Bilia AB

STO:BILI A

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the Bilia Q2 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Carl Fredrik, Investor Relations. Please go ahead.

[Carl Ewetz, executive]

Thank you very much, Dorothy, and good morning and welcome to Bilia's Q2 results presentation. As Dorothy said, my name is Carl Fredrik Ewetz, and I'm responsible for Investor Relations here at Bilia. And some of you might already have seen our report and noticed we report a stable set of figures, especially within Service. Remember, our Service Business represents between 60% and 70% of our profits, so very important.

We can go to the next slide, please, and that slide should be the agenda. It speaks for itself. But for you who are dialing in and are not able to see the slides, we will start with current market environment update. We will go through the results on the group level, and also dig into Service and the Car Business. Kristina will then focus on financial position, M&A and Mobility Care. And we'll end this call with an outlook for Q3.

And here to present the report is our CFO, Kristina Franzen; and our CEO, Per Avander. I'll leave the word to you, Per.

[Per Avander, executive]

Okay. Thank you very much, and hello, everybody. Yes, next slide, the current market situation. As you know, we have rising inflation and higher interest rates in the world. There is a continued consolidation in the car industry, changes in the distribution models of cars. We have, for the moment, a lot of discussions about agency model, car sharing and subscriptions together with our manufacturers.

We have stable demand in Bilia for the Service Business, and we have strong demand for used cars, despite we have a lack of cars in stock. We had in the quarter a little bit weaker demand for new cars after the 1st of May. And as you have maybe read already, we have a record high order backlog, 29,000 new cars. Kristina?

[Kristina Franzén, executive]

Yes. Good morning, everybody. Before we move in to the group results then, I would just like to comment on the financial target that we announced on the Capital Market Day in Stockholm in May.

So if we move into the next slide, Slide #4. You see the 4 financial targets we had. There were 2 of them that were updated. And I would like to comment a little bit specifically on one of them. It's number 2, on the sustainable business model, where we have a target for the operating margin. That was changed from the previous 2.5% to 5%. This change was made to reflect our profit ambition going forward, but also then to reflect our historical performance over the last years in terms of profitability. The other targets remain slightly revised, but not any major changes.

If we move to the next slide, Slide #5. We did also at our Capital Markets Day in Stockholm introduce sustainability targets for Bilia. We have set 4 targets or actually 4 areas of sustainability targets. And I would like to comment a little bit on 2 of them. The first to comment on is the target we have around our circular business model. It's the target referred to increase the number of reused parts in our repair shops. Here, we do have in-house supply from our car demolitions and parts recycling facilities, which is an advantage for us to have these type of supply in an in-house operation.

Further, I would just like to comment on one of the goals we have under women's share. We do have set the target for ourselves to contribute to a more diversified workforce within our business area. We have therefore set the target to have 30% women in our sales operations. We have received some questions why we have limited our ambitions to the sales operation. And the reason for that is that we see that within this area there are available competence to recruit for us. While we on the service side, unfortunately, see that there are more limited resources of female competence, and here, we will instead work on a more long-term basis and focus on where we can see -- we can short term make a difference.

So that's the updated and new targets for the Bilia operation. And with that, Per, I hand over to you.

[Per Avander, executive]

Okay. Thank you. We go to Slide #6. We report operating profit of SEK 498 million and a margin of 5.6%. And it's the second best quarter 2 ever. The net turnover decreased 5% due to 22% less delivered new cars.

I think we can go to the next slide. Sweden. Still, we have in Sweden a high margin, 6.7%. And the last year, it was 6.8%. And we have stable earnings in both Service Business and the Car Business despite less delivered new cars. We have this year sold 6 different Volvo/Renault facilities, 5 in the Skaraborg region and 1 in Stenungsund.

Okay. We go to Slide #8. Norway, we have a strong earnings with a solid margin of 4.8%. And we have delivered 38% fewer new cars in the quarter. So we have a really big backlog of new cars for the moment. We have lower earnings for the Service Business due to less delivered new cars and lower service for Polestar cars. To explain -- a sort of an explanation: we have in the biggest facilities delivery workshops and they are not utilized to 100% because we have a lack of new cars for the moment.

We go to the next slide, number 9, Belgium and Luxembourg. We have improved the earnings due to the divested operations in Germany. BMW is a really good brand in both Belgium and Luxembourg. And when we are talking market share in Belgium, BMW is #1 and often top 3 in Luxembourg. We are looking for more acquisitions in both Luxembourg and Belgium, especially in the Flanders area in Belgium for the moment.

Number 10, Service Business. We have stable earnings despite less delivered new cars in all countries. As I've told already, Polestar cars, we don't have so many to have service with for the moment. In Sweden and Luxembourg, Belgium, we have an organic growth of 3% and 4%. Service agreements and tire hotels is on a stable level and it creates loyalty.

