Bilia AB

STO:BILI A

Earnings Call Transcript 2022-Q3

[Operator]

Good morning and welcome to the Bilia Q3 2022 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Carl Fredrik. Please go ahead.

[Carl Ewetz, executive]

Thank you very much and good morning and welcome to Bilia's third quarter presentation. This morning, we released a stable set of figures, actually third best quarter result ever. We can jump to the next slide, which is agenda. We have a current market environment, we're talking about the group results and little bit on financial positions, M&A. And finally, we'll finish off with the outlook for the next quarter. And here to present our CFO, Kristina Franzen and Per Avander, CEO and myself. So I leave the word to Per Avander.

[Per Avander, executive]

Okay. Thank you very much, Carl Fredrik. Next slide, please. The current market situation in an overall perspective in the car industry and still the demand in the service business is stable in all our countries. We are in Sweden, Norway, Luxembourg and Belgium. It's a record high order backlog both for Bilia, but I guess it's the same for all brands and all the dealers in Europe for the moment. We have a bit weaker demand for new cars. If you go back some quarters, we had a strong sales in quarter one and quarter 2, it was below where if we compare to 2020 and 2021 and now for the moment now we see week-after-week. And often when we have a recession, often that the fleet business is really stable. The customers, they take leasing contracts 3 years and then they buy a new car. But the private consumer, they are little bit more hesitating for the movement now.

Let us see what happened, I'll come back to that later on in the presentation here. We have had lack of used cars, but really stable margins still. But we see now week-after-week, increasing our stock of used cars in all our countries. That's a normal phenomena I can say. Often, we have lack of used car in August and we built up the stock of used cars through December. There is a consolidation in the car industry. We acquired some companies, but competitor or colleague, you can say it indeed they acquire every month. So the big dealer, they will be bigger in the future. The economic conditions, interest rates and inflation increasing and let us see what happened with the energy prices in the end of this year.

I read in the newspaper today that it will be hard and tough winter this year, so let us see what the energy prices will be this winter. Please go on.

[Carl Ewetz, executive]

Next slide?

[Per Avander, executive]

Yes, yes, we report an operating profit, obviously, you have SEK 334 million compared to SEK 482 million last year. Net turnover decreased SEK 800 million accounts and we have divest business in, we call it big Oslo and in middle of Sweden, we have [ Scarborough ] region, it's a Volvo business, we sold it in beginning of this year and in Oslo 1st of July.

I think we can go to the -- not to the next slide, Carl Fredrik, go to the right-hand side, so you can see in historic perspective, the profitability. Now it's a bit more normalized. It's -- we talk about Norway here. It was a peak in the pandemic. We sold huge amount of new cars, despite the showrooms was closed, the customer they have to contact us in the telephone call first and book the meeting, but we sold a lot. So we had the peak 2 years 2020 and 2021. So if you look the trend here, you see it's a strong, as Carl Fredrik, said the third best quarter ever quarter 3.

Go to next slide, Carl Fredrik. As we said, a little bit weaker in the Norwegian market. Here, we have a slide of the consumer confidence. If you look at the left-hand side, you can see the red circle there, it's 2008 [indiscernible]. It was not so deep negative inhabitants in Norway at that time, minus 10, you can see. And if you go to the other side here, you can see it's really deep now. It's then interest, inflation, so we can't see the same as we saw 14 years ago when we're talking Norway and the Norwegian market, next slide please.

Yes, we have an earning of 3.5% in Norway, but the service business declined a little bit. I will come back to the next slide on that. But the same here on the right hand side, you can see in the perspective of 5 years is a strong performance as well in the Norwegian market, but we have the peak what I talked about in the Norwegian market. I think we can go to the next directly to the service business.

We have the divestment of the Volvo business in Oslo, 2 big outlets, Fornebu and Okern and the smaller one is Lillestrom, but it's a big business. In the past, when we had the business in Oslo, we were -- we had a contract with Polestar, we have talked about that in the other quarter telephone conferences. Polestar, we delivered lot of goods over the last years. So now we only have a service contract, there we have Volvo business, but not in Australia because we are not in the Australia anymore. And delivery workshops in the biggest outlets, we have separate our workshops in service workshops and delivery workshops. And the tempo in the delivery workshop is, it has been very, very low because we don't have so many new cars to deliver. And we have a record -- not a record, but a close record backlog of new cars still in Norway.

