Bilia AB

STO:BILI A

Earnings Call Transcript 2023-Q2

[Operator]

This call is being recorded. Welcome to the Bilia Q2 Report for 2023. [Operator Instructions] Now I will hand the conference over to IR, Carl Fredrik Ewetz. Please go ahead.

[Carl Ewetz, executive]

Thank you very much for that introduction, and a warm welcome to Bilia's Q2 results presentation with CEO, Per Avander; CFO, Kristina Franzen; and myself. .

The agenda looks pretty much as last quarter with one addition, and that we show in the operational earnings separately for each country. But let's start with how we see the current market or the current market industry, and I'll leave the word to Per Avander.

[Per Avander, executive]

Thank you very much, Carl Fredrik. Yes, Page #3 and the current market situation. In the car industry, there is a very good demand in the service business with long booking times. New cars have a weaker demand, especially for pure electrical vehicles. The government in Sweden stopped the climate bonus in the end of the last year.

In Norway, they have added VAT for cars over NOK 500,000, which means more expensive cars. Fleet business is much more stable and there is a still high demand. The industry has still a strong order backlog of new cars in Sweden and Western Europe. What I mean with Western Europe is Belgium and Luxembourg, there we have operation with BMW and MINI.

In Norway, it's a more normalized level. Norway has a challenging business climate. I mentioned tax regulations. Another challenge is cancellation of orders. Third is price reductions of new cars, which leads to lower margin in the used cars business.

The demand for used cars are on a good level. It's a higher level than last year. It's still a consolidation of dealers in the industry. Some brands started many years ago. For example, BMW, they reduced from 22 dealers to 6 dealers in Sweden. Others will follow.

For example, Toyota will start in the end of this year. It's a lot of discussions of new business models, especially agency model. It's already introduced with Mercedes and Volkswagen light commercial vehicles in Sweden.

For Mercedes, we are a pilot market in Sweden. Several brands will follow, and we have a lot of negotiations and discussions for the moment. Both Porsche and Toyota have confirmed that they will not implement agency model. Please go to the next slide, 4.

Net turnover increased due to higher deliveries of cars and growth in the service business. We report for Bilia Group result of SEK 445 million and a margin of 4.5%. Bear in mind, we have some divested operations in Sweden and Norway.

In Norway, we sold our Volvo business in Oslo area last summer. It was 3 outlets. In Sweden and Western Europe, we reported best quarter 2 results ever. I will get back to that on the next slide.

In Norway, we reported lower profitability due to both car and the service business, and as I mentioned, divested operations, and I will get back to the Norwegian market.

Please go to the next. On this slide, you can see quarter 2 results from '19 to '23. On the left-hand side, you can see the Swedish operations. And if we go back 5 years ago, we had a profitability of SEK 220 million and this quarter, SEK 369 million.

And on the right-hand side, you can see the Western Europe and the same, '19, SEK 25 million; and today, SEK 61 million. So really, really strong profitability in both Sweden and Western Europe. I will get back to Norwegian result on the next slides.

Please go to the Service business. Continued good demand in the Service business with long booking times much better compared with the same period last year. Right now, we are hiring more mechanics. We have an organic growth of 10%. It's a historical strong figure. Higher earnings than last year, considering divested operations, really good levels in both Sweden and Western Europe with a margin at the same level as last year in Sweden and a better margin in Western Europe.

Norway. Norway reported a lower earning compared to the last year. It depends on different reasons. One is, as I've told already, divested operations in Oslo area, another is a brand new dismantling facility Southwest Oslo, the name is Røyken. The third reason is that we moved a body and paint shop, which means a lot of cost without any production.

We also have had cost levels on rents and energy. High cost of that. We have already taken a lot of actions, for example, cost reduction, and we have a centralized business excellence team from Sweden helping our managers in workshop and spare parts departments.

Let me go to the car business. Deliveries of new and used cars adjusted for divested and acquired operations were 10% and 2% higher. We had a result of close to SEK 200 million. And for the used car, we were a little bit over SEK 100 million compared to SEK 120 million last year.

But in a historical perspective, it's a really, really high level for the used car business. Order intake on new cars adjusted for divested operations were 41% lower.

Norway declined with 78%. Western Europe increased the new car sales with 22% compared to the same period last year. So it's total different markets we are operation in. We have a good level of order backlog, close 20,000 new cars. The normal level for Bilia Group is around 13,000 to 14,000 new cars.

So we'll go over to Kristina.

