Bilia AB

STO:BILI A

Earnings Call Analysis

Bilia Q3 Report Shows Growth Amid Challenges

Bilia's Q3 results reveal an 11% increase in net turnover, with new and used car deliveries up by 16% and 3%, respectively, and a reported margin of 3.8%. Despite adverse conditions in Norway, profitability in Sweden and Western Europe hits a record, with the Service Business growing by 11% to SEK 205 million. The company's financial stability continues, evident from an improved cash flow of SEK 269 million, a solid credit availability of SEK 2.3 billion, and maintained dividend payments totaling SEK 8.80 per share. Looking forward, stable demand for used cars is expected, along with the potential uptick in M&A activities. However, Bilia remains cautious, prioritizing balance sheet integrity.

Steady Performance Amidst Market Challenges

The Q3 report of Bilia starts with a backdrop of a challenging market, especially in Norway where new car demand is weak due to economic headwinds, including inflation and the withdrawal of government incentives. Despite these conditions, the company has reported an 11% increase in net turnover, thanks to growth in the Service Business and higher car deliveries. Bilia's adaptability in such a market speaks to its robust Service Business model and operational efficiency.

Service Business as the Cornerstone

The Service Business continues to shine with an 11% organic growth rate and profitability reaching SEK 205 million, a notable increase from SEK 192 million in the previous year. This segment's strong performance, characterized by long booking times, is reassuring for the company's stability and reflects a consistent demand for maintenance and services, which is a good sign for investors looking for long-term security.

Solid Financial Foundation

Financial stability remains a pillar for Bilia, underscored by a solid cash flow of SEK 269 million and a steady net debt level at SEK 2.3 billion. With net debt to EBITDA at 1.1x, the figures are well below the company's financial target. This prudent financial management is further exemplified by a structured dividend payout, with SEK 8.80 per share to be completed in upcoming installments.

Looking Ahead with Cautious Optimism

For the forthcoming quarter, Bilia anticipates a robust performance in the Service Business, attributed to consistent demand for used cars and an emphasis on car maintenance. However, there is an anticipation of restraint from private customers in new car purchases, particularly in Sweden and Norway, potentially due to economic uncertainties. This foresight signals a conservative approach to growth, matched with an awareness of the larger market context in which Bilia operates.

Sustainability and Market Consolidation

Sustainability remains high on Bilia's corporate agenda with an increased focus on CSRD reporting requirements, showcasing their commitment to environmental responsibility. The outlook suggests a rise in M&A activity due to financial pressures on companies, with Bilia expressing intent to partake intelligently without jeopardizing financial integrity. Such strategic considerations could provide avenues for growth and increased market share.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Bilia Q3 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 the introduction and a warm welcome to Bilia's Q3 results presentation with CEO, Per Avander; and CFO, Kristina Franzén and myself. As you might already seen, we report stable results with an improved cash flow in the quarter.

The agenda is similar to last quarter, we start describing the current market environment in the industry, and we're finishing off with an outlook for the quarter. So let's start, and I'll leave the word to Per Avander.

[Per Avander, executive]

Thank you very much, Carl Fredrik. And we start with the current market situation in the car industry. There is a very good demand in Service Business with quite long booking times. New cars has a weaker demand in both Sweden and Norway, especially for pure electrical vehicles. The government in Sweden took off the climate bonus in the end of last year, and the government in Norway added VAT for electrical cars with a price over NOK 500,000.

The fleet business is much more stable with a better demand and often, the customer has a cycle of 3 years leasing contracts. We have a much better situation in Luxembourg, Belgium with the demand of new cars at the same level as the last years. In a historical perspective, we have a really high order backlog in Sweden and Western Europe.

The market conditions in Norway are still challenging, high inflation with high interest rates, a lot of floating rate for the Norwegian household via new cars, fewer company cars, if you compare to Sweden. In Sweden, we have 50% of all new cars is company cars and in Norway, it's around 25%. LNG prices is high and so on. The demand for used cars is in a good level and a little bit better than last year.