And we have a really higher energy cost as well in our workshop business. But in Sweden, really, really stable earnings. If we take off the business we have sold, we are in the same level in profitability with the last year in quarter 3. So we are little bit happy on that. And we often show you the organic growth in the service business and now we had 4%. And from the 9 first months, we are 0. So we see little bit better and better demand. And in all recession I have been in, the customer still, they repair their cars and they do a service. It's important for our customers.

Next slide, please. Yes, we have a record backlog, close to 30,000 new cars and we hope we can start to deliver a little bit better in quarter 4 now. But we are really, really humble, it's a little bit different between our manufacturers, some information we can get here, we see the light in the tunnel, but some other same, we have lack of components still. We delivered 8% less new cars and 27% used cars in the quarter. We have had as we told lack of used cars, mainly in Sweden and in Benelux area.

But if you look at the profitability in the used cars in historic perspective here as well, SEK 112 million is a really, really good result and stable margins still for the future. But what I told in the first slide here, the order intake, it was down 48%, mainly related to Norway. Norway was 80% and if we take off the big Oslo, auto business there, it was 55% lower in order intake in the Norwegian market.

Yes.

[Kristina Franzén, executive]

Then returning to Slide #9 on the financial position and at the end of the third quarter, we continued to report a low ratio for our net debt to EBITDA. It was 0.4x compared to our target of 2.0x, it continues to reflect that we have a very strong financial position for our business. Even though the ratio was slightly higher compared to what we presented for the second quarter, where it was on a very low level of 0.2x.

So the slight increase we have in the ratio is partly explained by a negative operating cash flow for the third quarter of some SEK 130 million, which was caused by working capital increases, primarily related to inventories and other liabilities. That has in its turn been partly compensated by the proceed that we received from sale of businesses during the third quarter, which amounted to some SEK 250 million. And if we look at the first 9 months, we have in total received cash from proceed of divested businesses of some SEK 800 million, while we are at the same period also had a buyback of shares amounting to some SEK 525 million.

It means that by the end of the third quarter, we had a net debt, taking out IFRS 16 liabilities amounting to some SEK 750 million, which was an increase by slightly SEK 180 million compared to the year-end last year. So all in all, a low level in terms of the ratio and the net debt. And it meant that we at the end of the third quarter still had around SEK 150 million available at our banks as a receivable and we did not utilize our available credit limits at the bank amounting to SEK 1.5 billion.

And then just a small reminder to say that the yearly dividend of SEK 8 per share is then paid beginning from this year on a quarterly basis, meaning that for at the end of the third quarter, 2 payments have been made and there are 2 remaining that will come during the fourth and the first quarter next year.

So then I think we move to Slide #10 and I hand over to you, Carl Fredrik.

[Carl Ewetz, executive]

Thank you. M&A in the quarter, as Per mentioned, there is an ongoing consolidation in our industry. We want to be part of this and we have a clear strategy. We are, of course, humble to the current economic environment with lower valuation, higher financing costs and will deploy our balance sheet if we do not feel it's really good fit for Bilia. So we made 4 acquisitions in the quarter. We have acquired a small tire company called DackAtt. This is in line with our strategy to grow within Mobility Care, our new business area independent from our car retail structure. And in this area, we continue to look for strategic targets to grow.

In addition to this, we have acquired 2 truck service businesses in Northern Sweden. This will enable us to develop our truck operations for Mercedes in the important and fast-growing area in Northern Sweden and this is specifically Gallivare, Kiruna region and [indiscernible]. Last but not least, we have in the quarter signed an agreement to acquire Soderbergs Personbilar, located in Norrkoping and Nykoping. And hereby, we are expanding the Bilia family with 5 new brands, Volkswagen, Audi, Skoda, Seat and Cupra and the takeover will take place end of December this year. So that's the M&A in the quarter 3.

So I'll leave it to you, Per, to highlight outlook for quarter 4.