[Kristina Franzén, executive]

Yes. Thank you, Per. Then we move over to the financial position at the end of the quarter. So during the second quarter, we generated a solid operating cash flow of SEK 519 million, and thereby, we recovered the negative cash flow that were occurred in the first quarter.

We will, during the coming quarters, continue our focus on working capital, where we, as you might have remembered from the last report for the first quarter, have had a higher working capital due to the push on electrical vehicles that we had around year-end, partly caused by the tax changes that Per mentioned earlier.

That meant that at the end of the quarter, we utilized around SEK 1 billion of our available credit limits of SEK 2.5 billion. We have not had any cash flow from payments from acquisitions during the quarter, but have paid our first installment of dividend amounting to around SEK 200. There will be another 3 installments relating to the decided dividend that amounts to SEK 8.80 per share. If we move on to the net debt, it amounted to SEK 2.2 billion. And in relation to EBITDA, it remains on a stable level of 1.1x, which is well below our financial target of 2.0x.

And then finally, during the quarter, we have successfully refinanced our SEK 800 million bond which had an ordinary maturity date in October this year. Our new bond have a 5-year duration time, meaning that it has a maturity in 2028 and was refinanced at terms on the level we expected.

So with that, I think that's where we are on the financial position.

[Per Avander, executive]

Yes. We had the outlook for quarter 3, and I will start, and then Carl Fredrik will take over. New cars in Sweden and Norway, we don't see the light in the tunnel yet. Often when we have a recession, we are early into a recession when we are talking new cars sales, and we come out often earlier than other industries and then start to sell cars again.

But for the moment, we don't see the light in the tunnel, and we are waiting for the -- what will happen in the interest rate. So the private, I guess, for quarter 3, it will be low sales on new cars. So instead, often private consumers, they start to buy more used cars instead.

And the fleet business, as I said, is a stable business. You have often 3 years leasing contracts and after you end in one, you're taking out a new car again. And what I told for quarter 2, it's a little bit the opposite in Western Europe. What we can see in Belgium, Luxembourg, we have a really good campaign for BMW, and meaning there if you compare it to Sweden and Norway for the moment. So we see in the tunnel, we will have some lights and see a good demand for new cars in both Belgium and Luxembourg.

[Carl Ewetz, executive]

Yes. And perhaps I can show some light in the tunnel. We see an increasing demand for used car on the back of an underlying pent-up demand, less money for the consumer and less subsidies for electrical vehicles.

Consumers used to keep their own cars or buying a cheaper used car, typically traditional IC car or hybrids. Depending on the demand, it's not impossible we will experience a lack of used cars in the Nordics soon. And I think Per mentioned it earlier, but when it comes to prices for used car, we see a stable situation during the coming quarters.

And with the interest for used cars picking up, new car deliveries and our own continuous improvement, we see good demand and a solid outlook for the service business in the coming quarter. And just to be clear, in 2020, the service business represented 22% of our turnover and 58% of our operating profit and in this quarter, 62% of the profit.

And I wouldn't say the service business is immune, but it's the least sensitive business area when it comes to economic downturns or upturns. When it comes to consolidation, we're a leading player in the industry, and we will take part in the ongoing consolidation, of course, without jeopardizing our balance sheet.

We have become more proactive searching in areas we think would be a good fit for our current and future strategy. We continue to see slightly longer lead times, increased supply and lower prices due to higher financing costs and increased requirements for investments.

So that's about it. Operator, we can open up for questions.

[Operator]

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

[Mats Liss, analyst]

Yes. Well, looking at the numbers here and in Norway, I mean, you mentioned that there are some changes going on there. You have not only sold off operations, but you have made some reshuffling there. And so could you give some sort of indication what we will see in the second half when things are sort of more stable or have been sort of settled?

[Kristina Franzén, executive]

Do you have the service business and the outlook for the service business in Norway in mind then with your question, Mats?

[Mats Liss, analyst]

No. I mean in the report, you mentioned that in Norway, yes, well, you have sold off operations, but you have also made some changes there and then what was the cost impact for these changes?

[Per Avander, executive]

Yes. Yes. What I said is, if we talk about the service market. So we have a good growth in the Norwegian market. And then we had some actions we took with the dismantling to open up a new one and moved the body and paint shop [indiscernible] and then a little bit high cost level. But we see it's a sort of a cost for once you can say...

[Carl Ewetz, executive]

One-off.

