized approximately 1.5% electric vehicle market share in 2023.

So in the previous slide, I have underlined the highlights of our integrated sustainability report. And in this slide, I'm going to underline the highlights of our sustainability activities and recent news.

Under the environmental heading, thanks to our solar energy power investments. We met the 67% of our electricity needs through renewable energy sources. And additionally, climate change strategy and reporting in accordance such as IFRS S1 and S2 and TSRS will be the main priority for our sustainability activities and Dogus Otomotiv objectives. Under the social heading, we have increased volunteer hours by approximately 60% and training hours per employee approximately 23%. And last of all, under the economic heading, we have realized approximately [ TRY 88 million ] green CapEx and TRY 125,000 green OpEx.

As I have mentioned in previous presentations, in terms of corporate governance rating score, we have reached a level of 97 points in 2023 from 85 points in 2012. Thanks to good practices and best applications, we became the second company with the highest corporate governance rating score in Turkey. The main priority is we'll maintain and keep this success in 2024 and 2025 as well. Last of all, just a corporate governance. Corporate sustainability rating score is a determinant of our Investor Relations activities. At the end of August, we have reached a level of 83-point level. And our point was 66 points into 2020. We have one of the highest points in Turkey in terms of corporate sustainability rating score.

So thank you for listening to me, and I'm giving the word to Mr. Talih for guidance 2024.

[Kerem Talih, executive]

Yes. Somehow I have already pointed out that we are expecting the performance of year '24 to reach to a level of 1 million units. So in the last 4 to 5 months, an additional 300,000 units is a target, which is reasonable. I believe that we will all be seeing this. And within that, we have increased our sales target to a level of 110,000 units. And when we just add up the budget or the targets of Skoda, which is at a level of 4,000 to 5,000 units, we can say that Volkswagen Group performance in Turkey will be around or even more than 160,000 units.

As I have said so, our investment expenditures are still continuing to a level of and will reach to a level of almost TRY 5 billion. The half of this figure is stemming from the purchase of company cars, test cars and so on and so forth. And the remaining portion is, as I said, is relating to the infrastructure expansion investments, mainly for our Scania together with the renovation of our education facility and territories, respectively. And also, we will always sustain our expansion and development spending in digitalization and now together with the related electrification investments in line with the development of the markets.

So those are the information that we have planned to pass to you, and this is the end of our presentation. So if there are any questions, we are more than happy to help you. Thank you very much for listening us.

[Operator]

[Operator Instructions] Our first question comes from Mr. Aytunc Uz from Ata Yatirim.

[Aytunç Uz, analyst]

My question is, I know it's too early at this point, but can you share your thoughts about 2025 domestic market? I don't mean any specific numbers, just the trends you are seeing like, for example, do you think a 10% to 15% year-over-year decline is reasonable in 2025?

[Kerem Talih, executive]

It may be early at this stage to make a forecast for the performance of next year knowing that the temp up demand coming from previous year is also still on the market, but also the macroeconomic policies, mainly relating to the level of interest levels in the market will be the key determinable profit. If the interest rates are still -- will be at the same level, there may be some slight normalization in the total size of the market. But I don't know whether it will be 10% or more than 10% lower than this year. We will see.

[Aytunç Uz, analyst]

Another question is before pandemic, EBITDA margin was around like 5% to 6%, if I remember it right. Like what would you consider as a normalized EBITDA margin in the future, maybe 8% to 9%? Does it sound reasonable?

[Kerem Talih, executive]

8% is the under normal -- I mean the period of COVID margin are normal period. The period just after COVID that we have been experiencing in year '23 and this year as well is also a normal market conditions just because there is still demand coming from those years due to lack of availability, which is a pushing of our gross profit. But under normal market conditions, 8% EBITDA margin is, we can say, somehow normal conditions.

[Operator]

[Operator Instructions] Our next question comes from Mr. Lutfu Gazioglu from HSBC.

[Lutfu Gazioglu, analyst]

My question is about equity pickup in profit or loss in second quarter and also Skoda Yuce Auto contribution of [ TRY 165 million ] net loss in the second quarter. And that was around TRY 200 million net income contribution in first quarter. What was of the reason in the second quarter net loss contribution? Is it related to a one-off item? And what should we expect from the remainder of the year for Yuce Auto?

[Kerem Talih, executive]

The remaining cost here in the second -- mainly in the second half of the year, they will be recovering this performance. But the main influence is the campaigns. So they have rebuilt many new brands and they also inject some campaigns for them. And when you are having a campaign and when you are trying to launch a new product in the market, namely the new Superb, the new Kodiaq and the coming models have been new in the market with some facelifts as well. So those volume brands' gross profitability was low, this was the reason. But in the second half of the year, we are expecting them to close this gap.

[Lutfu Gazioglu, analyst]

I guess I missed it, sorry for that, but what was the reason for the VDF Servis loss in the second quarter? There was a loss in first quarter as well, but the loss is very high this quarter. Is this mainly due to the inflation accounting?

[Kerem Talih, executive]

For both of them, knowing that they also have a strong equity structure in their balance sheet, inflation accounting, as we do in Dogus Otomotiv, is working to their negatives in Dogus financial statement. But at the top of it, mainly for VDF, since credit penetration is still low, just because interest rates are high and also, the provisions coming from their vehicle portfolio in operational or rental activities is generating some noncash expense in the form of provisions. This is the reason of their negative performance in our consolidation.

[Operator]

[Operator Instructions]

[Kerem Talih, executive]

I think that's all what we have had.

[Operator]

Yes, indeed. No further questions. Mr. Kerem, I'll pass the line back to you for your concluding remarks.

[Kerem Talih, executive]

Thank you very much for listening us. Looking forward to see you. And for the coming quarters, we are planning to go back into stage and instead of maybe -- not may be for the performance of the third quarter, but I can say that for the year-end performance, we are planning to make these board meetings again face-to-face as we used to do. So thank you very much for listening us and our greetings in the name of Dogus Otomotiv. Have a nice day. Bye-bye.

[Operator]

Thank you very much. This concludes today's conference call. We will now be closing all the lines. Thank you, and goodbye.