[Per Avander, executive]

It's the outlook for quarter 4 and when we are or go into a recession, often, I got the question about what's happening in the car industry? And we can see the consumer confidence is really low. I show the Norway, but it grew as well in Sweden, Belgium and Luxembourg. But the fleet business, what I have seen being in the car industry for many, many years, the bank crisis, the IT and [indiscernible], but the fleet business is quite stable and the service business as well, stable, but the private. And in the past, when we had a recession, the private consumers, they move from -- to buy a new car to used car. But today, bear in mind that 58% of all private consumers take a private leasing. So I'm not sure what will happen this time if when the contract is often 36 months, if the customer after that go for a used car or take in private leasing because the monthly cost is increasing because of the interest rate.

So we are not sure for the moment, but 2 of the 3 here is quite stable. As I told in another slide about availability of new cars, what we can hear and our forecast for the quarter 4, we see it can be little bit better, but we are humble something can change very fast here. But if we start to deliver more new cars, it's really good for our delivery workshops and we can get used car little bit higher level into our stock.

And Sweden is the third best country in Europe for the moment now, where we are talking about electric cars. If we take fully electric -- pure electric cars, plug-in hybrids and hybrids like Toyota, around 65% of all cars we sell now is -- now I talk to the car industry. But in Bilia, it is a bit higher, so the battery is here to stay in the field. But little bit more luxury, pure electrical vehicles over SEK 700,000. The government took a decision to take off the support we had in the past. So, yes, let us see what happen with pure electric vehicles, but many of the manufacturers now, they try to have a price little bit under SEK 700,000.

Norway, the government took a decision 2025. We will sell 0 of petrol and diesel engines. And if you go back 3, 4 years, all people in Norway said, it's impossible. But today, everybody is saying, yes, they will reach the target. So today, around 80% of all new cars is fully electric and they change the taxation system yearly the government, something happened the last year, we sold a lot of plug-in hybrids and then they took off some of the support for plug-in hybrid, so the customer move this year to more pure electrical vehicle. So I see 2025, it's only some years, we will see only fully electric new cars in the Norwegian market.

[Carl Ewetz, executive]

Mobility Care, I touched upon it a little bit earlier, it's an area where we want to grow. We have, as I said, in the quarter, made an acquisition. We will continue to look at interesting targets within tires. We're also looking at, obviously, glass that we can do quite a lot to rim repair, et cetera, et cetera. So this is a really interesting area independent from our retail car structure. So still focus and in line with the strategy that we've said in the CMD in May. Kristina?

[Kristina Franzén, executive]

Yes and then given the current economic uncertainty that we are all well aware of and that we have touched based on earlier in this meeting. We did during the summer, launched a cost-saving initiative to prepare the organization for the tougher times that we are now moving into. In addition to this activity during the summer, we are now working on the next phase in our cost saving process. We have identified further cost saving activities that will be possible to launch during the coming quarters based on how the economic development will turn out going forward. So in other words, we feel that we are well prepared to actually take on the further actions that might be needed going forward. That's where we are in that aspect.

[Carl Ewetz, executive]

Next slide. So that's the end of the presentation. I guess we open up for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Mat Liss from Kepler Cheuvreux.

[Mats Liss, analyst]

A couple of questions. First, looking at, well, inflationary pressure that you indicated here and you have the leasing liabilities, IFRS 16 leasing out. Could you say something if they are expected by the, well, potential increase now in rents for your facilities?

[Kristina Franzén, executive]

Let's see if I followed your question, Mat, there because you said leasing is that the facilities you have in mind or...

[Mats Liss, analyst]

Yes, I mean we see sort of demand for increased rents are sort of maybe 9%, 10% due to the [ inflation ].

[Kristina Franzén, executive]

Yes, I mean in -- our rentals are in most of the cases adjusted by sort of an index following inflation. So I mean, for the next year 2023, there will be adjustments on the rentals in accordance with those agreements.

[Mats Liss, analyst]

Okay. Great. And then I mean you mentioned that, of course, you expect some recessionary scenario and consumer confidence around especially in Norway, I guess, turning then you mentioned the fleet sales is important in all your markets, I guess. But is it similar situation in Norway and Sweden there? Do you have a similar amount of fleet sales?

[Per Avander, executive]

Yes, we have a little bit lower amount of fleet sales in the Norwegian market, if you compare to the Swedish market. In the past, we could see private leasing, the willingness to take expensive car for private leasing in Norway, it's much higher in a normalized market. If you compare to Sweden, if the car cost monthly SEK 10,000 in Sweden, it's not easy to have a private leasing. But in Norway, it was not the problem in the past. But now the customer, they had to take a little bit in Norway what we can see. So therefore, the order intake is low.

