Bilia AB

STO:BILI A

Earnings Call Analysis

Market Overview and Strong Demand

In the latest earnings call, Bilia's CEO, Per Avander, discussed the current landscape of the automotive industry, highlighting a robust demand particularly in the Service Business. With extended booking times for services, customers are demonstrating a commitment to vehicle upkeep. The company observed notable activity in the tire season and reported a market share of approximately 60% in Sweden's fleet market. Private consumers, however, appear cautious, exhibiting a 'wait-and-see' approach. Contrastingly, Norway is experiencing a positive business climate, indicated by increasing demand for new cars and stable consumer sentiment, showcasing effective marketing campaigns across various brands.

Financial Performance and Profitability

Bilia reported a net turnover increase of 3%, driven by higher deliveries of used cars and service growth. The gross results for the quarter amounted to SEK 281 million, with an operating margin of 3.1%. The Service Business continues to outperform, accounting for 74% of total operating profits, with a notable increase of 6% in organic growth, particularly strong in Norway at 10%. However, new car sales revealed a decline in profitability, attributed mainly to lower turnover rates compared to the previous quarter, leading to a profit of only SEK 73 million, as opposed to SEK 151 million reported last year.

Cash Flow and Financial Position

Kristina Franzén, the CFO, emphasized the focus on cash flow management, with Q3 generating an operational cash flow of SEK 480 million, leading to a cumulative cash flow of SEK 1.3 billion for the first nine months, significantly up from SEK 500 million the previous year. The strategic management of inventory, alongside effective working capital utilization amidst rising financing costs, remains a priority. Aggregate net debt at quarter-end stood at SEK 2.5 billion, marking a slight increase from the previous December but an improvement from June figures, maintaining a net debt to EBITDA ratio below the targeted 2.0x.

Outlook for Q4 and Future Prospects

Looking ahead, Bilia's executives expressed optimism about continued demand in the Service Business, expecting it to remain strong through Q4. Management noted 'significant pent-up demand' in the market, particularly among private consumers, and anticipated further promotional campaigns to stimulate car sales. They underscored the operational improvements ongoing in newly acquired businesses while cautiously eyeing the new car sales outlook as they project better market conditions in the upcoming quarters.

Strategic Acquisitions and Market Position

During the call, the company disclosed its acquisition of a BMW dealer in Luxembourg and plans to acquire another dealer in Sweden, enhancing Bilia's market presence. These strategic moves are aimed at strengthening their competitive edge while they continue to monitor market dynamics—especially as manufacturers revert to traditional sales models. The management is proactively working to optimize efficiency and drive profitability in existing operations, showcasing a measured approach to growth.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Bilia Q3 Report for 2024. [Operator Instructions] Now I will hand the conference over to IR, Carl Fredrik Ewetz. Please go ahead.

[Carl Ewetz, executive]

Thank you for the introduction, and welcome to Bilia's third quarter results presentation with CEO, Per Avander; CFO, Kristina Franzen; and I, Carl Fredrik Ewetz. We also have our Deputy CEO, Stefan Nordström here today. The agenda is that Per will start going through the current situation in the car industry followed by Q3 numbers. Then Kristina will go through the financial situation, and I will conclude with an outlook for Q4. So by that, 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. There is a strong demand in the Service Business with quite long booking times. Our customers take care of the cars, both for service and repairs. And right now, we are in the important tire season. The fleet business, still a stable demand for new cars in Sweden with a market share around 60% of the total sales. The private consumers are still in wait-and-see. But we can see some better activities when we measure, for example, floor traffic in the showrooms.

Many brands have started strong campaigns with big discounts and attractive private leasing offers. In Norway, we see signs and can feel a better business climate. The demand for new cars is growing, good booking times in workshops and the consumer index is at a stable level. Our brands have, for the moment, strong campaigns in the Norwegian market. The demand for used cars are on a good level in Sweden and Norway, and we see stable prices for all cars except fully electrical vehicles. The stock of used cars is at a good level in all our countries.

There have been lots of discussion regarding different business model during the last years. A few years ago, it was really popular to try car sharing, subscription and agency models. Still we see some manufacturers using agency models, but other manufacturers hesitating adopting to this. We now see clearly that we are going back to traditional business models we had in the past.

Please move to the next slide. Net turnover increased organically by 3%, explained by higher deliveries of used cars and growth in the Service Business. We reported a result of SEK 281 million with a margin of 3.1%. We have better earnings in the Service Business and the Used Car Business was at the same level as last year. We see lower profitability from new cars.