It's still a consolidation of dealers in the industry, some brands started many years ago, for example, BMW and others will follow as Toyota. But the trend is still clear, fewer and bigger deals.

Chinese brands, we see a lot of Chinese brand entering the Nordic market. Some will succeed and some will lose. And we have now launched XPENG, both in Sweden and Norway, and we have a strong belief in the brand. And I can say the start, it has been very, very good.

Business models -- can go to the next slide, please. Agency model. It's a lot of discussion of new business models, especially agency model. It's already introduced by Mercedes in Sweden. And from a dealer perspective, it works quite well. Lower risk in stock of new cars and demonstration cars, lower cost of marketing and so on. Some brands as Toyota and Porsche have confirmed that they will not implement agency model.

Net turnover increased by 11% due to growth in the Service Business and higher deliveries of cars, especially new cars. Reported result of SEK 335 million in the margin of 3.8%. And as you can see on the right-hand side, it's SEK 1 million more than the last year. Sweden and Western Europe reported higher profitability but lower result in Norway due to the Car Business.

On this slide, you can see the quarter 3 profitability from 2019 to 2023 in each country. Sweden, as I mentioned, is doing it well, SEK 44 million better in Western Europe, SEK 26 million better than the last year. And it's a new record for the quarter in Western Europe. I will get back to the Norwegian result on the next slides.

Service Business. Continued good demand in the Service Business with quite long booking times, much better compared to the same period last year. We have an organic growth of 11%, a historical strong figure. We reported profitability of SEK 205 million compared to SEK 192 million last year. It is 1 day less than last year, and both Norway and Western Europe reported better profitability. In Sweden, it was close, the same level as last year. We see a slight improvement in Norway after we have taken a lot of action as cost reduction, business excellence team from Sweden, helping our manager with, for example, efficiency processes and so on in the workshops in Norway.

Car Business. Deliveries of new and used cars adjusted for divested and acquired operations were 16% and 3% higher. We reported a result of SEK 151 million, close the same level as the last year. Sweden and Western Europe reported a higher result but lower in Norway.

In the used cars business, we reported a result of SEK 99 million compared to SEK 112 million last year. Sweden delivered a much better result but Norway were far away from the last year's figure. It has been a challenging market in Norway due to Tesla's position as the market leader and their aggressive price reductions. We have a stable order intake in Western Europe compared to Sweden and Norway. For Bilia group, the order intake were down 23%. In Sweden, the fleet business is still on a good level, but the private consumers wait and see.

The order backlog of new cars is still on a good level. Sweden and Western Europe continued high level in a historical perspective and Norway at a lower level. Kristina?

[Kristina Franzén, executive]

Thank you, Per. When it comes to the financial position, I would say that stability is a good way -- word to describe our position. We reported a solid cash flow amounting to SEK 269 million, which reflected a decrease in working capital during the quarter. If we compare to last year, it represents an improvement of around SEK 400 million.

We have available credit limits with our banks, SEK 2.3 billion, of which around 1/3 or SEK 844 million was utilized at the end of the year.

If we move into the net debt, it also remained on the same level as we had previously during the year, so SEK 2.3 billion, which also then looking into net debt to EBITDA means that it remains on a stable level at 1.1x, which has been the same throughout the year, which is then well below our financial target of 2.0x.

Finally, during the quarter, we have made one payment of the 4 installments of dividends that's been paid and it now remains to further installments in October and January to complete the dividend in total of SEK 8.80 per share.

[Per Avander, executive]

Back then to the outlook, starting with the Service Business. The continued interest for used car and new car deliveries and our own improvement, we see good demand and a solid outlook for the Service Business in Q4. Our customers continue to take care of their cars in even tougher economic times, and we see that continue in Q4. And in Q3, the Service Business represented 62% of our operating profit.

We foresee good demand for used cars in the coming quarter, like we saw in last quarter, consumers choose to cheaper old cars or buying a cheaper used cars. And when it comes to prices for used cars, we see a stable situation during the coming quarter.