The Car Business, number 11. The net turnover decreased 9%. As I have told already, we have a record backlog, 29,000 new cars. It's the double if you compare with the last year. Still we have a really good profitability of used cars, SEK 120 million. And in a historical perspective, it's a really, really good profitability we have for the moment.

Okay. Kristina?

[Kristina Franzén, executive]

Yes. So then we are on Slide #12, the financial position. Looking at the financial position, we had a solid and robust balance sheet at the end of the quarter. Our net debt amounted to 400 and -- around SEK 420 million, which was some SEK 170 million lower than at year-end. And then we should remember that we have also during the year made buybacks of share amounting to around SEK 520 million, where SEK 280 million was actually bought back during the second quarter.

Operating quarter for the -- operating cash flow, sorry, for the quarter was around SEK 250 million. It was lower than last year, but still then contributing to a very solid operating cash flow, on a 12-month rolling basis amounting to around SEK 1.5 billion, which is very good.

All in all, it means that we at the end of the quarter had also for this quarter available funds at the bank of SEK 510 million. And we did, hence, then also have unused credit limits of SEK 1.5 billion with our banks.

If we move into our growth strategy and turn to Slide #13, M&A. We have during the quarter announced 4 acquisitions for different type of businesses. The first, Kokstad Autosenter, is an operation of used cars going across all brands. So it's brand independent. The operations are running in 2 facilities in Bergen, in Norway. Another acquisition we did was M Bilar, which is operating sales and Service Business for BMW and MINI in Sweden. So here, we contribute by another 5 facilities in very attractive locations that we are happy about.

The third, Insignia, is adding 2 more brands into the Bilia family, who we are very happy to welcome, Jaguar and Land Rover to us. The operations are run through one location in Norway. And the fourth is Bil1Din Holding AS, which is then an operation of car dismantling and cars recycling. And with these acquisitions, we are moving into this -- as the first within our business, we are moving into these operations in Norway, which we are very proud of.

When it comes to timing, we do have Kokstad and we do have Insignia with us in the balance sheet at the end of the quarter, while M Bilar and Bil1Din will join us in the coming quarters. And Kokstad and Bil1Din are part of a new operational area, focus area.

So if we move to Slide #14, I would just like to give a few words about Mobility Care, a new operational area that was also introduced at the Capital Markets Day in Stockholm in May. The operations -- the business activities that run within these operations are independent from the car brands that we are currently handling within Bilia, but also actually independent from all different car brands, also outside our own facilities.

The activities that we have included are tyre and tyre hotels, rim repairs, vehicle recycling and Bilia Outlets, actually being sale of used cars. And Bilia Outlet is the brand we are using for that. And also then including car glass and body and paint. And we have also then subsequent to the second quarter made a smaller acquisition within the tire activities, which we are very happy about.

So the Mobility Care operational area will safeguard that we continue to develop sustainable, attractive and innovation solutions to make sure that our One Stop Shop is having a complete offer to the customer.

So with that, Per?

[Per Avander, executive]

Okay. Thank you, Kristina. We go to the next slide, the last one, the forecast for quarter 3. We see stable demand in the Service Business in all our countries despite higher inflation, higher fuel prices and higher interest rates. To comment the higher fuel prices. We see that our customers still drive their cars despite the higher fuel prices we have in our countries for the moment.

We see a small light in the tunnel when we talk availability of new cars for some of our brands we have in the portfolio. For quarter 3, we still see a good demand and a good margin when we are talking used cars. Electrical cars, taken off really in Sweden and in Norway.

To go back to Norway. 80% of all new cars selling in the market is pure electrical vehicles. And when we are talking hybrid and plug-in hybrid, it's 90%.

In Sweden, we have -- we are the third best country in Europe when we are talking battery cars. We are a little bit above 60% today. And from the 1st of July, we will sell our Volvo business in Oslo.

Okay. Kristina and Carl Fredrik, it was all from us. Now we can have Q&A. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Yes. Can you hear me?

[Per Avander, executive]

Yes.

[Kristina Franzén, executive]

We do, Andreas.

[Andreas Lundberg, analyst]

Great. So if I start with the order stock. I believe that was 29,000 cars at the moment, right?

[Kristina Franzén, executive]

Yes.

[Andreas Lundberg, analyst]

And you see some positive indications there. When do you expect to have delivered this order backlog? Will it be a few quarters or a year or for how long is your best guess?

[Kristina Franzén, executive]

A good question, Andreas.