Next slide, please. On this slide, leaving the lower profitability compared to the quarter 3 last year. As you can see, the big red here is the difference coming from the New Car Business.

To the next. On this slide, you can see the quarter 3 profitability between 2020 to 2024 in each country. And in the middle, we have Norway and here you can see some improvement. On the right-hand side, you can see Western Europe delivering at a stable level. Sweden delivers lower earnings due to the Car Business that we showed on the previous slide.

We are moving to the important Service Business. As I mentioned, there is still good demand in the Service Business in all our countries, especially for body and paint shops. We have an organic growth for the group of 6% and in Norway as much as 10%. We report profitability of SEK 221 million, this is 74% of the group earnings. As you can see on the right-hand side, it's SEK 60 million better than last year.

There are several reasons why we report a higher result. One is we had a strong underlying growth and a better profitability in the Swedish body and paint shops. Another is good booking times in all our countries. And the third is, we had one working day more in the quarter, except Belgium, there we had 2 more.

The Car Business. Deliveries on new and used car adjusted for acquired and closed operations were 4% lower for new and 50% higher for used compared to quarter 3 last year. For the Car Business, we report a result of SEK 73 million compared to SEK 151 million last year, and the profitability for new cars in all our countries were on a lower level. The main explanation for that is lower turnover.

For used car, we report profitability at the same level as last year. The demand is good, and we have a stable and good margin, especially in Sweden and Norway. The stock of used car is at a normal level. The order intake on new cars adjusted for acquired and closed operations was 11% higher compared to the last year. As I mentioned, we see and see a little bit better activity in all our countries. The order backlog of new cars is a bit on the weak side, especially in Sweden.

[Kristina Franzén, executive]

Thank you, Per. So let's then move into our financial position. Starting with cash flow, which continues to be one of our focus areas, and we did during the third quarter generated an operational cash flow of SEK 480 million. Thereby, we have for the first 9 months generated some SEK 1.3 billion compared to around SEK 500 million last year. We will continue to work on inventory management, including the turnover rate of new and used cars but we do also focus on other parts of working capital to be as efficient as possible in these times where financing costs are higher than in the past.

During the third quarter, we have also paid out our second installment of the dividend of in total SEK 6.6 per share, which means that we have paid around SEK 150 million to our shareholders. There are 2 remaining installments where one has been paid in October and the last one will be paid to our shareholders in January next year. We have not made any payments for acquisitions during the third quarter, while we, for the first 9 months, have made such payments for almost SEK 400 million in total.

However, as of October 1, we have taken over a BMW dealer in Luxembourg. Carlo Schmitz, whereby we are now running our operations from 2 facilities in Luxembourg and the payment for this acquisition was partly made in cash and partly in Bilia shares. During this quarter, we have also announced that we have entered into an agreement to acquire another BMW dealer, this time in Sweden, which are operating through one facility. We do expect this acquisition to be concluded in the first or the second quarter between February and May next year, and payments, well, to a smaller piece, also be done via Bilia shares.

At the end of the third quarter, we utilized just below SEK 1.3 billion out of our total credit limit of SEK 2.3 billion. This credit limit was renewed during the first quarter this year and matures in March 2029. Our financial net was SEK 83 million for the quarter, which was higher than last year, but in line with the previous quarters during the year. And the higher financial net compared to last year is due to higher interest costs.

Our net debt, at the end of the third quarter, amounted to SEK 2.5 billion, which was SEK 80 million higher than December, but some SEK 200 million lower than at the end of June. Our target is to have a ratio for our net debt in relation to EBITDA, excluding IFRS 16, below 2.0x. Looking at this ratio, at the end of the third quarter, the ratio was 1.5x versus 1.6x per June and 1.3x as per December 2023.

So in summary, the ratio remains on a stable level, well below our target of 2.0x. So I think that summarized our financial position.

[Carl Ewetz, executive]

Thank you, Kristina. We move over to the outlook for Q4, starting with the Service Business. This is one of the best Q results ever for Bilia in the Service Business delivered during a very tough economic period, especially for private consumers. I think it's fair to say this demonstrated resilience in this business. So with a more favorable consumer environment, we see the good demand to continue in Q4. In addition, we continue to see good booking times ahead across the business. As Per mentioned, in Q3, the Service Business represented 74% of our operating profit.