But bear in mind, Mat, it was a really, really high order intake 2021 and 2020 in the Norwegian market. So it's tough to compare with the 2 years we have had in the past now. But the market is low yet.

[Mats Liss, analyst]

Great. Then I guess looking at service part of the business, I see that you have a pretty good organic growth in Sweden actually. And do you feel that you are sort of gaining market share? Or is it sort of a pent-up demand now following everything and so could you -- I mean you had a 5.7% underlying growth in the third quarter.

[Per Avander, executive]

Damn, we are working hard with the third owner of a car often. We are really good with the first and the second owner of the car and it means cars up to 6 years old, but be better and better for the older cars in -- mainly in Sweden. And then as we are talking in the service business, we have included tires and dismantling business as well into the figures we have now, but we had done last year as well. But when we acquire a tire business or rim repair company, it starts not with a high tempo from the beginning. So I'm really curious what will happen this tire season, I guess we will do it better, now in quarter 4, if you compare to the beginning of quarter 2 when we had the tire season. So we -- when we acquire a company, it takes time to have the company up and running in our tempo, so it's little bit different what to say, it makes, yes, yes.

[Mats Liss, analyst]

Good. And then I mean coming back to car section again, sorry, you mentioned record high order backlog and I guess even if orders are down year-over-year, it seems that -- could it -- I mean it's only sort of consumer confidence? Or is it also that you have these long lead times, I mean, if you order a new ball like sort of get it.

[Per Avander, executive]

Yes, it's lack of semiconductors and components, but if you have a really bad order intake, it will be shorter and shorter delivery time for the customer. But some of our models today, it can be up to one year. And therefore I also say that what I said in the presentation, the customer hesitate to wait one year now with interest rate increasing, the energy prices increases -- increase, so they hesitate a little bit. But we hope and the forecast from Mobility, Sweden now is a little bit over 80,000 units for quarter 4 in the Swedish market. So it's higher if you compare with the other quarters this year.

[Mats Liss, analyst]

Okay. Great. And finally just about fourth quarter, you mentioned previously may pick up a bit, but you have also made some acquisitions. And could you just indicate if there are the potential impact from those? Will there be any -- or is it more to be expected next year?

[Kristina Franzén, executive]

Let's see, you mean the acquisition that we will come -- that will come in the fourth quarter? That is what you had in 9 months, right?

[Mats Liss, analyst]

Yes, I mean the [indiscernible].

[Kristina Franzén, executive]

So the Volkswagen I think Carl Fredrik said, that will take over by the end of the quarter, so there will not be any effect in the income statement coming from those. While for the [ M ] Bilia, the BMW dealer, the takeover is planned for the 1st of November. So you will have 2 months of income statements included in the fourth quarter.

[Mats Liss, analyst]

And it will cost you more in the future?

[Kristina Franzén, executive]

Yes, if you talk about the fourth quarter, right, there is nothing else, I mean, that will come in there because it's so close, we're in the middle of it. When it comes to acquisitions for next year, right, I mean we are, as Carl Fredrik pointed out earlier, I mean, looking into what could be of interest for us, but, of course, with a little bit more of carefulness perhaps given the uncertainty in the economic environment.

[Per Avander, executive]

Yes, but still, Mats, it's lot for sale in all of our countries and we have a room to acquire more about as we now stand here in the in the environment, we are in now maybe we are little bit careful.

[Operator]

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

[Andreas Lundberg, analyst]

You touched upon private leasing customers that you are uncertain how they will act now. Could you perhaps share with us what the ones that where agreements actually have expired in the last, let's say 2 quarters, what then those people done? That's my first question.

[Kristina Franzén, executive]

I think you have in mind if we can really see that the ones with the private leasing, Andreas, are actually -- it's very exciting to take on a new.

[Per Avander, executive]

Yes, yes, I got the question. I got the question from Dagens Industri television if customer terminate the contract for private leasing and I and our Deputy Managing Director, we had every Friday meeting with our subsidiary companies, managing directors. And listen, what happened for each brand we have in our portfolio and still we can't see, the customer they waited for the cars between 6 to 12 months, so they take out the car they have signed for, so we can't see it. But now what we can see now because we don't deliver so much new car yet as you have seen in quarter 3 now. And therefore that we prolong the private leasing contracts as well with the customer. But I don't know still what happened if customers say I don't sign for a new contract instead for I buy used car instead and pay the car with bank loan or something like that.