[Per Avander, executive]

Yes. As I said, we see the sign in the tunnel. But I don't think we will start to deliver a lot of the -- this summer in August and September. It will take a little bit more time. So more in quarter 4 is our forecast for the moment and quarter 1 next year. Not so much in quarter 3. So that is our answer for the moment.

[Kristina Franzén, executive]

It will probably take a little while, while the production is fully ramped up and before we get the deliveries. But...

[Per Avander, executive]

One example. We read the report from Volvo and they had a really good production in June now. But it takes a little bit long time when we can deliver the car to our customers. And we see the different situation between our brands we have as well. So quarter 4 and quarter 1 is our answer today.

[Kristina Franzén, executive]

But still positive indication, which is very nice.

[Andreas Lundberg, analyst]

And it's still difficult to get -- for you to find used cars to sell? Or how do you work with that given the inflation?

[Per Avander, executive]

Yes, it's the same situation what we have had the last year. So we try to purchase used cars from the market in all our countries. But in the backlog there is a lot of cars. And today, we have private leasing and we are responsible for the residual values. For example, Volvo and Renault is 100% come back. So we can get back some cars from private leasing as well.

[Kristina Franzén, executive]

But we would have preferred to have more cars during the second quarter, of course. I mean, as you saw, there were fewer deliveries than last year. So that is, of course, a result of the lack of cars also on the used car side.

[Andreas Lundberg, analyst]

And speaking about leasing, what's your indication so far about the demand there for contracts being expired...

[Per Avander, executive]

If we look in the history, the fleet business really stable, where we have had some recessions. Private leasing, we don't see -- we can't see -- we say wait and see what will happen, because the interest rate is increasing for the customers. So the amount the customer pays monthly will be a little bit higher. So I don't have -- I can't see what happened for the moment. I guess it will be a little bit better in the end of quarter 3.

But car -- Sweden, they change name now to Mobility Sweden. Their forecast -- they declined the forecast of 300,000 new cars in Sweden. It's a signal that the demand will be a little bit lower in the future.

[Kristina Franzén, executive]

Might be a little bit too early given the interest rate increases, right, to really understand how the reaction has been from the customers.

[Operator]

[Operator Instructions] Your next question comes from Mats Liss from Kepler.

[Mats Liss, analyst]

Yes. Well, coming back to Norway, and I guess it's a slightly weaker quarter there compared to last year. And then again, you mentioned that the outlook for the third quarter seems to be pretty stable. But I guess that was more a comment given for the whole group. Could you say something about the development in Norway for the third quarter? Should we see a similar sort of -- I mean, Sweden performed pretty well in the second quarter and Norway was a bit softer. Is it the same trend in -- going forward this...

[Per Avander, executive]

Yes, yes. You can say in historical perspective, we had a peak the last year. I show that in Slide #8 in the presentation. So now it's a little bit more normalized. And so SEK 140 million for quarter 2 is the second best quarter ever in the Norwegian market. So the forecast for us is we think it will be a little bit more normalized because we don't think quarter 3 we'll deliver so many cars.

And we had a peak of Polestar cars in our delivery workshops the last year and it was a record at the same time. So we have a huge job in our delivery workshops at that time. We don't see we will have it in the future. So now it's a little bit more normal profitability, I would like to say.

[Kristina Franzén, executive]

And perhaps also, Mats, to bear in mind is that we would also divest the 3 facilities affecting from July 1 -- or we have done it really, right? So that will also, of course, impact the Norwegian result going forward. But the trend is similar to -- the trend going forward is not different from the trend we have had during the beginning of the year or the end of last year.

[Mats Liss, analyst]

Could you please remind me what -- how much of the divestitures, well, represent for the Norwegian operation?

[Kristina Franzén, executive]

Yes. It is in the subsequent event. You have that number. It's SEK 175 million in average for the 2 -- last year for those 3 facilities. So it's noted in the subsequent events. Yes, for the full year.

[Mats Liss, analyst]

Yes. Great. Yes. And that's interesting. And the situation in Sweden seems to be more stable and also in Western Europe you performed well. And I guess that trend is also -- seems to continue on a good note, even if fuel prices are high and you sort of have a limited amount of new cars to deliver. So that's good, I guess.

Finally, the used cars also -- they seem to be in limited supply and the prices are sort of at high levels. But you expect that to continue as well, et cetera?

[Per Avander, executive]

Yes. I think we will be in the level we had in this quarter, because we had a lack of used cars in Sweden and Luxembourg and Belgium. So maybe when we are -- volume of used cars, we will sell fewer cars, but still with a good -- we can't say -- we can't -- we don't have all the cars the customer have a need for. But the margin will still be good. That's our forecast for quarter 3 and quarter 4.