Used cars, the activity level in the business will remain on good levels, and we see prices stable during the coming quarter. When it comes to full electrical vehicles, we are not certain on prices. I think, Per mentioned that earlier, and we actively work to strengthen our offering within used cars and we'll continue to do so also in the coming quarter. The stock of used cars was at a good and comfortable level in all our countries going into Q4.

We do see improvement activity among private customers following campaigns from the car manufacturers and an increasingly more favorable consumer environment with falling interest rates. We do expect to see even more campaigns in Q4 to increase private consumption. We are cautiously optimistic about the new car sales during the fourth quarter and/or first quarter 2025. We continue to believe that there's a big pent-up demand among especially private consumer to customers.

We see the order intake from fleet customers to continue at a good and stable level, so no trend shift here. Every day, we work to improve profitability and efficiency in our operations. We intensified this earlier this year, and we continue to work hard to improve newly acquired businesses as well as existing businesses lagging our own standard. Our goal is to continuously optimize our processes and create high customer satisfaction and increase share-holder value.

And then finally, just a reminder, we will have a Capital Markets Day in 2 weeks' time here in Stockholm to talk about Bilia and future, et cetera, et cetera. So that finalizes our third quarter 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 asked a few questions there. So to start with Norway, obviously, good to see that your earnings are improving here. Can you just give us some -- you say that the campaign activity in Norway has sort of improved -- helped improving that somewhat. Can you just give us a flavor on Norway going into Q4? Is it -- should we expect this to improve sequentially even more? Or how should we think about Norway here?

[Per Avander, executive]

If I start -- so we say we have better campaigns in Norway. If you remember, it was a lack of components a couple of years ago, 1 year ago or 2 years ago with long delivery times. So we have no campaigns at that time, but -- and we were in the deep sea. When you're talking order intake in Norway, we see some improvements now. One example is really good campaign for BMW in Norway, both private leasing campaigns and the right price into the market. Another is we launched XPENG, the Chinese brand. And in the Norwegian market, 88% is fully electrical vehicles this year. So we have right price for XPENG and we sell a lot of them as well.

[Stefan Nordstrom, executive]

And I think -- Stefan, here. I think you can also add that when you look at the Swedish market, it's somewhat lower activity on the fully electric cars, and we see more hybrids here and you see the same when you come to Western Europe. But when you go, as Per mentioned, to Norway. So I think the manufacturers they, in a way, need to put -- they want to put their cars in Norway to get the fully electric cars out. And I think, in September, you had a 96% fully electric in Norway. So I think that could also be one of the reason for the good campaigns.

[Per Avander, executive]

And you have the Volvo EX30, smaller car, and there is a really good price for the moment now in the Norwegian market.

[Stefan Nordstrom, executive]

But also for the BMW. So...

[Per Avander, executive]

Yes, yes.

[Simen Aas, analyst]

Okay. And then just to get a feel for sort of how that will pace out in general for a campaign activity. Did that start early in Q3? Or did it sort of start in the middle or given that you expect that this should continue into Q4? Just to get the feel for, how large part of the quarter had good campaign is the question for Q3?

[Per Avander, executive]

I would say we started in Q2, too, with some campaigns before the summer and a lot of manufacturers next year, you have to pay your fine with emission for petrol and diesel engines. So I guess, my best guess now, is many manufacturers, they will support the market in Norway really high with a lot of efforts into the market because you can sell easy the fully electrical vehicles there.

[Stefan Nordstrom, executive]

But we can also see it like -- it's a little bit when it comes to the campaigns, you can see it's a little bit of -- starting to be a little bit of a raise. When somebody enters with a good campaign, the others cannot stand still, and they also add something, so we can see an improvement with the campaign. So we think this is a positive going forward.

[Per Avander, executive]

And you can bear in mind that the total market in Norway is around 110,000 new cars. It's a really low market. And the top is 170,000 cars. We have been in the deep sea, you can say. But -- so I guess the next year, the forecast for next year will be much better new car market in Norway.

[Kristina Franzén, executive]

Yes, because I don't know, Simen, if your question partly relates to when we will see it in the figures because the campaigns will generate orders and then it will be delivered with a certain lead time.

[Per Avander, executive]

You can read it in the backlog for new cars. There you can see we have more cars this year. We are growing the backlog of new cars. If I remember right, Kristina, it was 1,800 cars some quarters back, and now we have 2,600 cars. So you can see them there.