[Per Avander, executive]

Yes. But -- so we take a lot of actions in the market. And what I didn't say we have had a mix of job in the quarter as well, a little bit with lower margin. Often I say the delivery workshops, there is a really good job for Bilia when we predelivery service, we call it internally in Bilia, and the delivery workshops. So there, we have had full actions in the quarter. So therefore a little bit lower margin if we compare with the last year.

[Kristina Franzén, executive]

And then as you said, Mats, I mean, in the next quarter, there will, in Norway, be a like-for-like quarter in that sense after divested operations are no longer included. While, of course, the start-up operations will take a while before it's fully up and operating in the level compared to the other workshops. So -- but they will gradually come up to the speed that we have on the other areas, of course.

[Per Avander, executive]

And then we have the centralized business excellence team from Sweden, and we open up a new business excellence team in Norway as well. And what I have told in the past is that the team go out and see some -- a little bit workshop where we are talking profitability, help the workshop manager, put a lot of actions, have an action plan, processes, concepts, and then they come back after a couple of weeks and go and help the workshop managers. So it's a full of different actions in the Norwegian market for the moment.

[Mats Liss, analyst]

Okay. And well, looking at other parts of the business, you seems to do well in Western Europe there, I mean the earnings are picking up. Is it sort of a sustainable level or are there sort of one-offs included there that's not...

[Per Avander, executive]

We still have a really high backlog of new cars. And in the quarter now, we delivered a lot of cars. But still, we have a lot of cars in our backlog. So I guess if we can get the cars from our manufacturers, no lack of components like semiconductors, we will deliver a lot of cars in quarter 3 and quarter 4 as well, but it's a really high level if you look at the total profitability in Western Europe.

[Kristina Franzén, executive]

Yes. It's, of note, at a high level, right, so we have that on a long-term basis, it might be a little bit on the high side.

[Mats Liss, analyst]

Good. Good. And I guess in Sweden, you...

[Kristina Franzén, executive]

[indiscernible]

[Per Avander, executive]

She is a little bit more clerical.

[Mats Liss, analyst]

Yes, yes. And in Sweden, I guess, things are moving along well with the support from the backlog and services is stable. So that's good news, I guess. But this -- well, price erosion in the new car segment, especially in electric vehicles, that's something that will be a headwind for some time. Yes, you indicate that, of course. So -- but when do you think this will sort of be stabilizing again and then we will see a return on the private consumer in the new car business as well?

[Kristina Franzén, executive]

Yes. So it's -- when do we expect the private customers to go back into the new car business and...

[Per Avander, executive]

Yes. 10,000 car owners' question. But if I look at the recession 2008 and IT crash 2000 and the bank crisis '92, so when the private consumers see [indiscernible] will be worse, they start buying new cars again. But we had the phenomenon with private leasing and the monthly amount you paid sometimes it's the double today if you compare 1 or 2 years ago because the interest rates, the government took off the climate bonus.

So it's much more expensive today. But we see some manufacturers they start to calculate of private leasing again because they are about full in the factories. So if you have a full order book, we don't see it. So it's total different between the brands we have. But some, they are starting to discuss really good private leasing again.

So -- and maybe remember, private consumers 2 years ago, 60% of all new cars to private consumer, it was private leasing. And now we try sometimes to find a solution with -- you pay cash 20% to take a bank loan, but still, you have a residual value. So we try to find new campaigns and solutions for our customers. So if Riksbanken say no more increasing of the interest rates, I guess the customer will come back again. Did that answered the question?

[Mats Liss, analyst]

Yes. And finally, just about service, I guess you have this 10% organic growth, which is very impressive. How much of that is sort of price and how much is volume? Could you say something about that?

[Per Avander, executive]

It's not so much price because when we -- for example, if you say we increased the price with 5%, we don't get it out in the figures, you can see because sometimes we have warranty jobs and there is another discussions and negotiations with our manufacturers and you have a lot of insurance business in our body and paint shops, so we have another negotiation with the insurance companies. So often we say if we increase the price with 5%, you can see in our profit 2.5%, the half. So it's not so much price in the growth you can see in the figures here.

[Mats Liss, analyst]

And is this volume increase then some sort of a pent-up demand from the consumer has been sort of resistant and keeping the service for some time and now it's sort of need to be done or should we expect this to continue in the second half as well?

[Kristina Franzén, executive]

Let's see. Your question was, Mats, if it's some sort of that persons have not really performed their service due to lack of...

[Mats Liss, analyst]

Yes. I mean thing is, was a bit more difficult to last autumn, I guess, then the high energy prices, which have sort of...