Looking at the different type of clients, we see order intake from fleet customers or business customers continue at a stable level in Sweden, while private customers are still in a wait and see mode. This also explains the main weakness in Norway where fleet business is not as widespread as Sweden. Even though we had underlying pent-up demand, we believe private customers will remain somewhat restrained also in Q4 when it comes to new cars in Sweden and Norway due to current uncertainty. On the other hand, Western Europe, we foresee continued stable demand for new cars in the coming quarter.

Sustainability is always high on the agenda, an increased focus on CSRD reporting requirements is ongoing and will continue in Q4. And this is obviously an important and necessary operation to establish to be able to show how well we live up to our ambitions within sustainability.

Moving over to consolidation. We believe activity in the M&A market will increase slightly in the coming quarter, where higher financing costs is and will become a reality for many companies. This, in combination with lower new car sales, will most likely push some into uncomfortable territories.

We continue to see slightly longer lead times, increased supply and lower prices. Having said that, we would like to be part of the ongoing consolidation, but we're also prudent and humble in these uncertain times, and we will never put our balance sheet at risk.

That finalizes our Q3 presentation, and we can now open up for questions.

[Operator]

[Operator Instructions] The next question comes from Simen Aas from DNB Markets.

[Simen Aas, analyst]

So I have a few questions. And the first question I have is on order intake. So adjusted for M&A, it was down 33% in the quarter. Can you just say something about the trends throughout the quarter? And obviously, this is a big improvement from the first half of the year. And is this the rough level we should think about when we look at Q4? Or how should we think about it?

[Per Avander, executive]

What we can see, as Carl Fredrik mentioned, in Western Europe, this is stable order intake of new cars. In Sweden, we see the same sentiment what we have seen the last year now. And bear in mind that when you compare the figures, it's easier in quarter 4 because it was a really bad demand in the new car market in Sweden last year, and the same in the Norwegian market. But we can't see the light in the tunnel yet.

But what we mentioned, the fleet business, the customer, they take out a new leasing car in the fleet business but, here, we see that the private consumers wait and see and instead, they buy used cars for the movement now. But when you look at the figures, be careful because it was not a good market quarter 4 last year.

It was a phenomenon in November when the government took off the climate bonus. So 1 week, it was a huge order intake. But after that, it was really silence for the new car.

[Simen Aas, analyst]

Okay. That's very helpful. And then on the same topic, so do you have any visibility on the new car orders for 2024? Or is that too early?

[Carl Ewetz, executive]

I think that's too early to say, Simen.

[Per Avander, executive]

There is not a forecast yet for 2024. The forecast this year is 265,000 new cars, and I guess it will be at least a bit more than 265,000 new cars. But what we see in for our -- if you say, our forecast, we see a lower market in Sweden than 280,000 new cars next year.

At the recession, I have been in 2008 and the IT crash [ 2020 ] crisis, '92. So when the private consumers see nothing more happened now than they start. So we are early out from the recession. But now, you don't know the inflation, the interest rates, it may be higher or not. So it's not a stable market for the private consumers yet.

[Simen Aas, analyst]

Okay. That's very clear. And then just one last one for me. So you talked about Tesla being very aggressive on pricing in Norway especially. How do your brands react to that? Do you have any comments around how BMW and Volvo, et cetera, is reacting to that, just to get the feel for the price levels?

[Per Avander, executive]

Yes, from the beginning, all other brands say, we don't follow Tesla. But what you can see in the market now, and I guess it's just -- of course, you had the lack of components, especially semiconductors in the past. So you had a demand but you don't -- you didn't have the production. Now we see the opposite.

So what we can see now, the pure electrical vehicles is not increasing pricing for the moment. So it's more and more campaigns from all the other brands to follow Tesla's aggressive pricing in the market in both Sweden and Norway. That's more in Norway because they are market leader there with market share over 20%. It's not the same in the Swedish market.

[Operator]

[Operator Instructions] 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 very much for listening to our Q3 results. And if you have further questions, do not hesitate to reach out to us. And have a good day. Thank you very much.

[Per Avander, executive]

Thank you very much.