[Simen Aas, analyst]

Yes. So that was just a follow-up on order intake. I think there is a typo in the report actually because it says that new order intake was 11% lower than previous year, but in the presentation, you said 11% higher. So is that the correct number? Just to get that right.

[Kristina Franzén, executive]

It's higher, yes.

[Simen Aas, analyst]

Yes. Okay. So okay, then that's good to know. And then one final one. Earlier this month or early this quarter, Volvo cars announced that it's scrapping the agency model in Norway and Sweden. Can you just give us your view on this? And how will this impact you? Is there any chance that you will -- will they sell their Oslo assets back to Norway now? Or how should we think about this?

[Per Avander, executive]

Yes. You talk about the business models Care by Volvo or...

[Simen Aas, analyst]

The D2C sales in Norway and Sweden, I think, was down.

[Per Avander, executive]

Yes, they will skip Care by Volvo in Europe now more for traditional business models, as I talked about in my presentation today. So we see some manufacturers nowadays, they're hesitating and see -- go back to the traditional business models. And for us, we have agency model for Mercedes Benz. We were pilot in Sweden. And it doesn't matter for us. You can say we have a good margin.

We have lower risk in demonstration cars and new cars. So for us, we can have both models. But what we think we have to go 100% for agency model or 100% for traditional models. Sometimes we can have a sort of mix. For fleet business, you have agency model. And the next time you have for private consumers, you have a traditional model. We don't like that because we can't be so efficient when we have different models. So for us, it's okay with 100% agency model.

[Carl Ewetz, executive]

I doubt the assets will come back.

[Simen Aas, analyst]

Okay. So what they're doing now is they have the agency model for B2B and not for B2C, is that how I should read it, Volvo that is?

[Per Avander, executive]

No, no.

[Simen Aas, analyst]

They said that they will have a hybrid model.

[Per Avander, executive]

Yes. But they talked hybrid model. It was traditional business as we have had in the past and Care by Volvo. So we have had it maybe 3, 4, 5 years, the model, hybrid model they talked about. And now they skip Care by Volvo 100% for traditional business.

[Stefan Nordstrom, executive]

But hybrid, I think it means also [indiscernible] channel, et cetera, et cetera.

[Simen Aas, analyst]

But the conclusion here is that it doesn't really impact you that much, but in one way, you will get more customers through your service shops, won't you? Because people have to visit your stores now.

[Carl Ewetz, executive]

In the longer run, yes.

[Simen Aas, analyst]

[indiscernible] positive, maybe.

[Per Avander, executive]

But I think we have the customers in our workshop before as well and regardless of model, so I think that is -- doesn't matter. But I think more when we talk the campaigns that we have better campaigns in the market to start the volumes to come increase even more on new cars. Then we will get even more people into our workshops. So -- and also delivery workshop like that.

[Operator]

The next question comes from Stefan Stjernholm from Nordea.

[Stefan Stjernholm, analyst]

Stefan from Nordea here. I have a question on the campaign activity and how that is impacting the profitability of the new car sales. Is the cost taken by the car manufacturer? Or is it both you and them sharing it?

[Per Avander, executive]

Sometimes, we can take sometimes a little bit of our margin together with the manufacturers. It depends on which brand we are talking about. For a moment, now we have a little bit lower margin when we are talking BMW. But for Mercedes, with an agency model, we had the same margin as in the past. So -- but how can I say it. We like to have a lot of campaigns. When you have overproduction of cars for the manufacturers, they give us a lot of incentives into the market with marketing, better pricing, better offers for private leasing. So for us, it's the better way to work instead to where we have lack of components and you had the demand, it was higher on the production, it's not so good for a dealer like Bilia.

[Stefan Nordstrom, executive]

But most important, we will get more cars in the long run into our Service Business.

[Per Avander, executive]

So the forecast for this year is 255,000 new cars in Sweden. And if you look back 10 years, the average is 326,000 new cars. So it's a low market. So it impacts us if we have many, many bad years, impact us and hit us into the service workshops in the future. So we must back to a better new car market again.

[Stefan Nordstrom, executive]

And with that, then you add also the finance and the things like that.

[Stefan Stjernholm, analyst]

And then going into Q4, do you see a sequential increase in campaigns or you think it will stay at the same level as in Q3?

[Per Avander, executive]

We are in quarter 4 now. And if you look in the newspapers, you can see a lot of activities and campaigns for the moment now. One example is, Volkswagen is really aggressive and Audi is aggressive for the movement into the market.

[Stefan Nordstrom, executive]

It will most likely increase.