I can't give you an direction for it for the moment, I guess it's 10,000 terminal question for all in the car industry for the moment.

[Kristina Franzén, executive]

Little bit too early to tell.

[Per Avander, executive]

Yes, yes.

[Andreas Lundberg, analyst]

Or you haven't seen anything so far? Is that what you're saying?

[Kristina Franzén, executive]

No, we have not, but yes.

[Andreas Lundberg, analyst]

Okay. On to used cars, profitability is still very, very high. What do you think will happen here now when, well, if new car dealers can take off? Or could you perhaps share with us if there are any structural improvements that have taken place in the recent years?

[Per Avander, executive]

Yes, we have had high record margin many quarters now. But if we will get more cars into our stocks, I guess the margin will go down a little bit. But in the other hand what I said, if the private consumers go more for used car, we have a really good demand for used cars. But still, we see a stable and robust margin.

[Carl Ewetz, executive]

Are you still there, Andreas?

[Andreas Lundberg, analyst]

Sorry, I was mute.

[Carl Ewetz, executive]

Okay.

[Andreas Lundberg, analyst]

Now sorry, but have you done anything internally, so to say, in the last 2 years to improve the used car business structurally?

[Per Avander, executive]

Yes, the big outlet business, in the past, older cars, other brands, for instance, if we are in a showroom for BMW and the customer has Audi, we sold it to brokers directly with a low margin. Today, we always call our purchase department in Bilia outlet and they take care of all cars, the outlets for the new car business don't want to have in their stock. And then they take a decision, auction or we sell them in their showroom the Bilia outlet. So therefore I guess we have a little bit better profitability if you compare to how we worked couple of years ago.

[Andreas Lundberg, analyst]

I think you touched upon that you are so normally or typically building up inventory used cars in the later part for the year. Is this solely dependent on new car deliveries or how can you find cars without that?

[Per Avander, executive]

Many different ways, the purchase department, they can buy cars from Blocket and [ Fin ] count point in Norway. And in Norway, we import cars from Europe. So we buy sometimes, but as I said Blocket and [ Fin ] point and know -- we buy cars directly from private person. So we find different ways to fill up our showrooms for used cars.

[Andreas Lundberg, analyst]

Given the weak Swedish krona, I know you are focusing on your markets, obviously in your domestic market, are you still seeing other players are focusing or prioritizing selling cars outside of the Nordics?

[Per Avander, executive]

Yes, it's easy to sell to Europe from Sweden now, but we don't like it. We don't like have the car in our areas there we are because it's a service customer in the future. So we don't like to sell them out from Sweden, but I know some competitors that sell a lot to Europe for the moment. We had a Board meeting in our Porsche company and they said we can have a empty showroom of used car if you want, we can sell 100% to Europe because they have so many calls from Europe to buy their Porsche's, but we like to have them in our markets. We have a long-term customer into our service business.

[Kristina Franzén, executive]

Yes, but the short-term advantage, but long-term...

[Per Avander, executive]

No, it's not good for our...

[Kristina Franzén, executive]

So we keep the long-term strategy and hold on to that.

[Andreas Lundberg, analyst]

And lastly, on your recent Soderbergs Personbilar concession Volkswagen, et cetera, what's the market share for that business? And what's your agenda with this prior moving forward?

[Per Avander, executive]

What we have heard, they are around 2.5% of the total sales for Volkswagen and Audi in Sweden. So they are quite small, but the turnover is SEK 1 billion. So often, the family companies, they are in the size what we acquire now and be it little bit higher turnover, but not so much. So we see it as a start to start to learn about the Volkswagen and Audi business together with the importer in [indiscernible]. This is the first step we can think.

[Operator]

As there are no more questions, this concludes our question-and-answer session. I would like to turn the conference back to Mr. Carl Fredrik for any closing remarks. Over to you.

[Carl Ewetz, executive]

Thank you very much for listening to our Q3 presentation. If you would have any further questions, feel free to contact us and have a lovely day. Thank you very much. Bye-bye.

[Per Avander, executive]

Bye-bye.

[Kristina Franzén, executive]

Thank you. Bye-bye.

[Operator]

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