[Per Avander, executive]

Well, we don't see it. So the demand today in all our 4 countries is better, if I compare with the same period last year. So you take care of your car, you repair and you do your service. So we don't see the customer jump over in the service program like that. So it's a better market -- the service market today, if I compare 1 year ago.

[Operator]

[Operator Instructions] The next question comes from Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Can you hear me?

[Kristina Franzén, executive]

We can hear you loud and clear, Andreas.

[Andreas Lundberg, analyst]

That's good. If I start with the last topic Mats touched upon low service and you said demand is better today than a year ago. I mean what has been -- what's driving demand, is my first question?

[Per Avander, executive]

In the service business, you mean? Yes?

[Andreas Lundberg, analyst]

Yes.

[Per Avander, executive]

One is the competition is a little bit lower. The smallest workshops sales is down or they sell the business to bigger groups because it's really expensive to educate mechanics for [indiscernible] and buy some tools and everything. So -- and then we have done a really good job with a little bit older segments of cars. Often loyalest customer we have in our workshop is often the first owner and the second owner up to the car is 6, 7 years old. But today, we are really good in the third owner as well.

So -- and another is when we keep your car is that to buy a new one, you have to repair the car as well. I remember 2008, Lehman Brothers crisis, at that time, some big companies they said our salesmen have biggest leasing contracts and said we prolong the leasing contract, then instead -- a lot of repairs of the cars started instead [indiscernible] to prolong their leasing contract.

[Andreas Lundberg, analyst]

So do you think there are any structural elements there? I mean, as you say, competition lighter, small workshops selling or shutting down that should continue, I guess? Or how do you see it?

[Per Avander, executive]

Yes. It started maybe 8, 9 years ago. We have fewer today. I'd say, I've seen the figure, we are little bit over 3,000 workshops in Sweden today. And in the past, we were close 6,000 workshops.

[Andreas Lundberg, analyst]

Do you think that trend will accelerate given the EVs coming more into play or really just continue as is?

[Per Avander, executive]

Yes. I don't know. So [indiscernible] consolidation, obviously, driven by electrification and digitalization. And -- so clearly, it's an ongoing consolidation.

[Andreas Lundberg, analyst]

Now switching gears to the backlog here. How long do you think it will take to come to normal levels to work down this backlog given what you know today?

[Per Avander, executive]

It depends on which brand we are talking about, it could be the difference. Some of our brands is like there are no lack of components for the moment. Other brands say they still have lack of components so it's little bit different. But if I guess now, I think most of the backlog we will deliver this year.

[Andreas Lundberg, analyst]

Okay. I think you touched upon on it, Per, but how long does a typical recession take or when you do expect to see some improvements in the order intake again?

[Per Avander, executive]

Since we initiate [indiscernible] 10,000 [ pounds ] question. Yes, yes. I hope we will see a little bit light in the tunnel in quarter 4. But some things have happened in the market, so -- and it will be total opposite, but I hope.

[Andreas Lundberg, analyst]

Yes. More of a reflection question. I mean it has been a messy few years for you with extremely high earnings levels during the pandemic for 2021, perhaps. Now you have seen the divestments in the last year, depressed consumers and so forth. What do you think [indiscernible] current earnings levels given that and given the weak order intake...

[Per Avander, executive]

Yes. We never given forecast for the...

[Andreas Lundberg, analyst]

It's not a forecast. It's...

[Per Avander, executive]

Okay. This is more signaling, you mean.

[Andreas Lundberg, analyst]

We can take it afterwards then since you already touched upon it. You talked about consolidation and that you may be active in at least in discussions and so forth analysis. What do you want to acquire? What was the most highest priority for you?

[Per Avander, executive]

Yes. We would like to acquire more of the Volkswagen Group. We are quite small now 2.5% of the total sales in Sweden, where we will hope we can acquire more and take out a lot of synergies. So we have only acquired one. We would like to acquire more in Belgium and Luxembourg, especially BMW and MINI, so we can take out more synergies there. And dismantling business is a really good business in Sweden and Norway. So if we can acquire more there, we would like it a lot. Yes.

[Operator]

[Operator Instructions]

[Per Avander, executive]

No more questions?

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Carl Ewetz, executive]

Thank you for that. And again, thank you all for listening in. And from Gothenburg, we wish you all a happy and relaxing summer.

[Per Avander, executive]

Bye-bye.

[Carl Ewetz, executive]

Bye-bye.

[Kristina Franzén, executive]

Thank you. Take care.

[Carl Ewetz, executive]

Thank you.