[Stefan Stjernholm, analyst]

Okay. And another topic. Looking at the service subscription and wheel storage numbers, they are both down year-over-year relative to the start of the year. Is -- those figures [ or any ] higher numbers depending on improved cars, new car sales? Or how should we think about that?

[Per Avander, executive]

Yes, it start with new car sales. When you sell a new car, we put in the winter tires directly into our tire hotels, and we sell less cars. We declined a little bit in both for tire hotels and service subscriptions. But we are working and putting a lot of efforts into when we sell a used car to sign for service subscriptions and tire hotels as well.

[Operator]

The next question comes from Mats Liss from Kepler Cheuvreux.

[Mats Liss, analyst]

A couple of questions. First, I mean, cash flow was good, I guess, and you mentioned working capital impact somewhat. But -- and you also indicated that there are more measures to be done. I mean, are there any structural changes that you are looking at or -- and maybe also if you could give some comments, I mean, if car producers move away from the DTC sales approach and you go back to the old or traditional way of selling cars. Will that sort of increase the need for your imbalance -- sort of balance the opportunities?

[Kristina Franzén, executive]

No, I think -- Mats, to start with your first question, I mean, there is not any real structural changes that we are taking. It's more to continue the work that we have done for several years, right? Perhaps in these times, a little bit more intensified, right? And also, of course, working with the new operations that we have acquired over the past few years to make sure that they have a turnover and the same focus on the aging of the cars as we have in the other operations then. When it comes to changes in business models...

[Stefan Nordstrom, executive]

Mats, I think when we take the changes there, I think like that. When we buy cars, if we have a traditional model, it's not the same that we put them in store because you have a production time in the factories. So our goal is always even if you have a traditional model to sell the cars, why they are like what we call it changeable in the factory, so we can adjust them for your specification. So that is the way we are working. So even if we go back, we try to be very, how to say, lean with the capital. That's why if we take the used cars with the turnover rate 10x per year to work in all our subsidiaries with that and with new cars, we try to sell them before they enter to our, how do you say, plot or what you say. So that is the target even if we go back to the traditional way like before.

[Mats Liss, analyst]

Sounds reassuring. And then on the P&L there, I guess you have this result from interest in joint ventures. It's sort of -- you have a cost there. And I was wondering if it sort of will reappear in this fourth quarter? Or is there more to expect in that line?

[Kristina Franzén, executive]

It is a joint venture that is the importer business that we -- where we have started for our Jaguar Land Rover business, right? So -- and then your question is, Mats, I guess, if the result and the start-up expenses that we have seen so far, if that would also flow into the fourth quarter, that's your question, I guess, right?

[Mats Liss, analyst]

Yes, yes.

[Kristina Franzén, executive]

And I think they will -- I mean, there will be some start-up expenses also in the fourth quarter, right? It is a new business that we have to get to learn and understand how to operate, right?

[Per Avander, executive]

One example is we started from 0 with a warehouse for spare parts. So when you start with 0 turnover from one day to another, it's really costly to start...

[Kristina Franzén, executive]

Yes. So it's a new warehouse we have started that sort of distribute spare parts for both the Swedish and the Norwegian market. And so -- but we are trimming it, of course, but we have had it up and running now for 6 months and that is still a rather short period of time to get to know the operations and to have it fully trimmed.

[Mats Liss, analyst]

Great. Then finally, I mean, M&A activities, I mean, you mentioned the BMW dealer in Belgium. And I guess there are some competitors out there that are sort of having tough -- well, trying to adapt to a tough market situation. Do you see more opportunities there to grow or speed up the M&A again? Or are you sort of filled at the moment?

[Per Avander, executive]

It's a lot of company for sale for the moment, but we are really careful. We like when we acquired the BMW dealer in Luxembourg because we were only 3 BMW dealers in the Luxembourgish market. Now we are only 2, so we have one competitor there. So it means, in the future, maybe a little bit better margins for new cars, the workshops. So -- but we are really careful. So we are a little bit more focused.

And in my comments in the report, now we talked about we can do it better. In some business, we have. One is that you are Land Rover importer. Another is we star tup with XPENG Sweden, Norway. We have a brand-new dismantling business in Norway, and we have some workshops we can do better in the future with our centralized business excellence team. So we, for the moment now, are a little bit more focused on the business we have today. But still, we are looking for -- yes.

[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 that, and thank you all for listening. And please revert to us, would you have further questions. Have a good day.