[Mats Liss, analyst]

Yes. And finally, just about the acquisitions and M&As. I mean, you have made quite a substantial amount of acquisitions this year and recent years also. And I guess should we expect there to be -- synergies to be, well, supported gradually now? Or sort of -- do you have a sort of plug-and-play operation? So it's -- or the synergies are limited? Could you say something that -- about...

[Per Avander, executive]

Yes. It takes time to implement new brands, for example, Mercedes and Porsche. But it's a lot for sale for the moment in the market in Sweden and in Belgium, Luxembourg. And we prefer more of BMW/MINI, as I told in the presentation, in Belgium, in the Flanders area and maybe in Luxembourg, one more. And we have a team working with business excellence -- we call them that --to improve the business in the service. We can do it in the same time and acquire more. So we say we will still have a high tempo when we are talking acquisition.

[Kristina Franzén, executive]

And I think the synergies will come a little bit gradually in months, right? I think it doesn't happen overnight automatically once we acquired them, right? But with the excellent team Per talked about, it comes gradually, right? And we do have...

[Per Avander, executive]

And it's -- what I tried to say is, when we acquire a new brand, we don't have so much synergies in the first acquisition we make. But if we acquire more of Mercedes now, we can find more synergies. The easiest way, as what we have sent out in the press release, M Bilar, a BMW dealer in Sweden, there we can find a lot of synergies.

[Kristina Franzén, executive]

So it's a mix. But it's a high focus area, of course, to integrate both the new brands and the new facilities in a good manner. So we do receive those synergies going forward.

[Mats Liss, analyst]

Yes. And just finally. I mean, you have this huge order backlog of new cars to be delivered. And I guess -- I mean, private persons and consumers are maybe sort of damped more by, well, potentially increasing interest rates and so on. But historically, you had quite a large part of company cars. And I guess there is a need for companies to be -- sort of showing a sustainable -- changing the company car fleets. And how much are sort of company cars in the order backlog and what do you see going forward?

[Per Avander, executive]

In Sweden -- it's a little bit over half of the backlog we have in Sweden, maybe around 60%. In Norway, it's a little bit less, around 40%. And in Belgium, Luxembourg, it's not so common with company cars there. So most of it is private person. But we don't see that the customer terminate their contracts. We don't see it still. So they have a need for a new car and they wait for a long time. So all the customer -- if we have a problem and one customer terminates the contract, we have another customer directly. So it's not a problem for the moment.

[Kristina Franzén, executive]

If that was your question, Mats, if there were sort of a risk for obsolescence or so in the...

[Mats Liss, analyst]

Yes. I guess company cars are maybe more sort of trailing...

[Per Avander, executive]

Able -- yes.

[Mats Liss, analyst]

Yes. But it's good news that private...

[Kristina Franzén, executive]

And I don't think we see it in private person, yes. Right, there's also -- we haven't seen it...

[Per Avander, executive]

And most of the cars in the backlog is the new technology with plug-in hybrids and pure electrical vehicles. So the customer love them and wait for the cars.

[Operator]

We have a follow-up question from Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Yes. And it relates to the car deliveries, sort of the decline in car deliveries. And in fact, on the Service Business, obviously, it's a negative effect. But can you perhaps give some more quantification of this effect on the Service Business?

[Per Avander, executive]

We don't have it. But I'll try to explain that the biggest facilities we have, we have separate delivery workshops. So as you can see, we have a capacity of 100. So maybe we are working at around 60%, 70% of the full capacity we have with the mechanics. So all the cars we have in the backlog, they have a need for a pre-delivery service. And many of our customers, they have booked winter wheels and maybe some other accessories. So it affect us a lot when we are talking workshop hours and spare parts, because accessories is included in what we call spare parts. But we don't have a figure for it.

[Andreas Lundberg, analyst]

Okay. And I'll lastly switch gears to the cash flow statement. Maybe ask you, Kristina, about -- the working capital movements were obviously less positive or even negative in the quarter comparing to last year. Now it could be volatile. But anything you could highlight here could be worth...

[Kristina Franzén, executive]

No, I think it is, as you say -- no, I think it is a little bit, as you said, Andreas, that -- the working capital is, of course, dependent on primarily the availability of cars, right? So it moves a little bit back and forth in terms of that.

And there were enormous good cash flow last year, right? So I think the comparison hence is a little bit tough. But I think it's good. We generated a strong cash flow in the quarter, right? And on the 12-month rolling basis, we're still on a very positive number by the SEK 1.5 billion. So I think it's good and solid.

[Operator]

Thank you. There are no further questions at this time. I'll now hand back for closing remarks.

[Carl Ewetz, executive]

Thank you very much for attending Bilia's Q2 presentation. We wish you a happy and great summer. Thank you from us.

[Per Avander, executive]

Thank you very much.

[Kristina Franzén, executive]

Thank you.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.